Cost Inefficient Research Articles

Cost Efficiency Determinants: Evidence from the Canadian Banking Industry

This study examines the cost efficiency of the banking industry in Canada. Utilizing 12 years of data (i.e., 2006 to 2017), and a two-stage data envelopment analysis (DEA), it provides insight on the determinants of the industry’s cost efficiency. It finds that the industry is cost inefficient, and that it could reduce costs by 11.52 percent. The cost inefficiency is due to technical and allocative inefficiencies, with technical inefficiency playing a dominant role. The technical efficiency decomposition shows that pure technical efficiency improved, but the scale efficiency deteriorated. The analysis of the determinants of cost efficiency reveals that deposit conversion into loans, high capitalization, and managerial tolerance for increase in administrative expense drive cost efficiency. On the other hand, market power and diversification diminish cost efficiency. In addition, the impact of profitability and credit risk are inconsequential to cost efficiency. This study contributes to literature by providing insights unique to Canada. Managers in the industry, policy makers, and regulators can point to these findings as empirical evidence supporting measures aimed at increasing the industry’s competitiveness and resilience.

Production with storable and durable inputs: Nonparametric analysis of intertemporal efficiency

We propose a nonparametric methodology for intertemporal production analysis that accounts for durable as well as storable inputs. Durable inputs contribute to the production outputs in multiple consecutive periods. Storable inputs are non-durable and can be stored in inventories for use in future periods. We explicitly model the possibility that firms use several vintages of the durable inputs, i.e. they invest in new durables and scrap older durables over time. Furthermore, we allow for production delays of durable inputs and storage costs for storable inputs. We characterize production behavior that is dynamically cost efficient, which allows us to evaluate the efficiency of observed production decisions. For cost inefficient behavior, we propose a measure to quantify the degree of inefficiency. An attractive feature of this measure is that it can be decomposed in period-specific cost inefficiencies. We demonstrate the usefulness of our methodology through an application to the Italian manufacturing sector of fabricated metal products over the period 1995–2007 drawn from the AMADEUS dataset.

Association Between Medicare's Mandatory Hospital Value-Based Purchasing Program and Cost Inefficiency.

The Patient Protection and Affordable Care Act instituted pay-for-performance programs, including Hospital Value-Based Purchasing (HVBP), designed to encourage hospital quality and efficiency. While these programs have been evaluated with respect to their implications for care quality and financial viability, this is the first study to assess the relationship between hospitals' cost inefficiency and their participation in the programs. We estimate a translog specification of a stochastic cost frontier with controls for participation in the HVBP program and clinical and outcome quality for California hospitals for 2012-2015. The program-participation indicators' parameters imply that participants were more cost inefficient than their peers. Further, the estimated coefficients for summary process of care quality indexes for three health conditions (acute myocardial infarction, pneumonia, and heart failure) suggest that higher quality scores are associated with increased operating costs. The estimated coefficients for the outcome quality variables suggest that future determination of HVBP payment adjustments, which will depend solely on mortality rates as measures of clinical care quality, may not only be aligned with increasing healthcare quality but also reducing healthcare costs.

Are South African public universities economically efficient? Reflection amidst higher education crisis

The question of free quality higher education has possessed the soul of the nation since the ‘fee-free university education for the poor report’ was withheld by the Minister of Higher Education and Training. The paper asks: are South African universities economically efficient and if they are efficient how many more students would they fully fund internally to increase financial access to, and academic success in, the academy? Using stochastic frontier modelling, I find that public universities, on average, are 12.7% cost inefficient. The deadweight loss is the equivalence of 79,231 potential undergraduates who were denied access to fully university-funded 3-year degrees between 2009 and 2013. Universities are ranked in terms of their inefficiency scores. Determinants of cost inefficiency are modelled and their implications discussed. The free quality education issue needs a multidimensional solution one of which is reduction of deadweight losses in university cost outlays.

Are Public Master’s Institutions Cost Efficient? A Stochastic Frontier and Spatial Analysis

The current study examines costs, measured by educational and general (EG (2) there are economies of scale in undergraduate education and diseconomies of scale in graduate education; (3) relatively few institutions are cost inefficient; and (4) cost inefficiency tends to be long-term and persistent rather than short-term and residual. This research also identifies public master’s institutions that are the most cost efficient. Our inquiry has implications for future research as it points towards specific institutions, which may be engaged in effective practices to keep costs low, for possible follow-up case studies. Going forward, the techniques used in this study could be applied to examine economies of scale and scope as well as cost efficiency among other types of higher education institutions, such as public or private research universities, baccalaureate institutions, and community colleges.

Analysis of profitability and cost determinants of smallholder oil palm processing in Cross River State, Nigeria: A comparative study

Oil palm processing is a source of livelihood to many people. The study analyzed cost determinants and profitability of smallholders’ oil palm processors using traditional and improved processing technologies. A multistage sampling technique was used to select respondents. Data were collected through questionnaire; analysed using budgetary technique and inferential statistics. Traditional methods’ users spent an average of ₦30 as cost of processing a kilogramme of fresh fruit, while the improved processing technologies adopters spent N36. However, average net revenue of ₦13 and ₦19 was realized by traditional and improved smallholder processors respectively. Hence, oil palm processing is a profitable enterprise; though, profit earned was significantly different at 1% level of probability. Average Rate of Return (ARR) of the smallholder processors established that on every naira invested, a profit of 41 and 54% gain were realized by traditional and improved smallholder processors respectively. The cost determinants were labour, fresh fruit, depreciation, other costs and output. Smallholder processors were cost inefficient. Cost inefficiency reducing variables include; processing experience, educational attainment and access to credit. Gain can be achieved with the present level of technology and input prices. Thus, oil palm processing enterprise can serve as a source of employment for the teeming jobless youths in the State. It is recommended that adoption of improved technologies for processing oil palm should be encouraged by government via various media channels; various tiers of government should provide adequate rural infrastructure to promote investment climate for the commercial development of oil palm processing sector.Keywords: cost determinants, oil palm, profitability, processing, technologies, efficiency

Production with Storable and Durable Inputs: Nonparametric Analysis of Intertemporal Efficiency

We propose a nonparametric methodology for intertemporal production analysis that accounts for durable as well as storable inputs. Durable inputs contribute to the production outputs in multiple consecutive periods. Storable inputs are non-durable and can be stored in inventories for use in future periods. We explicitly model the possibility that firms use several vintages of the durable inputs, i.e. they invest in new durables and scrap older durables over time. Furthermore, we allow for production delays of durable inputs. We characterize production behavior that is dynamically cost efficient, which allows us to evaluate the efficiency of observed production decisions. For cost inefficient behavior, we propose a measure to quantify the degree of inefficiency. An attractive feature of this measure is that it can be decomposed in period-specific cost inefficiencies. We demonstrate the usefulness of our methodology through an application to Swiss railway companies.

Organizational Form and Expense-Preference Behavior: Evidence from Islamic Banks

This paper examines the organizational forms of Islamic banks, corporate governance mechanism, and their effects on organizational behavior, specifically relating to managerial expense preferences. The paper opted for an OLS cluster regression and followed by a stochastic frontier approach test as a robustness test. Findings of this study indicate that organizational forms of Islamic banks influence managerial expense preferences. A stochastic frontier approach test supports the initial findings and reveals that the average noninterest cost inefficiency of Islamic banks without Shari’ah Boards is 23% compared to commercial banks. Islamic banks with Shari’ah Boards are, on average, 28% less noninterest cost inefficient compared to Islamic banks without Shari’ah Boards, and are on average, 16% less noninterest cost inefficient compared to commercial banks. Shari’ah Supervisory Boards’ positive implications for Islamic Banks are independent of the expectations of the governing structure or ownership. Specifically when looking at Islamic Banks with Shari’ah Supervisory Boards, managerial propensity to engage in self- serving behavior is reduced. This paper fulfils an identified need to understand how the distinct nature of Islamic banks organizational forms and governance impact managerial behavior.

Organizational Form and Expense-Preference Behavior: Evidence from Islamic Banks

This paper examines the organizational forms of Islamic banks, corporate governance mechanism, and their effects on organizational behavior, specifically relating to managerial expense preferences. The paper opted for an OLS cluster regression and followed by a stochastic frontier approach test as a robustness test. Findings of this study indicate that organizational forms of Islamic banks influence managerial expense preferences. A stochastic frontier approach test supports the initial findings and reveals that the average noninterest cost inefficiency of Islamic banks without Shari’ah Boards is 23% compared to commercial banks. Islamic banks with Shari’ah Boards are, on average, 28% less noninterest cost inefficient compared to Islamic banks without Shari’ah Boards, and are on average, 16% less noninterest cost inefficient compared to commercial banks. Shari’ah Supervisory Boards’ positive implications for Islamic Banks are independent of the expectations of the governing structure or ownership. Specifically when looking at Islamic Banks with Shari’ah Supervisory Boards, managerial propensity to engage in self-serving behavior is reduced. This paper fulfils an identified need to understand how the distinct nature of Islamic banks organizational forms and governance impact managerial behavior.

Using stochastic frontier regression to estimate the construction cost inefficiency of prevailing wage laws

PurposeThe aim of this paper is to use stochastic frontier regression to measure the effect of the introduction and expansion of prevailing wage requirements on the cost efficiency of public school construction in British Columbia. The results provide evidence from a specific sector and location that contributes to the accumulated evidence on the topic.Design/methodology/approachStochastic frontier regression is used to measure the effect of the introduction and expansion of prevailing wage requirements on the cost efficiency of public school construction in British Columbia. The results of a likelihood ratio test indicate that stochastic frontier regression is preferred to OLS cost estimation because of the presence of statistically different cost inefficiencies across a sample of covered and uncovered projects.FindingsSpecifically, projects covered by the introductory stage of the wage requirements are significantly less cost efficient compared to other public school projects. However, by the time of the expansion of the wage policy 17 months later, covered projects were no more cost inefficient than other projects. The results indicate that if prevailing wage laws are associated with changes in the cost efficiency of construction, stochastic frontier regression is the preferred estimation technique.Research limitations/implicationsThis is the first study of its kind with results specific to school construction in British Columbia. Further research based on data from other projects may/may not confirm the existence of differences in construction cost inefficiencies for projects covered by construction wage policies.Social implicationsBy implication, the results suggest that if the cost inefficiency of prevailing wage laws is short‐lived, the impact on the total cost of construction may similarly be ephemeral. The results imply that prevailing wage regulations do not contribute to long‐run construction cost inefficiency.Originality/valueThis is the first study to use stochastic frontier regression to examine the cost inefficiencies associated with prevailing wage laws. Previous studies that examine the effect of the wage policy on construction costs are based on OLS estimation.

Estimating cost inefficiency of food crops farmers in Imo state, Nigeria

This study used survey data on input costs and total cost of production by 90 proportionate randomly selected food crops farmers in Imo state, to measure farm level cost inefficiency using a behavioural approach. The farmers were cost inefficient. The mean level cost inefficiency was 0.59, and the level ranged from 0.91 – 0.44 by individual farms. Major determinants of cost-inefficiency were education, farm size, family labour use, extension and credit. Food crops production costs can still be reduced in Imo State through increased efficiency in input markets, price legislation and provision of subsidy. br> Journal of Agriculture, Forestry and the Social Sciences Vol. 3 (2) 2005: pp.24-31

Access to credit, plot size and cost inefficiency among smallholder tobacco cultivators in Malawi

AbstractUsing data from the Malawi Financial Markets and Household Food Security Survey, this paper examines the effect of access to credit from formal sources, and tobacco plot size, on cost inefficiency among Malawian smallholder tobacco cultivators. Farm‐specific cost inefficiency is estimated within the framework of stochastic frontier analysis. Access to credit is measured as the sum of household members' self‐reported credit limits at credit organisations, arguably a truer measure of an exogenous credit constraint than credit program participation or actual loan uptake. It is found that tobacco cultivation is significantly less cost inefficient per acre on larger plots. While access to credit by itself has no statistically discernible effect on cost inefficiency, it reduces the gain in cost efficiency from a larger plot size.

Access to credit, plot size and cost inefficiency among smallholder tobacco cultivators in Malawi

Using data from the Malawi Financial Markets and Household Food Security Survey, this paper examines the effect of access to credit from formal sources, and tobacco plot size, on cost inefficiency among Malawian smallholder tobacco cultivators. Farm-specific cost inefficiency is estimated within the framework of stochastic frontier analysis. Access to credit is measured as the sum of household members’ self-reported credit limits at credit organisations, arguably a truer measure of an exogenous credit constraint than credit program participation or actual loan uptake. It is found that tobacco cultivation is significantly less cost inefficient per acre on larger plots. While access to credit by itself has no statistically discernible effect on cost inefficiency, it reduces the gain in cost efficiency from a larger plot size.

Size and Cost Efficiency in the Production of Local Road Services

The authors analyze 925 town highway departments in New York to determine potential economies from consolidation and the degree of cost efficiency. Only 15% of departments would reduce costs by merging, resulting in an average 13% reduction in expenditures. In addition, all of the towns are cost inefficient by an average 17%. Size economies are estimated using a log quadratic stochastic frontier regression model. The estimated cost curve is a textbook U shape with a mean cost elasticity of 0.97, indicating that most towns are operating at the minimum point of the curve. The composed error model is used to estimate cost inefficiency, which is not systematically linked to size inefficiency. However, 14 very small departments are quite cost inefficient.

Estimation of Cost Efficiency with Heteroscedasticity: An Application to Electricity Utilities

SUMMARY This paper deals with the estimation of efficiency. Efficiency is measured relative to the cost frontier which is defined as C*(W, 1) = minx{ W'Xf(X) 3 Y X X O} where W is the vector of input prices, X is the vector of inputs, Y is the actual output produced and ft ) is a function of the production technology. The condition J(X) > Y, X 0 implies that the maximum possible output, given X 3 0, can never be less than the actual output. A firm is defined as cost inefficient if its actual cost exceeds the minimum cost given by the cost frontier, which is to be estimated by using data on actual costs, output and input prices. We first consider a panel data model where cost inefficiency is decomposed into a permanent component and a residual component. The model can be viewed as a one-way error component model (ECM) with an additional error term introduced to capture the residual component of cost inefficiency. Second, the ECM is generalized to accommodate firm-specific variances for the permanent inefficiency component. Finally, we propose a multistep procedure to estimate the cost function parameters and to predict cost inefficiency. The model is applied to examine efficiency in the production of electricity by 10 major investor-owned electricity utilities in Texas during 1966-85. The production technology is represented by a cost function that is assumed to be the same for every utility (except for heterogeneous intercepts), but it is allowed to shift over time owing to changes in technology. Empirically we find evidence for permanent and residual cost inefficiencies. Furthermore, the data support the ECM with firm-specific variances and rejects the homoscedastic ECM. Cost inefficiency is found to vary widely across utilities, ranging from 8% to 36% with a mean of 27%. Technical change, defined as the rate of cost diminution over time with everything else unchanged, is found to be quite small (less than ? 1%), especially during 1971-85.