Dynamic Inefficiency Research Articles

Secular Stagnation, Rational Bubbles, and Fiscal Policy

It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an efficient allocation. This paper considers a world where r fluctuates over time due to shocks to the marginal productivity of capital. Then, bubbles further efficiency, though they cannot implement first best. While bubbles can only be sustained when r = g in a deterministic economy, r > g on average in a stochastic economy.Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubbly economy, fiscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while fiscal policy implements intragenerational transfers. Hence, while bubbles and fiscal policy are perfect substitutes in the deterministic economy, fiscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic inefficiency should lead to a higher sovereign debt.

Time substitution for environmental performance: The case of Swedish manufacturing

We extend recent advances in time substitution modeling to a directional distance function framework, in order to examine the environmental performance of firms in Sweden’s pulp and paper industry for the years 2002–2008. Our data allow us to estimate the optimal reallocation of environmental investments, expenditures and energy use to simultaneously maximize production output and minimize emissions in the years immediately before and after the implementation of the European Union Emissions Trading Scheme. We find some evidence of overall productivity decline when considering both emissions and output objectives, due primarily to technological decline, and that cumulative dynamic inefficiency outweighs static inefficiency. A comparison of optimal investment with observed investment indicates that firms could have improved their performance by reallocating environmental investments to early periods and production-oriented investment to later periods.

Solving dynamic inefficiency with politically sustainable guest worker programs

An overlapping generations economy that is dynamically inefficient can solve the inefficiency by allowing foreign guest workers every period in order to decrease capital per worker. These policies increase the welfare of all generations and can be politically supported by a young majority under Markov and under trigger strategies that “reward” or “punish” the behavior of previous generations.

Demonstration effect and dynamic efficiency

Can dynamic inefficiency be remedied by intergenerational family transfers? The issue matters for the connection between fiscal policy and economic growth. Yet family transfers have mostly been narrowly cast as altruistic. I show that an alternative motive–the demonstration effect, whereby parents transfer to mold preferences of children–can generate vastly different results: family transfers are positive under dynamic inefficiency. These transfers are instrumental to depress capital accumulation so as to approach the Golden Rule capital stock. Intuitively, family transfers from youth to old age reduce capital accumulation. However, family transfers are nil under dynamic efficiency. Unlike public debt, both capital accumulation and welfare are not worsened.

Dynamic multi-directional inefficiency analysis of European dairy manufacturing firms

This paper extends the method of multi-directional inefficiency analysis to account for dynamics of firms’ production decisions. The resulting approach – dynamic multi-directional inefficiency analysis – measures variable input- and investment-specific inefficiency using Data Envelopment Analysis. The empirical application focuses on panel data of large dairy manufacturing firms over the period 2005–2012 in three European regions (Eastern, Southern and Western). The results show that investments are the most inefficient factor for firms in all European regions, followed by labour and materials. However, the findings also suggest a high dispersion of investment-specific inefficiency scores within the sample. The paper also finds that the median dynamic inefficiency is changing rapidly in the years after the beginning of the financial crisis.

Uncertainty-Induced Dynamic Inefficiency and the Optimal Inflation Rate

I construct an overlapping-generations model of money with Epstein and Zin (1989) preferences and study how aggregate output uncertainty affects the optimal rate of inflation. When money only serves as savings instruments, I find that the optimality of Friedman Rule breaks up only if agents prefer late resolution of uncertainty. However, if an additional role of money as a medium of exchange is introduced, then the Friedman Rule becomes generally suboptimal regardless of agents' preferences for the timing of uncertainty resolution. The aggregate output uncertainty, nevertheless, crucially determines the level of optimal inflation rate in this case.

Investment Age and Dynamic Productivity Growth in the Spanish Food Processing Industry

This article analyzes the relation between investment age, measured as the number of years since investment spike, and dynamic productivity growth and its components, which include dynamic technical change, dynamic inefficiency change, and dynamic scale inefficiency change. The empirical application focuses on firm‐level data for the Spanish food processing industry covering the period from 1996 to 2011. This investigation of the impact of firms' investment decisions on productivity growth employs a dynamic production framework and analyzes the impact of these decisions on the components of dynamic productivity growth. Our findings show that dynamic productivity growth is negatively affected by investment spikes in both the meat processing and oils and fats industries, and that dynamic inefficiency change initially falls just after the infusion of large investment for oils and fats firms, but then grows as the firms acquire experience with this investment. We further find that investment spikes lead to improvements in dynamic technical change and worsening in dynamic technical inefficiency change in the meat processing industry, while dynamic scale inefficiency change was negatively impacted in both industries.

The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation

In this study, we address a major problem in the measurement of firm performance and the regulation of natural monopolies, namely the intertemporal character of long-term investment decisions. Specifically, we focus on the impact of adjustment costs of investments on estimates of firms’ technical and cost inefficiency. We make use of a nonparametric dynamic data envelopment analysis to investigate the dynamic inefficiency of electricity distribution and transmission companies in the US during the years 2004–2011. These results are compared to their static counterparts. Our empirical findings reveal that ignoring long-term investments and their corresponding adjustment costs significantly distorts both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments.

Effect of Food Regulation on the Spanish Food Processing Industry: A Dynamic Productivity Analysis.

This article develops the decomposition of the dynamic Luenberger productivity growth indicator into dynamic technical change, dynamic technical inefficiency change and dynamic scale inefficiency change in the dynamic directional distance function context using Data Envelopment Analysis. These results are used to investigate for the Spanish food processing industry the extent to which dynamic productivity growth and its components are affected by the introduction of the General Food Law in 2002 (Regulation (EC) No 178/2002). The empirical application uses panel data of Spanish meat, dairy, and oils and fats industries over the period 1996-2011. The results suggest that in the oils and fats industry the impact of food regulation on dynamic productivity growth is negative initially and then positive over the long run. In contrast, the opposite pattern is observed for the meat and dairy processing industries. The results further imply that firms in the meat processing and oils and fats industries face similar impacts of food safety regulation on dynamic technical change, dynamic inefficiency change and dynamic scale inefficiency change.

Simulation of the dynamic inefficiency of the CMS pixel detector

The Pixel Detector is the innermost part of the CMS Tracker. It therefore has to prevail in the harshest environment in terms of particle fluence and radiation. There are several mechanisms that may decrease the efficiency of the detector. These are mainly caused by data acquisition (DAQ) problems and/or Single Event Upsets (SEU). Any remaining efficiency loss is referred to as the dynamic inefficiency. It is caused by various mechanisms inside the Readout Chip (ROC) and depends strongly on the data occupancy. In the 2012 data, at high values of instantaneous luminosity the inefficiency reached 2% (in the region closest to the interaction point) which is not negligible. In the 2015 run higher instantaneous luminosity is expected, which will result in lower efficiencies; therefore this effect needs to be understood and simulated. A data-driven method has been developed to simulate dynamic inefficiency, which has been shown to successfully simulate the effects.

Time Substitution for Environmental Performance: The Case of Sweden Manufacturing

We apply recent advances in time substitution modeling to examine the environmental performance of firms in Sweden’s pulp and paper industry for the years 2002-2008. Our data allow us to estimate the optimal reallocation of environmental investments, expenditures and energy use to simultaneously maximize production output and minimize emissions reductions in the years immediately before and after the implementation of the European Union Emissions Trading Scheme. We find some evidence of overall productivity decline when considering both emissions and output objectives, due primarily to technological decline, and that cumulative dynamic inefficiency outweighs static inefficiency. A comparison of optimal investment time paths to observed investment levels indicates that firms could have improved their performance by reallocating environmental investments to early periods and production-oriented investment to later periods.

Efficiency of Flexible Budgetary Institutions

Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties bargaining over the allocation to a public good each period. Parties place different values on the public good, and these values may change over time. We focus on budgetary institutions that determine the rules governing feasible allocations to mandatory and discretionary spending programs. Mandatory spending is enacted by law and remains in effect until changed, and thus induces an endogenous status quo, whereas discretionary spending is a periodic appropriation that is not allocated if no new agreement is reached. We show that discretionary only and mandatory only institutions typically lead to dynamic inefficiency and that mandatory only institutions can even lead to static inefficiency. By introducing appropriate flexibility in mandatory programs, we obtain static and dynamic efficiency. An endogenous choice of mandatory and discretionary programs, sunset provisions and state-contingent mandatory programs can provide this flexibility in increasingly complex environments.

Dynamic effects in inefficiency: Evidence from the Colombian banking sector

Firms face a continuous process of technological and environmental changes that requires them to make managerial decisions in a dynamic context. However, costs and constraints prevent firms from making instant adjustments towards optimal conditions and may cause inefficiency to persist in time. We propose a dynamic inefficiency specification that captures differences in the adjustment costs among firms and non-persistent effects of inefficiency heterogeneity. The model is fitted to a ten year sample of Colombian banks. The new specification improves model fit and have effects on efficiency estimations. Overall, Colombian banks present high inefficiency persistence but important differences between institutions are found. In particular, merged banks present low adjustment costs that allow them to recover rapidly efficiency losses derived from merging processes.

Assessing dynamic inefficiency of the Spanish construction sector pre- and post-financial crisis

This paper undertakes the full decomposition of dynamic cost inefficiency into technical, scale and allocative inefficiency based on the dynamic directional distance function. The empirical application estimates dynamic inefficiency in the Spanish construction industry before and during the current financial crisis over the period 2001–2009. Static inefficiency measures are biased in a context of a significant economic crisis with large investments and disinvestments as they do not account for costs in the adjustment of quasi-fixed factors. Allocative inefficiency is smaller, while technical inefficiency is larger when using the dynamic compared to the static framework. Results further indicate that overall dynamic cost inefficiency is very high with technical inefficiency being the largest component, followed by allocative and scale inefficiency. Moreover, overall dynamic cost inefficiency is significantly larger before the beginning of the financial crisis than during the financial crisis. Larger firms are less technically and scale inefficient than smaller firms on average, but have more problems in choosing the mix of inputs that minimizes their long-term costs. Firms that went bankrupt, on average, have a higher overall dynamic cost inefficiency and scale inefficiency than continuing firms.

Measuring cost efficiency in the presence of quasi-fixed inputs using dynamic Data Envelopment Analysis: The case of port infrastructure

Port infrastructure has characteristics that are classified by quasi-fixed inputs, meaning they cannot be immediately adjusted, contributing to the production of transport services over long periods of time. Another important characteristic of port infrastructure is that its current technology is a consequence of investment decisions made in the past and whose effects resonate over various periods. A dynamic approach that acknowledges the inter-temporal relationship between the inputs used and the resulting outputs is more adequate to handle this type of inputs. In this article, the efficiency achieved for Spanish Port Authorities from 2000 to 2007 has been obtained using a dynamic inter-temporal Data Envelopment Analysis cost model, obtaining dynamic and static components of inefficiency. The result has been compared with that obtained from a static approach, showing that the static model overstates all components of cost inefficiency. Moreover, since by its very nature the static model is unable to yield the dynamic inefficiency, it has a tendency to transform efficiency into technical and allocative ones, which can lead to faulty investment decisions. If the specific characteristics of port infrastructure are not considered, the consequences could lead to investment decisions being made that seek to expand the productive capacity of the port when such an expansion is not warranted.

Technical Change and The Commons

AbstractThis paper addresses normative exploitation of common renewable resources with changes in technology and technical, allocative, and scale efficiency that exacerbate the commons problem and externality. Their impact depends on the rate and nature of change, investment, and state of property rights. An augmented fundamental equation of renewable resources with a modified marginal stock effect and a new marginal technology effect account for changes in disembodied and embodied technology and technical efficiency. Neglecting these changes generates misleading policy advice and dynamic inefficiency with overaccumulation of physical and natural capital and sizable foregone rents. An empirical application illustrates.

Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries

Financial crises accompanied by banking crises often entail heavy fiscal legacies. For the U.S., for example, the gross government debt to GDP ratio exceeded 100 % in 2012. Due to the unsustainability of public debt, both in the U.S. and in other advanced countries, moves towards a substantial reduction in debt levels would appear to be unavoidable. However, as shown in this paper, the long-run welfare impact of debt reduction in advanced countries, both at home and abroad, may prove to be somewhat of a disincentive for policy makers. In particular, we find that under conditions of dynamic inefficiency, and when Home (U.S.) has a negative external balance and a lower capital production share than Foreign (China), both domestic and foreign welfare decrease if Home reduces public debt.

The Dance of the Dynamics: The Interplay of Trade and Growth

We study the interaction of endogenous growth and Ricardian trade working solely through comparative advantage. The model is built to be consistent with several facts about technical progress, R&D activity, industrial organization, and trade. We obtain a full characterization of the transition dynamics and trade's welfare effects. We find that trade affects growth and that growth affects trade in ways previously unexplored. The model can explain in a single framework several observed phenomena usually analyzed separately. Beside the usual efficiency gains, trade may raise or lower initial output of either country through a cross-industry externality. More important, trade may increase or decrease the balanced growth rate of either country, with the possibility of a decrease arising from a growth-related dynamic inefficiency. Trade leads to equal growth rates for some countries but permanently unequal growth rates for others. In general, the world's distribution of growth rates may become one of 'twin peaks' with groups of countries having persistently high or low growth rates. Trade leads to effective technology transfer, with a country's growth rate being the same as if that country had adopted its trading partner's R&D technology even though no such technology transfer ever occurs. Effective technology transfer offers a new interpretation of the evidence on productivity gains from trade. Economic growth can change the trading regime endogenously by moving the world economy across the boundary of the standard Ricardian interior (complete specialization) and corner (incomplete specialization) solutions. Through its effects on economic dynamics, trade may raise or lower social welfare in the short run, the long run, or both. For all results, the model specifies the conditions under which each possible outcome occurs.

Optimal factor tax incidence in two-sector human capital-based models

This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent's learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.

Public debt in an OLG model with imperfect competition: long-run effects of austerity programs and changes in the growth rate

In this paper we consider a modified version of Diamond’s OLG model. We show, first, that dynamic inefficiency may be relevant when the presence of imperfect competition is taken into account. Second, if fiscal policy is used to avoid inefficiency and maintain an optimal capital intensity, the required debt ratio will be inversely related to the growth rate. Third, austerity policies – reductions in government consumption and entitlement programs for the old generation – raise the required debt ratio.