Cost Elasticity Research Articles

The Principle of Cost-Based Supervision in Practice

A key response of financial regulators around the world to the financial and economic crises of ten years ago has been the formation of supervisory committees. Such committees now exist in several countries worldwide. Consequently, many regulators fund their supervisory function by charging their supervisees. The objective of this paper is to compare how these regulators charge fees, identify common practices, draw conclusion from observations, and provide relevant recommendations. This paper especially focuses on the Federal Reserve, the European Central Bank and the Bank of England that charge fees just enough to recover the cost of supervisory function, or those that follow what this paper refers to as the “principle of cost-based supervision.” A discussion on how selected examples of regulators practice the principle of cost-based supervision follows. Simulations of fees using selected procedures to supervisees in the Czech Republic and Greece follow. Then this paper introduces the asset elasticity of cost notated as n and simulates the hypothetical supervisory fee if n is constant.

Fiscal Policy, International Spillovers, and Endogenous Productivity

AbstractThe paper presents empirical evidence on the international effects of U.S. fiscal policy from structural vector autoregressions identified through external instruments in a panel setting for the G7 countries. An exogenous increase in U.S. government spending is estimated to produce sizable positive responses of output and consumption in the rest of the G7 countries, both about half as large as their domestic U.S. counterparts, while strongly depreciating the U.S. terms of trade and lowering the U.S. trade balance and short‐run real interest rates. Moreover, fiscal shocks are estimated to have a strongly positive impact on hourly labor productivity in the private sector. We solve a two‐country New Keynesian model in closed form and show that a low cost elasticity of varying technology utilization can simultaneously explain the positive productivity, consumption, and international spillover effects as well as the real depreciation resulting from expansionary U.S. government spending shocks.

Heterogeneous uncertainty matters! Evidence based on firms' cost management decisions

The literature traditionally treats the uncertainty firms encounter as a whole, neglecting the inherent heterogeneity of uncertainty that prevails in the real world. To address this critical issue, this study employs natural language processing methods to decompose uncertainty into three distinct levels: firm-level, industry-level, and macro-level uncertainty. We then examine the impact of heterogeneous uncertainty on corporate decision-making from a cost management perspective. Our findings indicate that while uncertainty as a whole increases cost stickiness, this effect mainly stems from firm-level uncertainty rather than industry-level and macro-level uncertainty. These findings suggest that firms only respond to uncertainty when they perceive uncertainty at the firm level. Cross-sectional tests indicate that the impact of uncertainty on cost stickiness is more pronounced when firms face higher adjustment costs, lower financing constraints, and lower competitive pressures than otherwise. Additionally, uncertainty diminishes firms' cost elasticity, curtailing their production flexibility. Collectively, our results provide insights into comprehending the internal mechanisms of firms' decision-making in the face of uncertainty.

The quality admission and price decisions of production capacity on the third‐party platform for shared manufacturing

AbstractMany third‐party platforms for shared manufacturing (platforms) have developed rapidly in recent years. The quality admission and pricing of production capacity are crucial issues for these platforms. This paper focuses on the platform supply chain composed of a platform, multiple manufacturers with surplus production capacity (sharers), and multiple manufacturers with insufficient production capacity (renters). Considering the impact of the production capacity quality on the shared scale and rental demand of production capacity, this paper constructs a game model for the platform supply chain under different quality admission scenarios, investigates the quality admission and price decisions of production capacity on the platform, and analyses the impact of the quality admission on the sharers’ and renters’ profits. The results show that the platform sets the quality admission when the sharers’ production capacity scale is small and the platform regulatory cost is low. The platform always increases its service price but may reduce the rental price of production capacity under the quality admission scenario. When the sharers’ production capacity scale is large, the platform lowers the threshold of quality admission with the quality elasticity of production capacity increasing. In addition, when the quality elasticity of production capacity and platform regulatory cost are low, and the sharers’ production capacity scale is small, the quality admission of the platform realizes the win–win–win situation for the platform, renters, and sharers.

Monopsony Power and Cost Structure: Evidence from the U.S. Hospital Industry

ABSTRACT We examine the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries. Data Availability: Data are publicly available from the sources cited in this study. JEL Classifications: D22; D23; I11; M20; M40.

Cost behaviour and reporting frequency during the COVID-19 outbreak

We examine the effect of financial reporting frequency on cost management decisions in crisis situations, with a focus on the COVID-19 outbreak. Using the European setting, we find that quarterly reporters exhibit greater cost elasticity relative to semi-annual reporters, meaning they had larger changes in cost for each change in sales. When allowing for cost asymmetry, we see that our results are driven by firms with decreases in sales and that quarterly reporters reduced their costs more. Additional analyses show that managerial learning and monitoring pressure might be potential channels behind the results and that there is a positive performance effect in the short run.

The Effect of Cost Elasticity Choice on Loss Reversal

The Effect of Cost Elasticity Choice on Loss Reversal

“Downs's Law” under the lens of theory: Roads lower congestion and increase distance traveled

Downs (1962) claimed a “Law”: that expressways lower congestion even though they reach maximum traffic flow. In urban economics since Strotz (1965), road capacity is measured by road width, and congestion as the delay in travel: wider roads lower congestion. Duranton and Turner (2011), in an econometric study, atypically defined congestion, not as delay in travel, but as aggregate vehicle kilometers traveled (VKT) relative to the aggregate length of roads, concluding that roads are unlikely to relieve congestion. We first provide the theory behind “Downs's Law”. Then, in a series of theoretical models, we endogenize rent, income, the value of time, leisure, Marshallian productivity, consumption-linked trips, road costs, spatial detail, and a suburb-to-city expressway competing with existing roads. In each case we prove that adding more road capacity lowers congestion and increases utility in the short run when city population is fixed; and lowers congestion in the long run too despite induced travel or population growth. Aggregate travel cost and VKT rise or fall, depending on how much congestion is lowered, on the cost elasticity of travel demand, on location-based income and substitution effects, and on which roads are widened.

Implementation of industrial enterprises’ green innovation strategy under technology spillover

ABSTRACT In recent years, advanced emerging technologies have paved the way for new opportunities in green innovation strategies within industrial enterprises. This research aims to examine the impact of technology spillover on the strategic management of industrial enterprises’ green innovation initiatives and evaluate the role of government intervention. By employing an evolutionary game model and simulation approach, we identify a direct relationship between industrial enterprises’ strategic choices in green innovation and the degree of technology spillover. With significant technology spillover, industrial enterprises demonstrate an increased tendency to access innovation resources and technical support, leading to a preference for breakthrough green innovation strategies. Enhanced innovation capabilities and a higher innovation cost elasticity coefficient help reduce the risks associated with breakthrough green innovation, further amplifying the positive effects of technology spillover on such initiatives. Moreover, when the government provides considerable cost subsidies and incentive funds, industrial enterprises show a stronger predilection towards breakthrough green innovation strategies. This research adds to the body of knowledge concerning technology analysis, strategic management of green innovation, and the sustainable progression of industrial enterprises.

Competing for manufacturing value added: How strong is competitive cost pressure on sectoral level?

Unit labour cost plays a pivotal role in shaping the regional distribution of manufacturing value added by influencing both export dynamics and business relocation decisions. Nonetheless, cost competitiveness is often regarded as playing a minor role in strategies promoting industrial upgrading. This perception stems from the belief that high-tech manufacturing sectors compete on the basis of quality rather than cost. This paper challenges this assumption and explores whether industries characterized by high levels of innovation and technological sophistication are indeed less reliant on competitive cost structures. In order to attain accurate estimations of sectoral value added elasticity in relation to cost, unit labour cost is conceptualised as a vertically integrated metric, accounting for the cost situation along the value chain. The analysis is centered on 18 manufacturing sectors across 28 European countries and covers the period from 1995 to 2018. The discrepancies in estimated cost elasticity across sectors appear to align more closely with their exposure to international markets and not with their degree of technological advancement. According to this sectoral-level evidence, cost competitiveness emerges as an essential prerequisite for industrial success.

Service Trade Liberalization, Trade Elasticities and Welfare

ABSTRACTThis paper estimates the welfare effects of service trade liberalization at the country-sector level. We build a panel dataset combining information on service trade restriction index and bilateral service trade flows for 45 countries and estimate the service trade elasticity for cross-country heterogeneity at short horizons. Findings suggest that countries with smaller service trade share have greater the service trade cost elasticity, and the service trade elasticity ranges from 0.11 to 12.61. Then, we develop the CP mode to quantify the welfare effects from service trade liberalization. This study finds a significant positive relationship between service trade and welfare. During the 2014 –2018 period, service trade liberalization improved global welfare by 1.01%. The empirical results indicate that service trade liberalization mainly improves welfare through productivity effect and scale effect, with the former effect having a greater impact than the latter.

Cost sharing in passenger transport models: specification, implementation, and impacts

A common practice in many transport models is to allocate all costs to the car driver meaning that car passengers are essentially free riders. This specification provides an easy way of integrating drivers and passengers and fits well with the general understanding that car drivers rarely trade passenger seats for money. However, in this paper, we question this premise and argue that cost sharing can, and most likely will, take place in a variety of forms different from simple out-off-pocket money exchange. We also stress that from a modelling perspective, this issue is far from irrelevant as it influences not only demand elasticities but also the modelling of car occupancy rates which is one of the key variables when considering congestion, climate impacts, and network utilisation. In the paper we discuss the mechanisms by which costs are shared, consider how this can be operationalised in transport models, and finally, consider the consequences of cost sharing from a transport policy perspective. Based on empirical evidence from Denmark, we find that for trip purposes with high occupancy rates, cost elasticities and occupancy rates tend to be biased if cost sharing is not properly accounted for.

The bullwhip effect, demand uncertainty, and cost structure

AbstractThe firm‐level bullwhip effect is the amplification of demand uncertainty along a supply chain—that is, fluctuations in production (for manufacturing firms) or purchases from suppliers (for retailers or wholesalers) in a firm tend to be greater than its demand fluctuations. We predict that the bullwhip ratio (a proxy for the bullwhip effect) amplifies the relation between demand uncertainty and cost structure. We expect this amplifying effect because the bullwhip ratio determines the extent to which demand uncertainty translates into uncertainty in production or purchases, which, in turn, affects cost structure. Using data from public US firms over the 1990–2020 period, we find results consistent with our prediction. Specifically, we find that both the negative relation between demand uncertainty and cost elasticity in the manufacturing sector and the positive relation between the two in the retail/wholesale sectors are stronger for firms with higher bullwhip ratios. We contribute to the literature on cost structure by highlighting the important role of the bullwhip effect in cost structure decisions.

The Open Monopolistic Competition Models: Market Equilibrium and Social Optimality

We study the monopolistic competition model of Dixit–Stiglitz–Krugman with additive separable utility and transport costs of “iceberg types”. The production costs are not necessary linear. We study two concepts: market equilibrium and social optimality. There are well-known facts in the closed economy under monopolistic competition: (1) “in market equilibrium, the elasticity of revenue equals the elasticity of total costs” and (2) “in social optimality, the elasticity of utility equals the elasticity of total costs”. Moreover, earlier Prof. Sergey Kokovin (HSE University, Russia) generated the idea that (3) “the search for equilibrium is equivalent to the problem of optimization, but revenue, not utility”. For the case of several countries, it turns out that facts (1) and (2) and prediction (3) remain mostly true.

Identifying generalizable equilibrium pricing strategies for charging service providers in coupled power and transportation networks

Transportation electrification, involving large-scale integration of electric vehicles (EV) and fast charging stations (FCS), plays a critical role for global energy transition and decarbonization. In this context, coordination of EV routing and charging activities through suitably designed price signals constitutes an imperative step in secure and economic operation of the coupled power-transportation networks (CPTN). This work examines the non-cooperative pricing competition between self-interested EV charging service providers (CSP), taken into account the complex interactions between CSPs' pricing strategies, EV users' decisions and the operation of CPTN. The modeling of CPTN environment captures the prominent type of uncertainties stemming from the gasoline vehicle and EV origin-destination travel demands and their cost elasticity, EV initial state-of-charge and renewable energy sources (RES). An enhanced multi-agent proximal policy optimization method is developed to solve the pricing game, which incorporates an attention mechanism to selectively incorporate agents' representative information to mitigate the environmental non-stationarity without raising dimensionality challenge, while safeguarding the commercial confidentiality of CSP agents. To foster more efficient learning coordination in the highly uncertain CPTN environment, a sequential update scheme is also developed to achieve monotonic policy improvement for CSP agents. Case studies on an illustrative and a large-scale test system reveal that the proposed method facilitates sufficient competition among CSP agents and corroborates the core benefits in terms of reduced charging costs for EV users, enhancement of RES absorption and cost efficiency of the power distribution network. Results also validate the excellent generalization capability of the proposed method in coping with CPTN uncertainties. Finally, the rationale of the proposed attention mechanism is validated and the superior computational performance is highlighted against the state-of-the-art methods.

EFFECT OF RISK COMPONENTS ON OPERATIONAL EFFICIENCY OF DEPOSIT MONEY BANKS IN NIGERIA A STUDY OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

The main objective of this study is to examine effect of risk components on operational efficiency of Deposit Money Banks in Nigeria. The data to be used for the study will be extracted from secondary sources only. The data will be panel data which will be subjected to time and cross-sectional attributes and this will enable us to study innovation and performance of firms over time and as well as across the sampled quoted banks. The findings of the study revealed that credit risk increases the operational efficiency of Deposit money Banks. Also, the study found that liquidity risk has negative and significant effect on operational efficiency. The result also found that capital adequacy has positive and significant effect on operational efficiency. The study recommended that the management of the Deposit Money Banks should device viable measurement for evaluating the risk components confronting the banking operation and not to rely on the bank model with an assumption that that risk is incorporated into bank output without explicitly modeling its role in explaining inefficiency. This is because failure to account for risk-taking may lead to biased estimations of bank efficiency and misleading estimates of scale economies and cost elasticities.

Family Ownership Influence on Cost Elasticity

This study explores the relation between family ownership and cost elasticity. Using a sample of 1746 European firms, we first find that family ownership, a prevalent ownership type with unique characteristics, is associated with greater cost elasticity. Further, we use four empirical settings to increase our confidence that a higher cost elasticity is attributable to family ownership. We also document that family firms achieve greater operating cost elasticity primarily through modifying SG&A costs in response to changing sales, but not by hiring or firing employees. These findings extend prior studies on ownership effects on cost structures, suggesting that family ownership matters in understanding firms’ cost elasticity choices.

Business cycle and cost structure

This paper examines whether and how the business cycle affects a firm's cost structure decisions. Using annual data from a large sample of Chinese manufacturing firms over the period of 1998–2018, we find that firms choose a more elastic cost structure with higher variable and lower fixed costs, in recession than in boom periods. We also find that the positive association between recession and cost elasticity is more pronounced in firms in cyclical industries. Further, our mediating effects analysis suggests that managers' expectations regarding future sales and a firm's resource availability are two specific channels by which the business cycles affect a firm's cost structure. Our results also hold after a battery of robustness checks.

Supplier-Base Concentration and Cost Structure

ABSTRACT In the past three years, companies across the globe have witnessed significant supply chain disruptions due to the COVID-19 pandemic, which highlights the importance of managing supply risk. Supply risk has increased in the last three decades due to an increasing prevalence of concentrated supplier bases. We predict that firms with high supplier-base concentration will choose a more elastic cost structure in response to the increased supply risk. Using a unique dataset of 4,530 firm-year observations hand-collected from supplier information disclosed by Chinese-listed firms, we document a positive association between supplier-base concentration and cost elasticity. Furthermore, results from five cross-sectional tests are consistent with supply risk driving the association between supplier-base concentration and cost elasticity. Our study provides important practical implications to managers. To the extent that supplier-base concentration poses a supply risk, our study suggests that managers can respond by making the cost structure more flexible. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: L23; M41.

Agglomeration economies in developing countries: A meta-analysis

Recent empirical work suggests that agglomeration forces are multiple times higher in developing countries than in advanced economies, but also that these cities are crowded and dysfunctional. To understand the true productivity advantages of developing country cities, we systematically evaluate nearly 1300 agglomeration elasticity estimates from 76 studies in 34 countries. Using frontier methodology for conducting meta-analyses, we find that the elasticity in developing countries are less than 1 percentage point higher than in advanced economies, with the difference not being statistically significant. Further, we present novel estimates of urban costs in developing and developed country cities – pollution, carbon emissions, wellbeing, homicides and congestion. While the levels of urban costs and the elasticity of crime are higher in developing country cities, other measures of urban cost elasticity are not different across income groups.