Cost Frontier Research Articles

Payment schemes and cost efficiency: evidence from Swiss public hospitals.

This paper aims at analysing the impact of prospective payment schemes on cost efficiency of acute care hospitals in Switzerland. We study a panel of 121 public hospitals subject to one of four payment schemes. While several hospitals are still reimbursed on a per diem basis for the treatment of patients, most face flat per-case rates-or mixed schemes, which combine both elements of reimbursement. Thus, unlike previous studies, we are able to simultaneously analyse and isolate the cost-efficiency effects of different payment schemes. By means of stochastic frontier analysis, we first estimate a hospital cost frontier. Using the two-stage approach proposed by Battese and Coelli (Empir Econ 20:325-332, 1995), we then analyse the impact of these payment schemes on the cost efficiency of hospitals. Controlling for hospital characteristics, local market conditions in the 26 Swiss states (cantons), and a time trend, we show that, compared to per diem, hospitals which are reimbursed by flat payment schemes perform better in terms of cost efficiency. Our results suggest that mixed schemes create incentives for cost containment as well, although to a lesser extent. In addition, our findings indicate that cost-efficient hospitals are primarily located in cantons with competitive markets, as measured by the Herfindahl-Hirschman index in inpatient care. Furthermore, our econometric model shows that we obtain biased estimates from frontier analysis if we do not account for heteroscedasticity in the inefficiency term.

Cost Efficiency of Dairy Farming in New Zealand: A Stochastic Frontier Analysis

Research on the efficiency of dairy farming in New Zealand is limited and has focused predominantly on technical efficiency. We contribute to the literature on empirical analysis by examining cost efficiency of New Zealand dairy farms. We construct simplified translog stochastic cost frontiers based on an unbalanced panel of 824 farms. Average cost efficiency is estimated at 83 percent for dairy farms in the North Island and 80 percent for farms in the South Island. Our analysis of the relationship between inefficiency and farm characteristics suggests significant associations between cost efficiency and capital intensity, livestock quality, and farm size.

Measurement of Efficiency in Greek Banking Industries in The Light of the Financial Crisis

1. Introduction The efficiency of European banks has been one of the major topics in monetary and financial environment. The financial integration, the greater deregulation and the technological change of the European banking system forced financial institutions to strive for greater operational efficiency (Liapis et al., 2013). The enhanced competition due to the globalization of the banking system, the expansion of ATM's and e-banking (Pasiouras, 2006) has encouraged banks to improve the efficiency of their operations. However, the collapse of Lehman Brothers led to a global financial crisis that affected the real economy in Europe. The global financial crisis affected adversely the European banks that forced to minimize operational inefficiencies. To the best of our knowledge, the purpose of this study is to investigate the impact of the global financial crisis on the efficiency of Greek banks during the period 2008-2010. Although there is a well established literature on measurement of European banking efficiency a few studies are focused on the impact of global financial crisis on banking efficiency. This paper contributes to previous work and applies a DEA model in order to extract technical and scale efficiency scores of 20 Greek banking institutions for three years and find answers to the following concerns. How efficient are Greek banks? How the efficiency of Greek banks changed due to the global financial crisis? How the global financial crisis affected technical and scale efficiency of Greek banks? The remainder of this study is organized below as following. Chapter 2 analyses the concepts of efficiency and Chapter 3 reviews major studies in literature about efficiency in Greek banking sector. Chapter 4 presents the existing methodology and Chapter 5 concludes the data collected for three years. Chapter 6 indicates the empirical results for three years and Chapter 7 sums up the major conclusions of the study. 2. Conceptual Framework Farrell (1957) proposed two components in order to define efficiency. The first component is technical efficiency and the second is allocative efficiency. First of all, technical efficiency reflects the ability of a DMU to minimize inputs in order to produce a given level of outputs. Allocative efficiency reflects the ability of a DMU to use inputs in optimal proportions given their respective prices and production technology. It is worth mentioning that the level of efficiency of the individual firm is the ratio of total weighted outputs to total weighted inputs. The decision making unit (DMU) is the entity (business, regional, sector, country) that transforms n inputs into m outputs based on a specific technology. Coelli et al. (1997) define total efficiency measures as the product of technical efficiency and allocative efficiency. Efficiency ratio ranges between zero and one. An efficiency score of one denotes a fully efficient DMU while any other deviation from one indicates inefficiency. For example, an efficiency score measured against a cost frontier of 80% indicates that the DMU could have reduced cost by 20% without altering its output vector. (Brack and Jimborean, 2009) Figure 1 indicates that [DMU.sub.1], [DMU.sub.3], [DMU.sub.5] are efficient as they lie on the efficient part of the production frontier. Particularly, DMU3 is efficient under CRS and [DMU.sub.1], [DMU.sub.5] are efficient under VRS. Essentially, [DMU.sub.1] operates under increasing returns to scale (IRS) and is subject to economies of scale while [DMU.sub.5] operates under decreasing returns to scale (DRS) and is subject to diseconomies of scale. On the other hand, [DMU.sub.2] and [DMU.sub.4] lie inside the production frontier and they are inefficient while [DMU.sub.6] is inefficient although it lies on the frontier as the same amounts of outputs can be clearly produced with less input. (Webb, 2003, Brack and Jimborean, 2009). [FIGURE 1 OMITTED] The non-parametric approach, specifically the DEA model, measure scale efficiency by estimating two technical efficiency scores under the assumptions of CRS (2) and VRS (3). …

Are Women Better Bankers to the Poor? Evidence from Rural Microfinance Institutions

Microfinance Institutions (MFIs) provide financial services to the poor and in many ways resemble both banks and non‐profit organizations. Many MFIs target women because more women than men are poor, especially in rural areas. Studies show that women manage money differently from men and have different leadership styles. Thus, in credit unions and financial firms, female and male managers achieve different results. In microfinance, gender diversity on the board of MFIs is beneficial, and loans authorized by female loan officers have lower default rates. Motivated by these findings, we ask whether MFIs with a female Chief Executive Officer (CEO) are more efficient at serving the poor without jeopardizing financial sustainability. We adapt the banking approach to managerial (in)efficiency to account for the outreach and sustainability goals of the MFIs, and evaluate whether MFIs' outreach efficiency differs by the gender of their respective CEOs. We estimate a stochastic frontier cost function using the Battese‐Coelli (1995) model and the “true” random effects estimators using panel data from over 250 MFIs. We find that MFIs with female CEOs have significantly higher outreach efficiency than MFIs with male CEOs. Similar results are found with a two‐step stochastic frontier approach. Overall, the results suggest that promoting gender diversity at the top levels of MFI management is likely to have both social and financial benefits.

Metafrontier cost Malmquist productivity index: an application to Taiwanese and Chinese commercial banks

This study applies the data envelopment analysis approach and extends the group-specific cost Malmquist (CM) productivity index of Maniadakis and Thanassoulis (Eur J Oper Res 154:396–409, 2004) to define the meta CM productivity index under meta production technology. Parallel to the technology gap defined in the relationship between a group-specific adopted technology and its meta potential technology, we define a CM gap as the ratio of two CM productivity indices that measure the convergence of the group-specific cost frontier to the meta cost frontier and develop a further decomposition of the CM gap. To implement the decompositions of the CM index and CM gap, the research empirically examines panel data of 27 Taiwanese banks and 18 Chinese banks covering the period 2006–2009.

Unobserved Heterogeneous Effects in the Cost Efficiency Analysis of Electricity Distribution Systems

The purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.

Auction mechanisms for long-term electricity contracts: Application to the Colombian market

Electricity contracts are long-term supply assurance mechanism still in critical conditions, encourage competition and mitigate the risk of price volatility. However, it is necessary to evaluate design alternatives that balance contracts market versus expectations of the producers and the planner and/or regulator of the system. In this paper an international referencing is made, the formation of long-term price is analyzed, as well as market risks and their management. It implements a market simulation model, applying auction theory and descending clock auction. Contracting strategies are simulated, with product sensitivities, clearance mechanism, supply restriction and payment allocation, considering also the expectation of the buyer. For this, the demand function is estimated, the willingness to pay, and the maximum offer utility by sub-optimal allocations of opportunity cost and efficient frontier. Results show that the descending auction clears at more suitable prices against closed envelope auction and promotes competition under certain characteristics of the demand function. Best results are obtained with a standardized product, but in blocks of no more than 1% of the amount auctioned. A larger size creates infeasible solutions, increasing the closing price that contrasts when considering a supply pivotal constraint, obtaining lower closing prices. The proposed method offers a more suitable solution regarding intervention or handling mechanisms of the demand function.

The Effect of Governance Forms on North American Airport Efficiency: A Comparative Analysis of Airport Authority vs. Government Branch

This paper applies a stochastic cost frontier model to a panel of 54 major airports over 2002-2008 to examine how the two dominant governance forms of publicly owned airports in the United States and Canada, namely, operation and governance by a government (city, county, or state) branch, or by an airport authority, affect airport efficiency performance. Our key findings are (a) airports operated by an airport authority achieve higher cost efficiency (on average, 14% higher technical efficiency) than those operated by a government branch; (b) airports operated by a government branch have lower labor share than those operated by an airport authority; and (c) there is no statistically significant difference in the efficiency performance between airports operated by U.S. airport authorities and Canadian airport authorities.

Cost Efficiency and Outreach of Microfinance Institutions in Ethiopia: Do They Contrast with Financial Cooperatives?

Using a stochastic frontier approach, we analyse the imposition of financial sustainability requirement on the traditional social mission of microfinance – outreach to the poor. We also address whether the way ownership is organised and practiced affects the costs of microfinance delivery. Based on a disaggregated 107 sample microfinance providers in Ethiopia, the results suggest that outreach to the poor and achieving financial sustainability (as measured by cost efficiency) are contradictory objectives. Microfinance providers that are closer to the best practicing cost frontier are those with higher average loan sizes and lower proportion of women borrowers. The results also indicate that financial cooperatives are better in cost containment compared to specialised microfinance institutions.

Cost Efficiency of Italian Commercial Banks:A Stochastic Frontier Analysis

During 90’s, the Italian banking system faced a new competitive environment both widening the dimensional scale and pursuing a rationalization process. Some insights could be drawn through efficiency analysis by estimation of a stochastic cost frontier for the period 1993-2004. Benchmark analysis not only highlights the contribution of the main factors that affect efficiency, but also allows evaluation of efficiency dynamics through time, determining the existence of technical progress and scale economies. However, such measure is significant if the sample of firms is homogeneous hence, accounting for heterogeneity of the units involved is then a goal of our analysis.

The effect of government corruption on the efficiency of US commercial airports

In this paper, we argue that the cost of providing public goods is affected by local government corruption because bureaucrats have no strong incentives to pursue mandated tasks under a corrupt environment. Commercial airports in the United States are chosen to demonstrate such impacts of corruption. We first develop a theory which predicts the impacts of corruption on productivity and variable input allocation of airports. We then test the predictions by estimating a stochastic variable cost frontier model which incorporates both technical and allocative efficiency of airports. The empirical evidence confirms the theoretical predictions by revealing the following: (1) airports are less productive in more corrupt environments; and (2) airports tend to use more contracting-out to replace in-house labor in more corrupt environments. The findings can be applied to the context of other public goods and have important policy implications for reforming governance structure of public good provision.

Cost efficiency of French soccer league teams

This article evaluates the operational activities of French soccer clubs from 2003 to 2011 by using a finite mixture model that allows controlling for unobserved heterogeneity. In doing so, a stochastic frontier latent class model, which allows the existence of different technologies, is adopted to estimate cost frontiers. This procedure not only enables us to identify different groups of French soccer clubs but also permits to analyse their cost efficiency. The main result is that there are two groups among the French soccer clubs, both following completely different ‘technologies’ to obtain league points, suggesting that business strategies need to be adapted to the characteristics of the clubs. Some managerial implications are developed.

Cost Efficiency in the Public Finances of the Japanese National Health Insurance: A Stochastic Frontier Approach

In this study, I examine the cost inefficiency and production inefficiency of municipal insurers operating under the Japanese National Health Insurance system. I employ insurer-level panel data for 2005 and 2010 and adopt stochastic frontier cost and production models to overcome analytical problems encountered in previous studies. The cost frontier estimation indicates that adverse effects on efficiency are associated with aging of the insured population, soft budget constraints due to government subsidies, insurer contributions to the elder care systems, and an increase in care provider densities. A positive effect on efficiency is associated with an expansion in insurer scale. The production frontier estimation suggests that cost inefficiencies decreased by roughly 15 percent between 2005 and 2010. The correlation between cost inefficiency and technical inefficiency is not particularly strong, whereas the correlation between cost inefficiency and allocative inefficiency is strong and positive.

Cost and technical efficiency of physician practices: a stochastic frontier approach using panel data

This is the first study to use stochastic frontier analysis to estimate both the technical and cost efficiency of physician practices. The analysis is based on panel data from 3,126 physician practices for the years 2006 through 2008. We specified the technical and cost frontiers as translog function, using the one-step approach of Battese and Coelli to detect factors that influence the efficiency of general practitioners and specialists. Variables that were not analyzed previously in this context (e.g., the degree of practice specialization) and a range of control variables such as a patients' case-mix were included in the estimation. Our results suggest that it is important to investigate both technical and cost efficiency, as results may depend on the type of efficiency analyzed. For example, the technical efficiency of group practices was significantly higher than that of solo practices, whereas the results for cost efficiency differed. This may be due to indivisibilities in expensive technical equipment, which can lead to different types of health care services being provided by different practice types (i.e., with group practices using more expensive inputs, leading to higher costs per case despite these practices being technically more efficient). Other practice characteristics such as participation in disease management programs show the same impact throughout both cost and technical efficiency: participation in disease management programs led to an increase in both, technical and cost efficiency, and may also have had positive effects on the quality of care. Future studies should take quality-related issues into account.

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.

Comparative Efficiency Analysis of Broiler Farming Under Aftab Bahumukhi Farm Limited Supervision and Farmers’ Own Management

This study was conducted to assess the comparative efficiency of Aftab Bahumukhi Farm Limited (ABFL) supervised broiler farms and farmers’ own managed broiler farms. Data were collected from randomly selected 90 broiler farmers of which 45 were ABFL supervised farmers and 45 were own managed farmers. Cobb-Douglas stochastic production function and cost frontier function were applied to determine the technical, allocative and economic efficiency of broiler farming. Technical and economic inefficiency effect models were also estimated. The estimated mean technical efficiency of all farms was 94.06 percent. Whereas it was 94.49 percent for ABFL supervised farmers and 93.66 percent for the own managed broiler farm owners. The estimated mean allocative efficiency was 96.76 percent for all farmers, and 96.51 for ABFL supervised farmers and 96.45 percent for own managed broiler farm owners. The mean economic efficiency was estimated at about 91.60 percent for ABFL supervised farmers, 90.34 percent for own managed farmers and 91.00 percent for all farmers. This implies that the cost of broiler production per farm can be reduced by 9 percent keeping the output constant. The findings reveal that ABFL supervised farmers and own managed farmers were not significantly different in terms of efficiency.DOI: http://dx.doi.org/10.3329/pa.v19i2.16962 Progress. Agric. 19(2): 195 - 204, 2008

On the Cost-Efficiency of Service Delivery in Small Municipalities

Arcelus F. J., Arocena P., Cabasés F. and Pascual P. On the cost-efficiency of service delivery in small municipalities, Regional Studies. This paper analyses the determinants of the efficiency of local government spending. To that effect, a stochastic cost frontier is estimated on a sample of 260 small municipalities from Navarre, a region located in northern Spain. The results suggest that the cost-efficiency in the provision of municipal services increases with (1) the level of pooling or joint provision of services among municipalities; (2) the saliency of local taxes, as compared with regional grants, in its operating budget; (3) the presence of external public comptrollers; and (4) the magnitude of the municipality's accumulated past investment in infrastructures.

Profitability and economic efficiency of groundnut production in Benue state, Nigeria

There has been a remarkable reduction in the contribution of groundnut to Nigeria’s foreign exchange earnings since the discovery of petroleum resources. There is need to re -position this valuable crop to assume its rightful position in the nation’s economy. Thus, this study assessed the profitability of groundnut production and level of technical and allocative efficiencies of the farmers using Benue State as a case study. Multi -stage sampling technique, which involves purposive selection of two Local Government Areas (Makurdi and Ogbadigbo) and subsequent random selection of groundnut farmers from the selected three communities was adopted in collecting cross -sectional data from 270 groundnut farmers using structured questionnaire and oral interview. Descriptive statistics, gross margin analysis and Stochastic Frontier Model were used to analyse the data. The study found that the mean gross margin per hectare of groundnut was N 1,897.86 per month while the profitability test shows that it is profitable (t= 6.87; P ≤ 0.01). However, the key variables that influence profitability are hired labour, cost of seed, agrochemical and cost of fertilizer. Meanwhile, the mean technical efficiency estimate of groundnut farmers in the study area was found to be as low as 4%. This could be attributed to high demand for labour, land and agrochemicals which are the critical factors that play a significant role in groundnut production. The socio- economic factors that affect groundnut production in the study area include farmers’ age, household size and annual income. Similarly, an average farmer spent about 28% above the minimum frontier cost. Furthermore, the elasticity of cost of production with respect to cost of hired labour and cost of seed was found to be relatively high indicating their importance in groundnut production. More land should be put into groundnut production and farmers should be given essential agricultural inputs that will enhance the productivity of this cash crop. The study further recommends the development and dissemination of simple machines that can facilitate the stages involved in the production of groundnut.

Costs and Technical Change: Effects from Bank Deregulation

Banks were substantially deregulated during the 1980s. Interest costs rose faster than operating expenses (capital, labor) were reduced. As a result, measured technical change in banking was negative: it averaged -0.8% to -1.4% a year over 1977-88. Technical change was measured three different ways and for both equilibrium and disequilibrium factor input specifications. All three approaches -- a standard time trend, an index approach, and shifts in cross-section cost functions -- gave consistent results. These results were robust whether measured at the banking firm or office level, or at the cost frontier.

The random parameters stochastic frontier cost function and the effectiveness of public policy: Evidence from bank restructuring in Mexico

We apply specifications of the random parameters stochastic frontier cost function model to estimate bank efficiency. This class of model appears to resolve the long standing problem of confounding inefficiency and heterogeneity. Mean cost efficiencies from random models are higher by as much as eleven percentage points compared to pooled OLS estimates. Whilst tests show efficiencies are not drawn from the same population, rank order efficiencies are strongly associated. In a second step, we employ the estimated efficiencies to determine the effect of foreign acquisitions on bank cost efficiency following legislative reforms made as part of Mexico's bank restructuring programme in 1995. Foreign bank acquisition does not significantly affect efficiency whereas consolidation of local banks yields significant long-term improvements in efficiency. We recommend random parameters stochastic frontier models since they better accommodate heterogeneity and produce more precise estimated efficiencies.