Incorporating ancillary measures of process and quality change into a superlative productivity index

One of the persistent problems plaguing the measurement of productivity and output is accounting for changes in product quality. A similar problem arises in attempting to explain shifts in a production function using information on changes in the characteristics of the production process itself. We consider these problems under a behavioral model in which the firm chooses a profit-maximizing bundle of input/output/process characteristics as well as the profit maximizing levels of input and output. This view of quality change is similar to the endogenous design index advocated by Triplett 1983] for industrial prices and the endogenous quality indexes analyzed by Pollak 1983] for consumer prices. We show how a price-characteristics locus can be used to adjust the Tornqvist output- and input-oriented multifactor productivity indexes of Caves, Christensen and Diewert 1982] for changes in input, output and process characteristics. To show the applicability of the methodology to services, we apply the results in the framework of the commercial banking measurement of Fixler 1988] to measure the impact of bank branching on multifactor productivity.The refereeing process of this paper was handled through R. Färe.