Cost Frontier Approach Research Articles

Efficiency in Uganda’s seed potato systems

PurposeThis paper aims to examine the level of economic efficiency and factors that influence economic efficiency among seed potato producers in South-western Uganda.Design/methodology/approachThe paper analyses the economic efficiency of 499 informal and 137 formal seed producers using primary data collected through a structured questionnaire. A multi-stage sampling technique was used to select the study sites and specific farmers. A one-step estimation procedure of normalized translog cost frontier and inefficiency model was employed to determine the level of economic efficiency and the influencing factors.FindingsThe results showed that mean economic efficiencies were 91.7 and 95.2% for informal and formal seed potato producers, respectively. Furthermore, results show significant differences between formal and informal seed potato producers in economic efficiency at a one percent level. Market information access, credit access, producers' capacity and experience increase the efficiency of informal while number of potato varieties, market information access and producers' experience increase economic efficiency for formal counterparts.Research limitations/implicationsMost seed potato producers, especially the informal ones do not keep comprehensive records of their production and marketing activities. This required more probing as answers depended on memory recall.Practical implicationsFuture research could explore panel data approach involving more cropping seasons with time variant economic efficiency and individual unobservable characteristics that may influence farmers' efficiency to validate the current findings.Social implicationsThe paper shows that there is more potential for seed potato producers to increase their economic efficiency given the available technology. This has a direct implication on the economy through increased investment in the production and promotion of high yielding seed potato varieties to meet the growing national demand for potatoes.Originality/valueThe paper bridges the gap in literature on economic efficiency among seed potato producers, specifically in applying the normalized translog cost frontier approach in estimating economic efficiency in the context of potato sub-sector in Uganda.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-10-2021-0641

Economic Efficiency of the Korean Container Terminals: A Stochastic Cost Frontier Approach

Purpose - Recent issues such as vessel enlargement, strengthening of environmental regulations, and port smartization are expected to increase costs and intensify competition in the port industry. In the new normal era, when external growth has reached its limit, the efficient operation of ports is becoming indispensable for achieving sustainable growth. This study aims to identify the determinants of inefficiency by examining the cost structure and efficiency of container terminals in Korea and furthermore propose the political implications to derive the maximization of efficiency.
 Design/methodology - This study estimates the cost function of container terminal operators and identifies the efficiency of container terminals using stochastic cost frontier (SCF) in the first stage. In the second step, the SCF results are compared with the data envelopment analysis (DEA). Last, this paper proposes efficiency determinants on container terminal operation to establish appropriate strategies. Out of the 29 container terminal operators in South Korea, 13 operators participated in the survey. The translog cost function was estimated utilizing a total of 116 observations collected over the 2007-2017 period.
 Findings - Empirical analysis shows that economies of scale exist in Korea’s container ports, which provides a rationale for the government’s policy to establish the global terminal operator by integrating small terminal operators to enhance competitiveness. In addition, as a result of the determinants analysis, container throughput, weight of direct employment costs, and labour cost share have positive effects on improving cost efficiency, while inefficiency increases as the length of quay increases. More specifically, cost efficiency improves as the proportion of direct employment costs to outsourcing service costs increases.
 Originality/value - This study contributes to analyzing the inefficiency factors of container terminals through efficiency analysis with respect to a cost function. In addition, this study proposes the practical and political implications, such as establishing a long-term manpower pool, the application of the hybrid liner terminal system, and the construction of a statistical data system, to improve the cost inefficiency of terminal operators.

China's carbon allowance allocation strategy under the EU carbon border adjustment mechanism: An integrated non-parametric cost frontier approach

The implementation of the European Union (EU) Carbon Border Adjustment Mechanism (CBAM) will affect the cost efficiency of Chinese exporters, and few studies have considered how to deal with its impact from the carbon market perspective. Based on this, this paper constructs two price-variable resource allocation (VPRA) models to investigate China's allowance allocation strategies to mitigate the impact of the EU CBAM from a carbon market perspective. This paper takes the steel and cement industries in each province of China for example for cost efficiency assessment and carbon allowance allocation, and finds that: (1) The EU CBAM has a negative impact, and it is necessary to incorporate the CBAM into the top-level system design of allowance allocation to obtain an allowance allocation scheme that maintains the cost efficiency level of each industry. (2) A higher and more stable carbon price in China can effectively counteract the impact of the EU CBAM and ensure that the cost efficiency of each industry does not fluctuate significantly. (3) When the Chinese carbon price exceeds 60 RMB/ton, the impact of the EU CBAM on the cost efficiency of each industry will become significantly smaller. (4) Measures to reduce the number of products exported to the EU are not effective in mitigating the impact of the EU CBAM when the number of products exported to the EU exceeds a certain rate. The findings of this paper provide useful policy insights for China and other developing countries to actively address the challenges of the EU CBAM.

Heteroskedastic Stochastic Cost Frontier Approach in the Estimation of Cost Efficiency of Tunisian Water Distribution Utilities

Heteroskedastic Stochastic Cost Frontier Approach in the Estimation of Cost Efficiency of Tunisian Water Distribution Utilities

Stochastic Frontier Approach for Measuring the Efficiency of Indonesian Insurance Industry

This study uses case studies of 79 general insurance companies both conventional and sharia in Indonesia with a period of 2016-2018. The data used is secondary data obtained from the financial statements of each insurance company. This study uses a cost frontier approach and is measured based on the total cost variable (Y), total assets, equity, total claims, total premiums, total investment, and investment assets owned. From this research, it is found that the factors that influence the efficiency of sharia insurance companies are the number of claims and the amount of premiums. While the amount of insurance, the cost is influenced by claims, the amount of premiums, total assets, and the amount of investment.

Effect of Branch Expansion on Cost Efficiency of Ethiopian Commercial BANKS. (Stochastic Cost frontier Approach)

Banks are a vital parts of a nation’s economy that catalyzed Economic growth through facilitate spending and investment in the economy.Bank institutionis one and the top from the major financial institutions in Ethiopia.The number of all branches of the industry including public banks increased from year to year aggressively.Thus, the overall objective of this study was to investigate effect of branch expansion on cot efficiency Ethiopian commercial banks.Accordingly, from the population, Commercial banks operating in the country a total of 18, among these, 2 public and 16 private commercial banks (a total of 14 commercial banks) were included in the study period 2010/11-2018/19 based on non-probability, purposefully sampling method. The research used theprice of labor, prices of capital,Number of branches, annual inflation rate, real GDP growth, Total loan output, management performances, market share, capital adequacy ratio,liquidity risk, prices of deposit and total securities variables to measure cost efficiency. To this end, the study used secondary data from the NBE, balance sheets and income statements of individual commercial banks obtained from the period from to 2010/11 to 2018/9. Then nine years’ panel data of bank levelvariables has been collected and analyzed using stochastic cost frontier regression analysis. As a resultthe researcher concluded that stochastic frontier model as appropriate to represent inefficient operation among the commercial banks of Ethiopia .The Ethiopian commercial banks expanded their branches throughout the country’s territory; most of the bank branches were opened.Despite the various challenges, banks preferred to go ahead with its plan to open more branches to reach customers. However their cost efficiency had been decreased as of aggressively opened branches in the study years.Accordingly the analysis result Zemen bank was the most cost efficiency and become the best practiced bank and CBE the most inefficiency bank and in reverses also characterizes in branch expansion profile.The researcher recommended thatEthiopianbanking institutions should continue to innovate so as to reduce their cost inefficiencies. Moreover, NBE and government stand towards policy that forbids foreign banks entry, the Reserve required ratio amount, and competition environment and policy in opening branches must revised. Keywords: Branch expansion, cost efficiency, Ethiopian commercial banks DOI: 10.7176/RJFA/12-9-04 Publication date: May 31 st 2021

Determinants of banks’ cost efficiency: a case study of selected commercial banks, Ethiopia

This study examines the determinants of cost efficiency commercial banks’ in Ethiopian using balanced panel data with a sample of 13 commercial banks over the period 2010-2017 by paying a translog stochastic cost frontier approach. The identification and selection of inputs and outputs variables was based on the intermediation approach. Accordingly, three input variables (cost of labor, cost of capital, and cost of fund) and two output variables (total loans and other earning assets) are used in the study. Furthermore, five banks specific and one macroeconomic variable are included to examine their effect on cost efficiency. So as to examine the effect of determinant variables which are associated with banks efficiency, a single stage maximum likelihood estimation method is applied to stochastic frontier cost function. The empirical estimations were accomplished by Appling a single stage maximum likelihood function assimilated into Stata software. The estimation is based on conditional mean model concepts. The finding shows that from bank specific factors, return on assets (ROA), and intermediation ratio have positive and significant for intermediation (IR) and insignificant for ROA with cost inefficiency. On the other hand, Bank size (lnTA), Credit risk (CR) and capital adequacy ratio (CAR) have a significant negative coefficient with cost inefficiency. GDP also has negative but insignificant with inefficiency. Therefore, banks are recommended to improve and sustain their efficiency by maintaining available proportion of capital adequacy ratio and attract high value, low interest-bearing demand deposits.

Innovations and firm-level efficiency: a comparative analysis between China and India

PurposeThis study examines the innovation-efficiency linkage for Indian and Chinese manufacturing and service firms.Design/methodology/approachWe applied the stochastic production and cost frontier approach to determine the output and cost efficiency of the firms surveyed in World Bank enterprise surveys. We then used both unconditional and conditional propensity score matching (PSM) estimation techniques to examine the effects of innovation as well as R&D on output and cost efficiency of the firms surveyed.FindingsThe study results suggest that innovation-efficiency linkage varies between countries and sectors. Innovations significantly raise output and cost efficiency of Indian manufacturing firms, whereas innovations in Chinese manufacturing firms are cost-oriented and negatively affect output efficiency. For the service firms of both countries, innovations are significantly positively linked with output and cost efficiency. The study also suggests that R&D acts as a crucial moderator for innovation-efficiency linkage for Chinese manufacturing firms but not for Indian firms, and the interaction effects of innovations are not substantially higher in magnitude than their individual effects. Finally, conditional PSM results suggest knowledge spillover for effective innovations of Indian firms, whereas R&D is a must for substantial innovation-efficiency linkage in Chinese firms.Originality/valueThis study offers quite a few crucial policy decisions concerning the relationship between innovation and efficiency as well as the moderation effect of R&D on innovation-efficiency linkage. It concludes that the effects of innovation on firms' efficiency and the role of R&D as a moderator of the innovation-efficiency relationship differ between India and China across the manufacturing and service sectors.

Estimation and evaluation of productivity change and its drivers in the English and Welsh water sector: a stochastic cost frontier approach

ABSTRACTEstimating productivity change and its determinants is of great importance when measuring the performance of a firm. A true random effect cost model was employed to measure the cost efficiency of water companies in England and Wales from 1993 to 2016. Subsequently, total factor productivity change was estimated and decomposed into cost-efficiency change, technical change, scale efficiency change, output effect and residual price effect. The results indicate that the English and Welsh water industry increased its productivity over the period examined at a rate of about 2.1%, and it was influenced primarily by technical change. The price reviews appear to have a positive impact on the productivity of water-only companies during the whole period examined. In the case of water and sewerage companies, the 1994 and 1999 price reviews had a positive impact on productivity, whereas the last two price reviews had an adverse impact.

DETERMINANTS OF BANKING SECTOR PERFORMANCE IN UZBEKISTAN

ABSTRACT This paper analyses determinants of banking sector performance in Uzbekistan over the last two decades. In this purpose, it has been deeply studied that the relationship between the structure of bank ownership and bank performance. To test our hypothesis, we use the econometric cost frontier approach - measured the performance of banking sector in terms of efficiency, using Trans-Log Cost and Profit Function with panel analysis for 29 Uzbekistan’s banks over the period 2003-2017. This study has been carried out to show possible difference between state-owned banks and the other types of bank ownership (private, joint-stock and foreign owned banks) in Uzbekistan from the perspective of performance. Moreover, this paper discovered an interesting pattern on a substance effect of bank ownership to banking sector performance of Uzbekistan before and after the 2008s financial crisis. The result reveals that the structure of bank ownership is a key determinant for the banking sector performance in Uzbekistan and that it does matter before the 2008s financial crisis in the banking system. Furthermore, this study finds that bank capitalization and price policy are insignificant determinants for banking sector performance of Uzbekistan. More importantly, on average, state-owned banks operated more cost efficient and less profit efficient than other types of banks in Uzbekistan in the last decade. These are interesting findings, because the cost efficiency of the state-owned banks is consistent with the “development” theory (A. Gerschenkron, 1962), and the profit inefficiency of the state-owned banks is more likely connected with the “political” theory (La Porta et al., 2002). Furthermore, it has been concluded that there is a significant space for improving the overall performance of the banking sector through privatization of the state-owned banks by implementing good corporate governance practice in the banking system of Uzbekistan. Keywords state-owned, joint stock, foreign and private banks, bank performance, determinants, bank ownership, corporate governance, cost efficiency and profit efficiency.

Do optimal scale and efficiency matter in Taiwan's higher education reform? A stochastic cost frontier approach

A number of universities in Taiwan are currently confronting problems of low enrolment rates and financial distress mainly as a result of low birth rates and over-expansion of the higher education industry over the last few decades. These universities were requested by the Taiwan Ministry of Education to find a solution, including shutting down problematic departments and merging with other institutions. As such, information on cost efficiency and the optimal size of universities is important for making appropriate decisions. A stochastic cost frontier approach is adopted in the study to measure the cost efficiency and identify optimal size of Taiwanese universities by considering the heterogeneity of university quality. The results of the study indicate a positive correlation between the optimal size and the university quality. Approximately 47 percent of the selected universities are identified as either over- or under-sized. Moreover, the magnitude of cost saving from efficiency improvement is found to be no smaller than that of size adjustment. Therefore, it is suggested that universities should put more effort into efficiency improvement while considering size adjustment.

Cost and Profit Efficiency of Bangladeshi Commercial Banks: A Stochastic Frontier Approach

This paper assesses the cost and profit efficiency levels of banks consist of conventional, Islamic Shariah based and state-owned commercial banks in Bangladesh over the period of 2011 to 2015. Basic accounting ratios and stochastic cost and profit approaches originated by stochastic frontier analysis have been used in this study. From the results of accounting-based ratios used in this study, conventional private commercial banks are more efficient compared to Islamic Shariah based private commercial banks and state-owned commercial banks in the both cases of cost and profit. According to the stochastic cost frontier approach, the commercial banks in Bangladesh are not found considerable cost inefficient. The cost efficiency level of 35 commercial banks in Bangladesh is 91.4 percent. The results of this study indicate that traditional private commercial banks are more cost efficient compared to Islamic Shariah based and state-owned commercial banks. From the results of stochastic profit efficiency frontier, the conventional private commercial banks have the higher values of alternative profit efficiency levels than the state-owned and Islamic Shariah based commercial banks. It can also be drawn that around one-fourth of profits of banks are lost because of inefficiency over the period covered by this study.

Cost Efficiency of Islamic Banks in Indonesia – A Stochastic Frontier Analysis

This study aims at 1) estimating the cost efficiency of Islamic Banks –using stochastic cost frontier approach, (2) determining cost inefficiency sources and (3) analysing the influence of managerial competency and structural variable on cost efficiency. The samples of observation are three full Islamic banking system and 19 conventional banks listed on the Indonesia Stock Exchange (IDX) purposefully from 2004.03 – 2010.4. The result showed that Islamic Banks are superior in the achievement of technical efficiency, but the average cost efficiency is much lower than Conventional Banks. Cost inefficiency of Islamic-Banks come from allocative inefficiency.

Gender and relative economic efficiency in improved cassava farms of Abia State, Nigeria. A stochastic cost frontier approach

Multi-stage random sampling technique was used to select 120 improved cassava farmers (60 males and 60 females). Stochastic frontier cost function was used to estimate the level of economic efficiency and its’ determinants across gender, while descriptive statistics such as percentage response was used to capture farmers’ socioeconomic characteristics, gender participation and constraints to improved cassava production in Abia State. The results showed that the mean economic efficiency of the female group (0.78) was higher than that of male group (0.75). The cost of production of improved cassava to both gender farmer groups were affected by price of fertilizer, price of cassava cutting, land rent and output. Educational level and extension contact were positive and significant at 5% for both gender farmer groups. Credit was negative but significant at 5% amongst female farmer groups. Gender participation in improved new cassava showed that those energy sapping operations were dominated by male folk while light operation farming activities such as weeding and fertilizer application was mostly done by women and children. Both gender farmer groups encountered problems of low access to credit, high cost of labour and high cost of planting material. The study calls for policies that will improve both farmer groups access: to credits, extension contact and education. Moreso, new entrant and experienced cassava farmer groups should be encouraged through making available subsidized planting materials and capital inputs.Key word: Stochastic frontier, gender, improved cassava economic efficiency.

Have Spanish port sector reforms during the last two decades been successful? A cost frontier approach

The evolution of the port management model in Spain has been marked by three legislative reforms in the last two decades. This legislation was designed so that the Spanish regulatory framework could embrace the forms of port organization and management that would in turn permit the Spanish ports to function competitively and efficiently, and to be suitably positioned within the distribution systems. This paper aims to analyze the impact of these regulatory changes upon the economic efficiency of the Spanish Port Authorities during 1993–2007 period. To do this, we use a short run total cost model after contrasting that it is the more appropriate because our results suggest that this sector is not in long-run equilibrium. The results demonstrate that the impact of these legislative reforms has not been equal. The most significant changes, in terms of economic efficiency, took place in the first period. The results were also positive for the second period, although the efficiency gains were much more modest. Finally the third legislative reform seemed to have had a contrary effect upon economic efficiency.

The relative efficiency of charter schools: A cost frontier approach

Charters represent an expansion of public school choice, offering free, publicly funded educational alternatives to traditional public schools. One relatively unexplored research question concerning charter schools asks whether charter schools are more efficient suppliers of educational services than are traditional public schools. The potential relative efficiency advantage of charters vis-a-vis traditional publics is one of the mechanisms that supports the hypotheses that charters could improve performance for their students while using the same or fewer resources, and that the systemic effect of charters could lead to improved outcomes for traditional public students without requiring an increase in education sector resources.In this paper, we provide evidence as to the cost efficiency of charter schools relative to traditional public schools, and explore the extent to which those differences are attributable to differences in hiring and compensation practices, or to differences in the length of time a campus has been operating. We generate estimates of efficiency using a stochastic cost frontier approach. We estimate a translog stochastic cost frontier model using panel data for charter campuses and traditional public campuses in Texas over the five-year period 2005–2009.Our main findings suggest that charter schools are able to produce educational outcomes at lower cost than traditional public schools—probably because they face fewer regulations—but are not systematically more efficient relative to their frontier than are traditional public schools.

Consolidation in the European banking industry: how effective is it?

The European banking industry is becoming increasingly consolidated as banks engage in domestic and cross-border merger and acquisition (M&A) activities. Due to cultural differences in cross-border consolidations, the benefits of domestic and cross-border consolidations are likely to differ. This paper examines the effectiveness of merger processes, with a detailed analysis of both domestic and cross-border consolidations in Europe from 1998 to 2004. Effectiveness is measured via several criteria: improvement in costs, return on assets (ROA), and return on equity (ROE). To analyze potential cost efficiency improvement, we use a stochastic cost frontier approach. The same methodology is used for ROA and ROE to estimate efficiency in profitability. Finally, considering cross-border mergers as a form of entry, we carry out an analysis of the entry effect in response to the performance and profitability of the incumbent market participants. Results show that mergers in the European banking industry have been effective. Although domestic M&As are more common than cross-border M&As, banks involved in cross-border M&As are more efficient. Moreover, cross-border merged banks seem to outperform incumbent banks.

Cost Efficiency in the Life Insurance Industry

The life insurance industry has pivotal impact on an entire national economy. Under the trend of liberalization and internationalization, operating efficiency is critical to sustainable operations, and cost efficiency improvements positively affect operating efficiency, since integrated utilization of resources can produce maximal economic benefit. This study covers the period from 1997 to 2007, and adopted the Stochastic Cost Frontier Approach (SCFA) to make cost efficiency and economy-of-scale analyses, and studied cost efficiency factors. Some empirical results are as follows: 1) Variable scales and variable patterns in the life insurers enable different economy-of-scale and cost efficiency values. 2) It is recommended to join financial holding company or utilize a horizontal alliance to improve cost efficiency. 3) Based on the Tobit regression analysis, total asset turnover, fixed asset turnover are positively relative to cost efficiency. However, insurance payment to net written premium ratio is negatively relative to cost efficiency.

CONSUMPTION (IN)EFFICIENCY AND FINANCIAL ACCOUNT MANAGEMENT

Consumption may be inefficient when a household cannot choose the optimal bundle of goods at a minimum cost. After discussing alternative approaches, this paper proposes the use of money metric indirect utility function motivated by Feenstra and Varian in measuring consumption inefficiency. Then, Bamoul–Tobin transactions demand for money model is extended to show how household ability to manage its income, expenditure and financial accounts may affect consumption inefficiency. Results of the stochastic cost frontier approach, which is employed in estimation and the prediction of the European Union household consumption inefficiency, suggest that household expenditure performance is partly explained by the changes in the consumption efficiency and the efficiency is not independent of financial account management.

Different contracts in the Civil Code for different organizations in the market: comparing co-operative and stock banks using a cost frontier approach

Abstract:In this paper, I propose an empirical test of the main prediction of the theoretical literature on the firm as an incentive structure using data on the Italian markets, where two types of co-operative banks co-exist together with stock banks. I estimate a standard translog cost frontier and I derive cost efficiency scores. Kruskall–Wallis tests indicate that mean efficiency scores are statistically different among the three types of banks, providing empirical support to the theoretical prediction that different organizations represent different incentive structures. Moreover, co-operatives banks appear more efficient than stock banks. These results are robust also after controlling for the size of banks and the quality of their credit policies in a second-stage analysis. Hence, the efficiency gains stemming from the presence of scale economies seem to be dominated by the efficiency losses caused by the agency relationships within the bank in a more complex organization.