Economic Efficiency in Pension Plan Administration: A Study of the Construction Industry

Abstract

This article investigates the of scale in collectively-bargained, multiemployer pension plans in the construction industry. Nine characteristics are studied. An econometric analysis is made of data for 1969 and 1970. The dependent variable, administrative expenses, was regressed on two output measures: active participants and investment activity. Output variables, being highly collinear, were investigated separately. The models included other quantitative (and qualitative) variables. Economies of scale are found in all regression equations of long-run average administrative expenses. Long-run average costs decreased in decreasing amounts as the scale of operations increased. None of the qualitative differences proved statistically significant. Economic efficiency normally is understood to consist of the achievement of predetermined objectives with a minimum expenditure of resources. Many different factors exert an influence on economic efficiency. Technological advances, for example, may permit a reduction in expenses, as may internal reorganizations designed to produce price advantages and/or cost reductions. It also may be feasible to improve efficiency by encouraging greater specialization in the performance of necessary functions, thereby raising the level of productivity of the labor force. Economists long have recognized that important relationships exist between size and economic efficiency and the literature is replete with studies supporting the conclusion that, up to a certain point, increases in the size of an operation, as indicated by an acceptable measure of output, are accompanied by decreasing long-run unit input costs. The relationship between changes in the physical volume of output and monetary costs associated with inputs is usually termed economies of scale. In the event that an increase in inputs results in a more than proportional increase in output, increasing returns to scale exist. While increasing returns to scale may provide the technical basis for of scale, it is also possible that this result could be obstructed by an increase in the price of inputs. On the other hand, if declines in the price Jerry W. Caswell is a member of the Georgia State University faculty. When this article was written he was at Florida State University. He is a former fellow of the S. S. Huebner Foundation for Insurance Education. This paper was submitted November, 1974.