Cost Frontier Research Articles

Estimating the Market Power of Traders in the Arabica Coffee Value Chain in Lam Dong, Vietnam

Although some studies have assessed the market power of advanced degrees in Vietnam’s agricultural sector, this research only focuses on analyzing the level of market concentration through CR4 or HHI indexes. The stochastic cost frontier can estimate market power using the Lerner ratio when input price data are not available and with or without constant returns to scale. Thus, the stochastic cost frontier with a maximum likelihood approach of Kumbhakar et al. (2012) is used to assess the market power of traders in the coffee value chain in Lam Dong province, Vietnam. The estimated market power and Lerner rate results are 0.0001. This index shows that the local coffee market is a market with perfect competition. So the traders do not have market power. Thus, there is no collusion between coffee traders to lower the purchase price for farmers or increase the price for processors and exporters. An RTS ratio of 0.96 (less than one) shows that the return to scale for traders is decreasing. This number proves that the degree of competition in the local coffee market among traders is very high.

Cost Efficiency Status of Rice Farmers Participating in IFAD/VCD Programme in Niger State of Nigeria

This research empirically determined the cost efficiency of the farmers that participated in the IFAD/VCD programme in Niger State of Nigeria. The study elicited cross-sectional data of the 2018 cropping season viz. well-structured questionnaire complemented with interview schedule from a sample size of 110 respondents selected through a multi-stage sampling technique. The sampled data were analysed using the stochastic cost frontier model. The empirical evidence showed that none of the farmers was on the cost frontier surface i.e. inability to attain optimal minimum cost in the cultivation of rice in the studied area. The identified significant idiosyncratic variables militating against cost efficiency were the poor health status of the farm family which led to the extra cost incurred in labour substitution and diseconomies of scale due to their small-scale mode of operation. Therefore, the study recommends that the policymakers should sensitize the farmers on the importance of health preventive measures and should endeavour to improve on the existing basic health centres both in human capital and logistics. In addition, the farmers should be encouraged to explore cooperative marketing so as to take advantage of the bulk discount in input purchase and have bargaining power in the marketing of their output, thus tackling the problem of diseconomies of scale in their farm operations.

Economic efficiency of fish farming in ondo state, nigeria

This study assessed economic efficiency of fish farming in Ondo State, Nigeria. The study used primary and secondary data to achieve the objective of the study. Primary data were collected with the aid of structured questionnaire from 72 Fish farmers selected using the multistage sampling technique. The analytical technique involved budgeting technique, stochastic frontier production and cost function analysis. The study discovered from the gross margin and net-revenue analysis that fish production was profitable judging by the positive value and size of the gross margin (₦175.55 per kg) and net revenue (₦170.96 per kg). The result of the stochastic frontier production function analysis showed that all the regressors used in the analysis had positive coefficient, indicating that allthe inputs considered had direct relationship with farmers output. The result of the stochastic cost frontier function analysis showed that unit cost of labour, fingerlings, fertilizer and lime had positive regression coefficients, indicating that as these variables increase,the overall production cost of fish increases. The result also indicated that the presence of technical inefficiency had effects on fish production as depicted by the significant estimated gamma coefficient. The study recommends improvement in human capital development through education policy and training programme by extension education, opening of more market opportunities should be pursued and government should provide support to fish farmer’s cooperative society by increasing their capital base.

Does regulation induce cost efficiency in electricity distribution utilities? Use of stochastic cost frontier analysis for the Indian states

To overcome the macroeconomic crisis of the early 1990s, the Government of India persuaded the state governments to adopt market-oriented reforms for loss-making state public sector undertakings in general and power sector utilities in particular with an aim to limit the overall size of the public sector. This led the state governments to undertake unbundling of their vertically integrated State Electricity Boards (SEBs), establish independent regulatory bodies in the form of State Electricity Regulatory Commissions (SERCs) to regulate the power sector, and allow for an active participation of private sector. Given this backdrop, the present study attempts to examine the effect of establishment of SERCs on the cost-efficiency of electricity distribution in the Indian states. Thereby, it evaluates whether the establishment of SERCs has induced efficiency gains in the electricity distribution. Estimating a Cobb-Douglas stochastic cost frontier function, it finds that the establishment of independent regulators in various states has resulted in significant improvements in the cost-efficiency in the electricity distribution.

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

Copula-based Stochastic Cost Frontier with Correlated Technical and Allocative Inefficiency

Copula-based Stochastic Cost Frontier with Correlated Technical and Allocative Inefficiency

Measuring the marginal costs of reducing water leakage: the case of water and sewerage utilities in Chile.

Water leakage in the urban water cycle involves relevant economic, social, and environmental negative impacts. Thus, reducing water leakage is a key challenge for both water regulators and water companies. This study estimated the evolution (2007-2015) of the marginal cost of improving the quality of service in terms of water leakage in the Chilean water industry, which involves full private, concessionary, and public water companies. In water companies, management skills and efforts play an important role in meeting water leakage targets. Thus, this study employed a cost frontier model where it was assumed that unobserved management ability interacts with output and water leakage factors. The results reveal high levels of cost efficiency for the average water company. Management increases outputs and reduces water leakage and, thus, has a positive impact on costs and efficiency. The marginal cost of reducing water leakage is higher for the public water company than for private and concessionary water companies. The average estimated marginal cost of reducing water leakage was 0.349 €/m3, which means that a water company has to spend an extra 0.349 € in operating costs to avoid a cubic meter of water leakage. Some policy implications were discussed based on the results of this study.

Institutions and performance of regulated firms: Evidence from electricity distribution in India

It is commonly accepted in the economic literature that institutions influence economic development. But can we detect the effect of quality of institutions on the performance of specific economic sectors in the regions of a country? There is a significant gap in knowledge and evidence of this in the literature. Since the 1990s, India has adopted a set of reform steps to improve the efficiency of its electricity sector. However, there remain significant performance differences among the regulated network utilities. We apply a stochastic frontier analysis to examine the performance of electricity distribution utilities in 24 Indian states. Our estimated heteroscedastic cost frontier model allows us to identify determinants of performance related to state-level institutional and economic factors. The findings confirm that economic development and institutional quality positively affect the performance of electricity distribution utilities. Additionally, we simulate the potential cost savings from institutional enhancements. The results support the need to strengthen the institutions, for example, through reform and bolstering of independent regulatory agencies.

Efficiency in reducing air pollutants and healthcare expenditure in the Seoul Metropolitan City of South Korea

This study analyzes efficiency in the reduction of air pollutants and the associated healthcare costs using a stochastic frontier cost function panel data approach. For the empirical analysis, we use monthly data covering 25 districts in the Seoul metropolitan city of South Korea observed over the period January 2010 to December 2017. Our results show large variations in air pollution and healthcare costs across districts and over time and their efficiency in reducing air pollutants. The study concludes that efforts are needed to apply the World Health Organization’s air quality standards for designing and implementing location-specific customized policies for improving the level of air quality and its equal distribution, provision of health services, and improved efficiency in improving air quality standards. The study identifies a number of determinants of air pollutants and efficiency enhancement which provide useful pointers for policymakers for addressing the current environmental problems in South Korea.

Economic resources utilisation in maize production: Evidence from Central Region, Ghana

This study was undertaken to improve the efficiency of maize farming in the Central Region of Ghana. A stochastic frontier cost function, applied to cross-sectional data, was used to analyse firm level cost efficiency of production and its determinants. Efficiency of resource utilization was analysed using marginal value product of inputs. Results from the Cobb-Douglas stochastic cost frontier model and a farm-specific efficiency model showed that the mean cost efficiency was 94.95%. Furthermore, all production inputs were inefficiently allocated. Access to extension services, experience and access to credit had positive relationships with cost efficiency. The study concludes that maize farmers are not fully efficient in resource combination and allocation. Improved technologies and innovations should be made accessible to farmers by public and private extension service providers to increase efficiency of their maize farms. Key words: Cost efficiency, allocative efficiency, cost frontier, marginal value product, maximum likelihood estimates.

Does higher market power necessarily reduce efficiency? Evidence from Chinese rice processing enterprises

This study evaluates the market power and cost efficiency of China’s rice processing firms through a stochastic frontier cost function. The effect of market power on cost efficiency is tested using the two-stage ordinary least squares method and a Hausman-Taylor type instrumental variable. On average, firms in the industry have weak market power but high cost efficiency, which has been declining since the 2008 global financial crisis. Firms with stronger market power exhibit higher cost efficiency, contradicting the quiet life hypothesis. This effect is more significant for firms with weaker market power after the global financial crisis. The enhancement of market power may help save resources for improving management and efficiency for Chinese rice processing industry.

Analysis of electric distribution utilities efficiency levels by stochastic frontier in Brazilian power sector

The regulatory power sector model in several countries determines tariff review forms based, among other things, on sharing efficiency gains with consumers. As these reviews have an important impact on consumers and distribution utilities, it is necessary that the adopted methodologies always be improved. To this end, this article assessed a Bayesian inference application in order to estimate a stochastic cost frontier considering temporal efficiency dynamics. Taking this point into consideration is essential, since studies carried out to assess power sector efficiency have neglected the fact that part of efficiency increases originate from scale gain due to market expansion, which occurs over time. The sample assessed herein is composed of panel data from 61 electric power utilities between 2003 and 2016. The results demonstrate that the tariff review is positively affected by distributor efficiency.

A Comparison of Economic Efficiency of Monoculture and Multiple Cropping Patterns: The Case of Cassava Farming in Ende, Indonesia

<span lang="EN-US">Nuabosi cassava is an alternative carbohydrate source for the community, which is expected to be a substitute for rice. This commodity has the potential to be developed, but is limited in resources, so it requires technological breakthroughs. This study aims at analyzing the level of technical, allocative and economic efficiency between the cassava cropping pattern and the factors that affect the efficiency. The research was conducted in Randotonda Village, from November 2019 to January 2020 and the samples consisted of 61 monoculture farmers and 46 multiple cropping farmers. Data analysis was performed using the Cobb-Douglass stochastic frontier production function. The allocative and economic efficiency was examined with the stochastic frontier cost function approach. The results of stochastic frontier estimation show that all variables have a positive effect on the production variable. The variables having a positive effect on the total cost include the price of cassava cuttings, the price of fertilizer, production and the dummy cropping pattern. The average level of economic efficiency of monoculture farmers is lower than that of multiple cropping farmers. Factors that affect economic efficiency are age, length of time to cultivate, frequency of obtaining information, dummy of farmer group membership and dummy of cropping patterns. In short, the level of technical, allocative and economic efficiency of monoculture farmers is lower than that of multiple cropping farmers. Farmers are expected to pay attention to the types of plants that are suitable in implementing the multiple cropping pattern</span><span lang="IN">.</span>

Cost efficiency of recycling and waste disposal in Japan

This study uses the stochastic cost frontier models to investigate recycling cost efficiencies for 1,809 municipalities in Japan from 2011 to 2018. Our major findings are as follows. A U-shaped relationship exists between the waste management cost per ton and recycling rate. The current recycling rate in Japan is much higher than the per ton cost-minimizing recycling rate. The cost-minimizing recycling rate is 7.6%, in detail it is 6.9% for organized and 6.8% for non-organized municipalities. However, the actual mean recycling rate is 21.7%, and the policy target is 27.0%. By decreasing the cost inefficiency, the predicted waste management cost per ton can be reduced from 34,521 yen (approximately USD 336) to 32,849 yen (USD 385) for organized municipalities and from 39,612 yen (USD 320) to 37,422 yen (USD 364) for non-organized municipalities, even though the actual mean recycling rate is 21.7%. Furthermore, as recycling rates change from 21.7% to 6.9% and 6.8%, the costs would reduce to 28,198 yen and 31,624 yen for organized and non-organized municipalities, respectively. Cooperation among adjacent municipalities and the outsourcing of the waste collection function to private companies would reduce waste management costs per ton. The collection frequency of glass is a cost-inefficient factor, whereas that of paper is a cost-efficient one. For the robustness check, we divide the sample into small, medium, and large municipalities. The U-shaped relationship between the waste management cost per ton and recycling rate still holds for small and medium municipalities.

Determinants of profitability of community banks in the USA: a cost-frontier-based decomposition approach

This paper investigates the determinants of the poor profitability of community banks relative to that of large banks in the USA over the period 2001–2017, by decomposing the relative profitability of community banks into five multiplicative cost-frontier-based explanatory factors. To compute these explanatory factors, we estimate a Bayesian true fixed effects stochastic cost frontier model, which has the advantages of allowing the unobserved heterogeneity term to be correlated with the observed explanatory variables and providing statistical inferences on the cost-frontier-based explanatory factors. Our decomposition shows that community banks’ lower profitability was attributable mainly to their lower technical change, lower scale efficiency and higher funding costs. In addition, the latter two factors were also the two main contributors to the deterioration in the profitability of community banks.

Cost efficiency of principal crops in Bihar (India) – A stochastic frontier approach

In the present study, an attempt has been made to test the cost efficiency of cereal crops like paddy, wheat and maize separately in the state of Bihar using Stochastic Cost Frontier model. It has been tried to determine the determinants of cost inefficiencies. The study is also aimed to know the factors affecting the cost inefficiencies in production of major cereals of the state so as to ascertain proper steps to increase cost efficiency in production. Most important observation emerged that there existed non-linear relationship between cost inefficiency and farm category. Cost inefficiency first increased with the increase of farm size then it decreased. In case of paddy mechanization could negatively affect the cost inefficiency and proportion to family labour in total labour was found positive implying increase in cost inefficiency. But in wheat, family labour showed positive value, indicating thereby increase in cost inefficiency. In case of maize, coefficient of fertilizer use was observed positive indicating increase in cost inefficiency. Coefficients of land holding size were positive in all the crops for all categories of farms. This advocated non-linear relation between farm category and cost inefficiency which showed larger farms were less cost efficient. The cost inefficiency depends on proportion of family labour, mechanization, type of seed used. The result enables to identify the determinants of cost inefficiency, which will certainly guide the state to adopt suitable policies. Farmers may be made aware about rational allocation of resources to reduce cost and make farming cost efficient.

Sustainable agricultural intensification practices and cost efficiency in smallholder maize farms: Evidence from Ethiopia

AbstractSustainable agricultural intensification (SAI) practices have been promoted in developing countries to improve farm productivity and environmental services. However, it is still unclear whether use of a combination of SAI practices has a significant influence on the cost efficiency of smallholder farms. This study investigates whether the cost efficiency of smallholder maize producers in Ethiopia depends on use of input‐augmenting and agronomic SAI practices. Stochastic cost frontier models that account for heterogeneity across farms are used for estimation. We find that the use of individual SAI practices increases cost while the combined use of the practices reduces it. The marginal effect on cost reduction is substantial when SAI practices are set at their sample maximum levels. Overall, the results demonstrate the benefit of using a combination of SAI practices in minimizing production cost while addressing the adverse effects of soil degradation and climate variability. To enhance food security, smallholder farm incomes and the sustainability of production in developing countries, policy programs should focus on promoting packages of input‐augmenting and agronomic SAI practices.

India’s calorie consumption puzzle: insights from the stochastic cost frontier analysis of calorie purchases

Between the early 1970s and very nearly the present, Indians’ per capita calorie consumption declined. This decline, perplexing in the face of rising per capita income when malnutrition is rampant, has been termed India’s Calorie Consumption Puzzle. It has been partially attributed to a squeeze in the household food budget. This study employs Stochastic Cost Frontier Analysis to evaluate this explanation, upon the logic that such a squeeze shall likely result in the rising cost-efficiency of calorie purchases, that is, the more economical purchase of calories. Analysis of household expenditure data from India’s National Sample Survey reveals that Indian households’ purchase of calories did become more cost-efficient at every level of income, suggesting that there was indeed a squeeze in the household food budget, making this a viable explanation of the Calorie Consumption Puzzle. Besides thus investigating India’s Calorie Consumption Puzzle, this study demonstrates a novel application of Stochastic Cost Frontier Analysis, to consumption instead of the more common production, in that the method has not previously been applied to the consumption of multiple items treated as inputs yielding an output. Stochastic Cost Frontier Analysis applied to calorie acquisition may be a new way of gauging changes over time in food security, with a rise in cost-efficiency indicating a squeeze in the food budget or declining food security.

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.

Determinants of Cost Inefficiency of Maize Farming in Different Agro-climatic Regions of Sikkim, India

The present study makes an attempt to analyse farm level cost inefficiency of maize farming and its determinants in different agro-climatic regions of Sikkim. The primary data for the study were collected during the third and fourth quarter of 2018 from different agro-climatic regions of Sikkim. Both data envelopment and stochastic frontier analysis were used for measurement of the farm level inefficiency across different agro-climatic regions of the study area. Based on the Cobb–Douglas cost function for maize output, the article simultaneously estimated stochastic frontier cost function and examined the effect of exogenous factors on farm level cost inefficiency. The results of this study showed that, on an average, the farmer incurred cost which was 8 per cent to 72 per cent above the minimum cost defined by the best practice frontier. Further, cost inefficiency was relatively higher among the farmers in temperate agro-climatic region. Greater cost inefficiency seems to be directly associated with remoteness of farmland from input market. The study also found that the additional years of farming experience and farming in the rented plots were useful in reducing cost inefficiency.