On testing weak separability

A new framework for testing for the existence of a consistent aggregator for a subset of inputs in a production function is developed in terms of the variable profit function. In contrast to the Berndt–Christensen framework, in which the parametric restrictions required to attain weak separability also impose unwanted restrictions on the form of the aggregator, the aggregator function has a flexible functional form. Consequently this procedure should permit a less restrictive test of separability or aggregation. Application of the procedure to the data for U.S. manufacturing assuming a production function involving two labour inputs (blue- and white-collar workers) and two capital inputs (structures and equipment) leads to the conclusion that there does not exist a consistent aggregator for labor whereas there is some mild support for the existence of a consistent aggregator for capital.     

The response of small and medium-size business customers to Time-of-Use (TOU) electricity rates in Israel

This paper reports on the methodology, data, and results of the Israeli Time-of-Use (TOU) electricity pricing experiment in the industrial/commercial sector. We concentrate on the estimation of the demand functions for electricity under TOU, and the net welfare gains which result from applying TOU rates to small and medium-size business customers in Israel. This experiment, which was preceded by a 15-month load research study to allow an optimal sample design, was concluded in June 1992. The analysis yielded four major conclusions: (1) The estimated gains of small and medium-size customers in Israel from TOU rates are sufficient to justify investment in TOU metering technology. (2) There have been small, but noticeable, shifts of electricity from the peak to the mid-peak (if relevant) and to the off-peak periods during all seasons of the year, and particularly during the winter. (3) The structure and number of labour shifts during the day, and weather, are important factors in determining the response of business customers to the TOU rates. (4) Price elasticities vary substantially over the seasons and across SIC groups; they do not vary with customer size.     

Improving discrimination in data envelopment analysis: some practical suggestions

In some contexts data envelopment analysis (DEA) gives poor discrimination on the performance of units. While this may reflect genuine uniformity of performance between units, it may also reflect lack of sufficient observations or other factors limiting discrimination on performance between units. In this paper, we present an overview of the main approaches that can be used to improve the discrimination of DEA. This includes simple methods such as the aggregation of inputs or outputs, the use of longitudinal data, more advanced methods such as the use of weight restrictions, production trade-offs and unobserved units, and a relatively new method based on the use of selective proportionality between the inputs and outputs.     

Performance evaluation using data envelopment analysis in the presence of time lags

Data Envelopment Analysis (DEA) is a methodology that computes efficiency values for decision making units (DMU) in a given period by comparing the outputs with the inputs. In many applications, inputs and outputs of DMUs are monitored over time. There might be a time lag between the consumption of inputs and the production of outputs. We develop an approach that aims to capture the time lag between the outputs and the inputs in assigning the efficiency values to DMUs. We propose using weight restrictions in conjunction with the model. Our computational results on randomly generated problems demonstrate that the developed approach works well under a large variety of experimental conditions. We also apply our approach on a real data set to evaluate research institutions.     

Mix Efficiency in a Multi-species Fishery

A feature of fisheries that distinguishes them from most other industries is the level of control imposed on the production process. Previous studies have identified inefficiency in fisheries that is directly related to the management restrictions. The development of Slack-based measure (SBM) models allows the effects of management distortions to be further investigated through consideration of input and output mix efficiency. In this paper, the mix efficiency of a fleet operating in a multispecies fishery is examined. The results indicate that inefficiencies exist in the mix of inputs, which have developed as a consequence of the management restrictions imposed.     

Weight restrictions in DEA: misplaced emphasis?

Measuring productive efficiency is an important research strand within fields of economics, management science and operations research. One definition of efficiency is the proportional scaling needed for observations of inefficient units to be projected onto an efficient production function and another definition is a ratio index of weighted outputs on weighted inputs. When linear programming is used to estimate efficiency the two definitions give identical results due to the fundamental duality of linear programming. Empirical applications of DEA using linear programming showed a prevalence of zero weights leading to questioning the consequence for the efficiency score estimate based on the ratio definition. Early literature on weight restrictions is exclusively based on the ratio efficiency. It was stated that variables with zero weights had no influence on the efficiency score, in spite of the alleged importance of the variables. This has been one motivation for introducing restrictions on weights. Another empirical result was that often there were too many efficient units. This problem could also be overcome by introducing weight restrictions. Weight restrictions were said to introduce values for inputs and outputs. The paper makes a critical examinations of these claims based on defining efficiency relative to a frontier production function.     

A note on forecasting international tourism demand in Spain

This paper considers the extent to which price and income proxy variables help in forecasting tourist demand in Spain. Contrary to some recent studies, we found that the inputs' contribution in terms of fitting and forecasting is nil when compared with alternative univariate models. Whether these findings are the results of the restrictions embedded in building the proxy inputs or in a poor specification of the dynamics of these models remains to be seen. We also contend that when dealing with medium, long-term forecasting comparisons, the use of the traditional aggregate accuracy measures like RMSE and MAPE help very little in discriminating among competing models. In these situations, predicted annual growth rates may be a better alternative.     

Efficient inequality: differential allocation in the local public sector

This paper examines the consequences for social efficiency if the locally provided public input can be differentially allocated among residents. We derive the distributional efficiency condition, which is the distribution of public inputs that maximizes within-city gains from trade. Differential allocation also causes modifications to the standard (Samuelsonian) allocative efficiency condition. Additionally, we explore the consequences of differential allocation for the median voter model. Standard empirical voter models are seriously flawed because they fail to distinguish final public output production from either individual demand or the distribution of publicly provided inputs. Finally, we derive the club sharing efficiency condition.     

The time varying effect of oil price shocks on euro-area exports

In this paper we provide novel evidence on changes in the relationship between the real price of oil and real exports in the euro area. By combining robust predictions on the sign of the impulse responses obtained from a theoretical model with restrictions on the slope of the oil demand and oil supply curves, we identify oil supply and foreign productivity shocks in a time varying VAR with stochastic volatility. We find that from the 1980s onwards the relationship between oil prices and euro area exports has become less negative conditional on oil supply shortfalls and more positive conditional on foreign productivity shocks. Using the theoretical model we show that our empirical findings can be accounted for by (i) stronger trade relationship between the euro area and emerging economies (ii) a decrease in the share of oil in production and (iii) increased competitive pressures in the product market.     

Modelling market fundamentals: A model of the aluminium market

The standard approach to modelling primary commodity markets under rational expectations is to relate the commodity price to the production and consumption ‘surprises’ (i.e. the innovations on the equations). Using the world aluminium market, we show how this approach can be modified so that both the price and stock can be written in terms of one or more market ‘fundamentals’ which reflect the supply—demand balance on the market. This approach allows joint estimation of production, consumption, stock demand and price equations subject to cross-equation restrictions. It may be seen as a formalization of the approach adopted by metals industry analysts.     

A study of multiple-output production functions: Klein's railroad study revisited

Using two sets of U.S. railroad data with two outputs and three inputs, we estimated production function parameters via the system of derived input demand functions, and via the dual cost function. The results indicate increasing returns to scale, and a violation of required convexity for the production function.     

Irrelevance of the soft budget constraint for the shortage phenomenon

Kornai's thesis that shortage results from demand expansions bred by the soft budget constraint, derives from his implicit assumption that price regimes of input and output firms are different. Since any firm is both an input and an output firm, which discards the assumption as logically untenable, excess demand can only turn up because of lower than contracted inputs of labor and management that are not offset by an adequate downward adjustment of earnings. Expansions of demand that appear to be autonomous, are incited by uncertain deliveries of inputs, that is, by inefficiency (of output firms) as well. A by far the largest part of excess demand can be explained by state preferences for fast growth. As planners are more successful in generating investment, and the ensuing consumer, demand than in expanding production, shortage is inevitable regardless of the character of the firms' budget constraints.     

The investment decision of a Multinational Firm under uncertain quantity restrictions

In this paper we analyze the allocative investment decisions of a Multinational Firm (MNF) when it faces uncertain quantity restrictions such as a voluntary export restraint or a quota imposed by the host government. The model with uncertain quantity restrictions is analyzed further by introducing additional uncertainties such as a foreign tax rate, transfer prices, foreign exchange rates and foreign demand. The MNF invests more in the host country due to uncertain quantity restrictions. The risk averse MNF invests more in the host country despite its uncertain tax rate if the transfer price is less than the expected marginal revenue loss due to the uncertain quantity restriction. The uncertain transfer price leads the MNF to invest more in the foreign country if the tax rates are dissimilar between the two countries. Foreign demand uncertainty and foreign exchange rates uncertainty have the same effects on capital allocation between the host country and home country. In particular, we derive the condition under which the direction of investment is unambiguous.     

Testing and imposing Slutsky symmetry in nonparametric demand systems

Maximization of utility implies that consumer demand systems have a Slutsky matrix which is everywhere symmetric. However, previous non- and semi-parametric approaches to the estimation of consumer demand systems do not give estimators that are restricted to satisfy this condition, nor do they offer powerful tests of this restriction. We use nonparametric modeling to test and impose Slutsky symmetry in a system of expenditure share equations over prices and expenditure. In this context, Slutsky symmetry is a set of nonlinear cross-equation restrictions on levels and derivatives of consumer demand equations. The key insight is that due to the differing convergence rates of levels and derivatives and due to the fact that the symmetry restrictions are linear in derivatives, both the test and the symmetry restricted estimator behave asymptotically as if these restrictions were (locally) linear. We establish large and finite sample properties of our methods, and show that our test has advantages over the only other comparable test. All methods we propose are implemented with Canadian micro-data. We find that our nonparametric analysis yields statistically significantly and qualitatively different results from traditional parametric estimators and tests.     

Relaxing Hukou: Increased labor mobility and China’s economic geography

China’s Hukou system poses severe restrictions on labor mobility. This paper assesses the possible consequences of relaxing these restrictions for China’s internal economic geography. We base our analysis on a new economic geography (NEG) model. First, we estimate the important model parameters using data on 264 of China’s prefecture cities. Second, we use these estimates as inputs in a simulation of the full NEG model under different labor mobility regimes. We find that increased labor mobility leads to more pronounced core–periphery outcomes. Beijing, Shanghai, Guangzhou and Chongqing in particular will further strengthen their dominant place in China’s urban hierarchy. In addition, two other groups of cities can be distinguished: those in China’s populous heartland offering preferential access to China’s enormous internal market, and more peripheral cities that are better shielded from competition with China’s economic heartland by virtue of their relative remoteness.     

Short-run labor productivity in a dynamic model

A classic empirical finding is that the short-run output elasticity of demand is smaller than unity and is less than in the long run. This phenomenon is called ‘short-run increasing returns to labor’ (SRIRL). In this paper we analyze SRIRL using a dynamic factor demand model for variable and quasi-fixed inputs, where the latter incur increasing marginal internal adjustment costs. Speeds of adjustment of quasi-fixed inputs are endogenous and variable, not constant parameters. Labor hoarding is shown to be neither necessary nor sufficient for SRIRL. These results are illustrated empirically using annual U.S. manufacturing data, 1952-71.     

AN ENVIRONMENTAL/INPUT–OUTPUT LINEAR PROGRAMMING MODEL TO REACH THE TARGETS FOR GREENHOUSE GAS EMISSIONS SET BY THE KYOTO PROTOCOL

The Kyoto Protocol contains legally binding targets for greenhouse gas (GHG) emissions for industrialized countries. The importance of this agreement and the elaboration of a climate change policy make it necessary to define and establish national policy measures and to bring into force environmental regulations that will reduce GHG emissions. Extending our knowledge of the economic-ecologic relationships that exist within the production sphere can assist in defining and implementing successful environmental policies. In this paper, an Environmental/Input–Output linear programming model is proposed. To develop the model we consider the input–output model as a linear programming problem combining two types of restrictions: environmental restrictions establishing GHG emission targets, and economic restrictions. The model shows how targets for the emissions of GHGs may be reached and can affect production activity composition.     

Simple tests of alternative specifications in stochastic frontier models

Previous work on stochastic production frontiers has generated a family of models, of varying degrees of complexity. Since this family is nested (in the sense that the more general models contain the less general), we can test the restrictions that distinguish the model. In this paper we provide tests of these restrictions, based on the results of estimating the simpler (restricted) models. Some of our tests are LM tests. However, in other cases the LM test fails, so we provide alternative simple tests.