Allocative Efficiency Measures Research Articles

The Global (Mis)Allocation of Capital

The allocative efficiency of capital flows is one of the oldest and most contentious questions. We answer it by matching cross-border securities holdings reported in the US external statistics from 1995 to 2022 with the corresponding firm-level measures of allocative efficiency. We find that US investors tilt their international equity investment toward firms with high MRPK and markups, thereby fostering their potential for growth. Foreign investors tilt their holdings toward US firms with high productivity and intangible capital. A horse race shows that productivity is the best predictor of foreign investment in US firms and MRPK for US investment in foreign firms. Both US and foreign firms that receive more international funding increase spending on intangible capital, and foreign firms also increase tangible capital. The results are stronger for more productive firms.

Nonparametric estimation of allocative efficiency using indirect production theory: Application to container ports in Norway

Adaption to prices is an important feature of productivity development. This paper proposes an extension of the StoNED model to accommodate estimation of allocative efficiency. It demonstrates how indirect production theory is suited for assessing allocative efficiency and helps alleviating the curse of dimensionality for stochastic nonparametric estimators compared to conventional measures of allocative efficiency. Furthermore, the paper elaborates on the appropriate cost of capital for the estimation of allocative efficiency. The proposed model framework is utilized to study allocative efficiency of Norwegian container ports, thereby adding to the literature on seaport terminal efficiency studies.

Port allocative efficiency and port devolution: a study for the Spanish port authorities (1992-2016)

ABSTRACT This paper analyses the effect of port devolution on the Spanish port authorities’ allocative efficiency across periods with different regulations during the port devolution process in Spain. To do this, we first obtain a measure of allocative efficiency from a distance system of equations using two different approaches: the error components approach and the parametric approach. Then, we evaluate whether port devolution has had effects on allocative efficiency by applying a quantile regression approach, taking into account control variables related to port characteristics. Our results suggest that allocative inefficiencies occur in the Spanish port system. We also demonstrate that port devolution reforms, both internal and external port characteristics have had a significant effect on the port authorities’ allocative inefficiency.

Resource-Use Efficiency And Production Constraints Among Cassava Farmers in Nigeria: Insight, Linkage and Pathway

Maximum Likelihood Estimate (MLE) of efficiency in agricultural production, specifically crop sub-sector, determines the efficiency level of households in their farming activities. If accessible, farmers in developing countries like Nigeria do not use all potential technological resources, thus making inefficient decisions in their agricultural activities. This paper therefore made effort to measure the technical efficiency (TE) of cassava production, identified drivers of technical efficiency and production constraints facing cassava farmers in Nigeria. Using cross sectional farm level data from cassava farming households in Nigeria, the study employed Stochastic Frontier Analysis (SFA) in the Cobb-Douglas production function, Tobit regression, Benefit-cost ratio to achieve the objectives of the study. The calculated technical efficiency in the study was around 65.1 percent. The estimated variance parameter of the model (γ) was 0.92 which implies that about 92 per cent of the variation in cassava output was due to farmers' practices which comprise all variables. The study showed that there was gross inefficiency in the allocation of productive resources among cassava farmers in Oyo state. Most of these resources are over-utilized implying a sub-optimal utilization of resources. The study demonstrated that the key factors significantly influencing technical efficiency levels are years of production, size of land cultivated, household size, variety of cassava planted, total number of stem cutting used for planting and quantity of agrochemicals used per hectare. The allocative efficiency measurement shows that most of the resources were sub-optimally utilized. Meanwhile, high cost of inputs (such as labor) were identified as key constraints for cassava production in the study area. This study therefore suggest that economic efficiency and enterprise productivity will improve if government broadens the scope on provision of soft loans, adequate subsidized farm inputs (like agro- chemicals). This will improve increase income, food and nutrition security for the cassava farming households in Nigeria. Additionally, in order to achieve optimality in resource allocation, there is need introduce and encourage usage of technologies that can replace or reduce the use of inputs with high cost in the cassava production process. Hence, this will raise the productivity of resources, increase output and consequently improve revenue and net returns.

Reallocation and the Role of Firm Composition Effects on Aggregate Wage Dynamics

Aggregate wages display little cyclicality compared to what a standard model would predict. Wage rigidities are an obvious candidate but a recent strand of the literature has emphasized the need to take into account the growing importance of worker composition effects during downturns. With reference to the Italian case we document that also firm composition effects increasingly matter in explaining the aggregate wage dynamics, i.e. aggregate wage growth has been lifted up by the increase in the employment weight of high wage firms. To the extent that this reallocation occurs towards more productive firms, the composition effects may also reflect an efficiency enhancing mechanism. We use a newly available dataset based on social security records covering the universe of Italian employers be-tween 1990 and 2013 and employ a standard measure of allocative efficiency on wages paid across firms. We show that this measure has improved over time since prior to the recent downturn and that it is aligned, at the sectoral level, with measures of productivity growth and market openness to competition. We then focus on the recent downturn and find that large firms were able to adjust wages more than small firms, and that small firms instead adjusted employment to a larger extent. Finally, we document that the continued improvement in the measure of allocative efficiency over this period correlates positively with measures of economic activity (evolution of employment and value added) across sectors.

Measurement of Allocative Efficiency of Sugarcane Farms in District Charsadda-Khyber Pakhtunkhwa

Measurement of Allocative Efficiency of Sugarcane Farms in District Charsadda-Khyber Pakhtunkhwa

Cross-constrained Measuring the Cost-environment Efficiency in Material Balance Based Frontier Models

Frontier models based on the material balance principle (MBP) constitute a major group of environmentally-adjusted efficiency methods that produce environmental and economic outcomes, but fail to integrate them with measures of allocative efficiency in order to perform a joint cost-environmental efficiency analysis. Drawing insight from the literature on multi-criteria analysis, the objective of this paper is to extend the MBP framework to new measures of cross-constrained cost and environmental allocative efficiency using data envelopment analysis (DEA). Cross-constrained measures seek for efficiency improvement in one of the two relevant criteria, cost and environment, consistent with given levels of both production and the outcome of the other criteria. The incorporation of these measures into the MBP framework provides an extra decomposition of allocative efficiency in efficiency gains that involve an economic- environmental trade-off and those that do not. The proposed approach is illustrated with an application geared to assessing the efficiency of a sample of greenhouse horticultural production units in Almeria, Spain. The results for this case show that it is possible to increase environmental allocative efficiency by up to 34% on average without incurring additional costs.

Allocative Efficiency and Aggregate Wage Dynamics in Italy

Aggregate wages display little cyclicality compared with what a standard model would predict. Wage rigidities are an obvious candidate, but a recent strand of the literature has emphasized the need to take into account the growing importance of worker composition effects during downturns. With reference to the Italian case we document that firm composition effects also matter increasingly in explaining aggregate wage dynamics, i.e. aggregate wage growth has been raised by the increase in the employment weight of high-wage firms. To the extent that this reallocation occurs towards more productive firms, the composition effects may also reflect an efficiency enhancing mechanism. We use a newly available dataset based on social security records covering the universe of Italian employers from 1990 to 2013 and employ a standard measure of allocative efficiency on wages paid across firms. We show that this measure has improved progressively since before the recent downturn, being aligned at the sectoral level with measures of productivity growth and market openness to competition. We then focus on the recent downturn and find that large firms were able to adjust wages more than small firms and that small firms instead adjusted employment to a larger extent. Finally, we document that the continued improvement in the measure of allocative efficiency over this period correlates positively with measures of economic activity (evolution of employment and value added) across sectors.

Allocative and technical efficiency of New Zealand Banks

Purpose Paying too much for funding or failing to obtain adequate returns for lending and interest-bearing assets because of inappropriate mix is just as much a source of inefficiency in banking as overutilisation of input resources. The purpose of this research is to examine bank performance in terms of both technical and allocative efficiency. Design/methodology/approach This paper uses an extensive quarterly data set from New Zealand (NZ), which allows a decomposition of interest costs and revenues into quantity and price effects to explore the factors, including both technical and allocative efficiency, that impact changes in banks’ costs and revenues. Findings The research finds that focusing solely on technical efficiency can give a misleading impression of banking performance in our NZ sample. The inclusion of allocative efficiency measurement shows greater variability of performance, as well as highlighting changes in the mix of inputs and outputs needed for banks to improve performance. Originality/value A focus on prices and allocative efficiency has received little attention in the academic literature on banking. This paper shows how banking data can be decomposed into the respective price and quantity components.

An Augmented Static Olley–Pakes Productivity Decomposition with Entry and Exit: Measurement and Interpretation

We develop an augmented Olley–Pakes (OP) decomposition that allows us to examine how entering and exiting firms contribute to the popular OP covariance measure of allocative efficiency. Applying the decomposition to a comprehensive micro‐level data, we find that a large part of the OP covariance component can be attributed to entrants and exiting firms. We also build a model of firm dynamics that is consistent with our main empirical results. In the model economy, the standard OP covariance component tends to increase with certain type of distortions because of endogenous changes in firm entry and exit.

Measuring the performance of hierarchical organizations: An application to bank efficiency at the regional and branch levels

The measurement of performance has long been of central interest to both managers and management accounting researchers. As noted by Otley (1999), performance management is a preoccupation of management control systems researchers. In this study, we are concerned with coherence considered at two levels: (i) between the hierarchical organization and performance evaluation, and (ii) throughout the decision-making process between a hierarchical organization's various levels of decision-making. We do this by developing a system of performance measures from a prescriptive approach and a methodological basis rooted in operational research. Such a system of performance measurement ensures consistency between the different levels of a hierarchical structure. More specifically, we propose a means of measuring performance that captures both the overall performance and the contributions of the separate levels within an organization's hierarchy. The proposed measurement is based on an extension of standard frontier efficiency models to the situation where the “business units” being evaluated consist of two different levels within a hierarchical organization. Generally, the lower-level unit is responsible for “operations,” which can be assessed by using a measure of technical efficiency; higher-level units are assumed to make “strategic” decisions, which can be assessed by using a measure of allocative efficiency. We motivate and illustrate our method using data on 1585 branches of a major French bank.

Consistent estimation of technical and allocative efficiencies for a semiparametric stochastic cost frontier with shadow input prices

Conventional parametric stochastic cost frontier models are likely to suffer from biased inferences due to misspecification and the ignorance of allocative efficiency (AE). To fill up the gap in the literature, this article proposes a semiparametric stochastic cost frontier with shadow input prices that combines a parametric portion with a nonparametric portion and that allows for the presence of both technical efficiency (TE) and AE. The introduction of AE and the nonparametric function into the cost function complicates substantially the estimation procedure. We develop a new estimation procedure that leads to consistent estimators and valid TE and AE measures, which are proved by conducting Monte Carlo simulations.

Individual and Organizational Determinants of Wage Disparities in Israel's Local Authorities

In this study I compare hypotheses derived from a resource-based view of management with those based on an institutional perspective to test whether wage levels in local authorities are more likely to reflect technical or allocative efficiency measures, the former deriving from “autonomous” revenues from private sources, the latter from policy-based allocation of resources. A focus on wage variations for 5,033 employees from 83 local authorities shows that the level of autonomous revenues lowers the wages for women and Arab employees but not for men and Jewish employees. The results suggest that local authorities use a differential wage allocation, probably indicating increased access to privatized and outsourced employee recruitment. Moreover, the results show that equal opportunity notions, presumably inherent in social policy guidelines, do not ensure interorganizational homogeneity in wages: metropolitan and larger local authorities are more likely to use technical than institutional measures of organizational success. I conclude that neoinstitutional hypotheses that focus both on the competitive and institutional aspects of governance are differentially applied in regard to wages.

Allocative efficiency measurement with endogenous prices

In the nonparametric measurement of allocative efficiency, output prices are fixed. If prices are endogenous, the overall output in the market determines the allocative efficient point. We develop an alternative semi-nonparametric model that allows prices to be endogenously determined.

Measurement of Allocative Efficiency in Agriculture and its Determinants: Evidence from Rural West Bengal, India

Measurement of Allocative Efficiency in Agriculture and its Determinants: Evidence from Rural West Bengal, India

A comparison method for allocative efficiency measurement in multiclinic healthcare systems

Managers of large networks of clinics need a way to meaningfully compare the performance of these clinics and make recommendations on how to improve the less efficient ones. This process is complicated by different patient populations requiring a different clinic service mix. In addition, a significant problem occurs when resources are shared between clinics or the output of one clinic becomes the input of another. A mixed integer/linear programming model is developed for comparing the allocative efficiencies of clinics in a network. The model is illustrated using an example of two competing health systems that are considering a merger.

Allocative efficiency measurement revisited—Do we really need input prices?

The traditional approach to measuring allocative efficiency exploits input prices, which are rarely known at the firm level. This paper proves allocative efficiency can be measured as a profit-oriented distance to the frontier in a profit-technical efficiency space. This new approach does not require information on input prices. To validate the new approach, we perform a Monte-Carlo experiment providing evidence that the estimates of allocative efficiency employing the new and the traditional approach are highly correlated. Finally, as an illustration, we apply the new approach to a sample of about 900 enterprises from the chemical manufacturing industry in Germany.

Alternative Measurements of Productive Efficiency in the Global Bleached Softwood Pulp Sector

Abstract In this article, we conduct a productive efficiency analysis using the two major methods: stochastic frontier analysis (SFA) and data envelopment analysis (DEA). First, we demonstrate the steps and assumptions involved in SFA and DEA, and highlight their strengths and weaknesses. Then we apply them to the case of bleached softwood kraft pulp production to derive technical and allocative efficiency measures for 102 mills in the world. We find that in general, the SFA cost-efficiency levels are higher than their DEA counterparts, and much of the cost inefficiency is caused by inappropriate input mix, or allocative inefficiency, instead of the way with which inputs are converted into outputs, or technical inefficiency. In addition, SFA and DEA results rank some of the producers in different orders. We also find that while cost-efficiency levels vary in different regions, most producers have substantial opportunities to make improvements. Finally, we discuss implications of our study. FOR. SCI. 46(4):558–569.

An alternative approach to market structure and the markup ratio

Hall's studies of market power emphasize that the markup ratio of price over marginal cost is an important indicator for assessing the role of market structure in resource allocation (without using concentration ratios) and is also a good measure of allocative efficiency. The basic idea was that price is equal to marginal cost if there is perfect competition and constant markup ratio. A statistrical model was developed to estimate the markup ratio. If the markup ratio estimated for an industry is unitary, then the null-hypothesis of competition is not rejected. If, however, it is greater than one, the alternative hypothesis of non-competition is not rejected. The theory mandates that monopoly power is dynamically constant despite a nonconstant productivity residual. Hall assumes, in etimation, that technical progress (or solow residual) has a randomness. This assumption implies that the procyclicity of technical progress is not a true phenomenon. The spurious procyclicity is revealed in the estimated markup ratio as greater than one, and provides evidence against competition. Although Hall's method is very attractive for studying market power and the insight into the behaviour of technical progress in the business cycle is quite striking, the estimation method suffers from observational equivalence, not to mention some degree of arbitrariness in the selection of instrumental variables. That is, the satistical equation estimated can be expressed in two different forms. In the method of instrumental estimation, the tow different equations look exactly the same, because they cannot identify their own instrument. It is im possible to determine in actual estimation what is estimation what is estimated, and, thus, any arguments made on the basis of the estimation results are not reliable. Similarly, we conclude that all of DHP's conclusions based on the ocmparision with Hall are suspicious if not invalidated. This may also explain why, for instance, Shapiro applies a variant of Hall's approach and finds contrary to Hall and DHP a strong relation between concentration and price-cost margins. An alternative method for the study of market power is suggested, avoiding the observational equivalence problem. Under the assumption of profit-maximization, Hall's markup ratio of price to marginal cost is replaced by the alternative markup ratio of price to margianl revenue. The hypothesis testing is quite similar to that in Hall. If price is greater than the estimated marginal revenue, the null-hypothesis of competition is rejected. The alternative method assumes that the price movements have a substantial random element. This presumption is based on the idea that the price movements are spuriously procyclical. The spurious procyclicity of price change is evidnece against competiton, and is expected to be revealed in the estimate of the alternative markup ratio as greater than one. In this alternative method, the statistical model is expressed as in Hall's method in two different forms. However, unlike Hall's method, the two different equations can identify their own instrument, som which equation is being estimated is determinable. Besides this identifiability of the instruments, there are two other advantages of this alternative method. First, unlike Hall's method, it is not constrained by the assumption of constant returns to scale. Second, the number of variables needed for the test is much smaller, and the data are easier to obtain.

Measuring the industrial performance of Chinese cities by data envelopment analysis

The concept of allocative efficiency (AE) is discussed from the perspective of urban planning in China. The AE measurement is analytically achieved by data envelopment analysis/assurance region (DEA/AR) method. Using DEA/AR, this study illustrates the potential of AE to empirically measure the industrial performance of 35 selected Chinese cities. Besides the AE measurement, the current study explores the returns-to-scale (RTS) of these cities. The importance of the RTS measurement is that it does not assume uniqueness in its solution. This article thus presents an extended use of DEA in an attempt to improve the economic achievement within Chinese cities.