Cost Elasticity Research Articles

Does cost sharing really reduce inappropriate prescriptions among the elderly?

Improving prescription drug quality is an essential health policy goal in modern health systems, though evidence on the available instruments to attain such a goal are scarce. Cost sharing has an arguable role in improving the likelihood of an individual obtaining an appropriate prescription. This paper empirically examines the effect of cost sharing for prescription drugs in some dimensions of medication-related quality, namely the probability of inappropriate prescription drug use. Using data from United States seniors from 1996 to 2005, we explore various specifications of the probability of obtaining an inappropriate prescription that corrects for sample selection, endogeneity, and unobserved heterogeneity. Our results suggest a small, but measurable, negative price elasticity for inappropriate drug use to average out-of-pocket drug costs. That is, we find that user fees reduce the use of inappropriate medications, however the elasticity of cost sharing is found to be lower than that of drugs in general. A relatively close to zero price elasticity suggests that expected prescription quality improvements from co-payments are small in the light of our evidence.

Modelling non-performing loans probability in the commercial banking system: efficiency and effectiveness related to credit risk in Italy

In this article, we model the effect of the non-performing loans on the cost structure of the commercial banking system. With this aim, we comment on an increase in the non-performing loans by studying the consequences of such a change on the cost function and compute the probability of failure of maintaining a performing loan as such. In doing so, we are convinced that geography does matter and evaluate the risk propensity of the bank towards the non-performing loans accordingly. We finally stress that traditional efficiency indicators of cost elasticity do not fit properly with such a problem and propose a measure based on the costs for managing and monitoring the loans which, according to the related density function, will reveal effectively as non performing.

Balancing Development Costs and Sales to Optimize the Development Time of Product Line Additions

Development teams often use mental models to simplify development time decision making because a comprehensive empirical assessment of the trade-offs across the metrics of development time, development costs, proficiency in market-entry timing, and new product sales is simply not feasible. Surprisingly, these mental models have not been studied in prior research on the trade-offs among the aforementioned metrics. These mental models are important to consider, however, because they define reality, specify what team members attend to, and guide their decision making. As such, these models influence how development teams make trade-offs across the four metrics to try to optimize new product profitability. Teams with such an objective should manage to a development time that minimizes development costs and to a proficient market-entry timing that maximizes new product sales. Yet many teams use mental models for development time decision making that focus either just on development costs or on proficiency in market-entry timing. This survey-based study uses data from 115 completed NPD projects, all product line additions from manufacturers in The Netherlands, to demonstrate that there is a cost to simplifying decision making. Making development time decisions without taking into account the contingency between development time and proficiency in market-entry timing can be misleading, and using either a sales-maximization or a cost-minimization simplified decision-making model may result in a cost penalty or a sales loss. The results from this study show that the development time that maximizes new product profitability is longer than the time that maximizes new product sales and is shorter than the development time that minimizes development costs. Furthermore, the results reveal that the cost penalty of sales maximization is smaller than the sales loss of development costs minimization. An important implication of the results is that, to determine the optimal development time, teams need to distinguish between cost and sales effects of development time reductions. To determine the relative impact of these effects this study also estimates the elasticities of development costs, new product sales, and new product profitability with regard to development time. Armed with this knowledge, development teams should be better equipped to make trade-offs among the four metrics of development time, development costs, proficiency in market-entry timing, and new product sales.

Transitional Dynamics in a Tullock Contest with a General Cost Function

This paper models an infinitely repeated Tullock contest in which two contestants contribute efforts to accumulate individual asset stocks over time. To investigate the transitional dynamics of the contest in the case of a general cost function, we linearize the model around the steady state. Our analysis shows that optimal asset stocks and their speed of convergence to the steady state crucially depend on the elasticity of marginal effort costs, the discount factor and the depreciation rate. We further analyze the effects of second prizes in the transition to the steady state as well as in the steady state itself. For a cost function with a constant elasticity of marginal costs, a lower discount factor, a higher depreciation rate and a lower elasticity imply a higher speed of convergence to the steady state. Moreover, a higher prize spread increases individual and aggregate asset stocks, but does not alter the balance of the contest in the long run. During the transition, a higher prize spread increases asset stocks and produces a more balanced contest in each period. Finally, a higher prize spread increases the speed of convergence to the steady state.

Quantile regression for robust bank efficiency score estimation

Abstract We discuss quantile regression techniques as a robust and easy to implement alternative for estimating Farell technical efficiency scores. The quantile regression approach estimates the production process for benchmark banks located at top conditional quantiles. Monte Carlo simulations reveal that even when generating data according to the assumptions of the stochastic frontier model (SFA), efficiency estimates obtained from quantile regressions resemble SFA-efficiency estimates. We apply the SFA and the quantile regression approach to German bank data for three banking groups, commercial banks, savings banks and cooperative banks to estimate efficiency scores based on a simple value added function and a multiple-input–multiple-output cost function. The results reveal that the efficient (benchmark) banks have production and cost elasticities which differ considerably from elasticities obtained from conditional mean functions and stochastic frontier functions.

Monetary Policy and Productivity Shocks with Endogenous Hours and On-the-Job Search

This paper develops a New Keynesian model with on-the-job search. Workers are allowed to search on the job in order t o find a better job. I analyze how output, consumption, inflation, unemployment, and t he other labor market variables respond to productivity and monetary policy shocks. I allow the labor input to change both at the extensive margin and at the inte nsive margin. This generates a lower elasticity of marginal cost with respect to o utput which is important in obtaining the sluggish response of inflation. I fin d that output and consumption show large and persistent responses to productivity and monetary policy shocks, whereas labor market variables do not show persiste nt effects and adjust very quickly in response to monetary policy shocks. On-t he-job search mechanism also eliminates the need for exogenous wage rigidity and reduces the average duration of price contracts, which is consistent with the micro data. The increasing search activity by the employed creates an incentive for t he firms to post vacancies and helps in achieving the relatively smooth behavior o f wages over the cycle without assuming any exogenous and ad-hoc wage rigidity.

Exaggerated Death of Distance: Revisiting Distance Effects on Regional Price Dispersions

This paper empirically establishes the significant roles of transport costs in price dispersions across regions. We identify and estimate the iceberg-type distance-elastic transport costs as a parameter of a structural model of cross-regional price differentials featuring product delivery decisions. Utilizing a data set of wholesale prices and product delivery patterns of agricultural products in Japan, our structural estimation approach finds large distance elasticities of the transport costs. The result confirms that geographical barriers are an economically significant contributor to the failures of the law of one price.

Inventories and real rigidities in New Keynesian business cycle models

Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stockouts. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data.

EMPLOYMENT AND DEADWEIGHT LOSS EFFECTS OF OBSERVED NONWAGE LABOR COSTS

I. INTRODUCTION Nonwage labor costs consist of several mandated benefits, health, training, accident, housing plans, as well as several taxes, and are intended to increase workers' welfare and job security. However, these benefits tend to come at the expense of reducing employment and deadweight losses. To quantify these resulting effects, one needs a reliable measure of the employment labor cost elasticity. Most studies conducted on this subject find low estimated values for this elasticity, which contrasts with policy-makers' enthusiasm to reduce labor In this article, using a Peruvian-matched firm-workers data set, we find that nonwage labor costs reduce employment measured in total hours of work by 17% for white collars and by 53% for blue collars with associated deadweight losses of 10% and 35% of total contributions' revenues, respectively. We also compute employment losses of compliance with mandated employers' and workers' contributions of 4% for white collars and 12% for blue collars, with respective associated deadweight losses of 2% and 6% of contribution revenues. These results come from estimating the long-run unconditional firm-level labor demand function by a procedure that corrects for endogeneity of wages. We show that unbiased estimates, even using small units such as firm-level data, require not only that wages are exogenous but also that their unobserved determinants are uncorrelated with the unobserved determinants of labor demand. This requirement is not fulfilled in the likely event, pointed out by Becker (1993), that larger firms are matched with more productive workers. Consequently, an estimation that corrects for endogeneity yields a larger labor cost elasticity of labor demand than one that does not, like ordinary least squares (OLS). In the past two decades, there has been intensive theoretical and empirical research on the effects of labor market frictions on job creation. Western European economies, characterized by large job security provisions, have been the center of attention of this research that has modeled these frictions as adjustment costs in labor demand (Bentolila and Bertola 1990; Hamermesh 1989; Hopenhayn and Rogerson 1993; Nickell 1987; Rendon 2004). This literature finds that the effects of eurosclerosis, that is, labor markets with high firing costs, are ambiguous: in good times, sclerotic labor markets create fewer jobs than free labor markets; however, in bad times, sclerotic labor markets reduce job destruction. Most of the research done in Latin America has been done under these guidelines, obtaining statistically significant negative effects of job security provisions on employment rates. (1) Furthermore, using country-level data for Latin America and Organization for Economic Cooperation and Development countries, Heckman and Pages-Serra (2000) found large effects of job security provisions on employment, (2) which are robust to several specifications, OLS, random, and fixed effects. The authors present their results as a strong evidence against Freeman's (2000) view that job security regulations mostly affect distribution, but not efficiency, and advocate the substitution of job security provisions by other mechanisms that provide income security at lower efficiency and inequality costs. Under a classic labor demand framework and using worker- and firm-level data, this article provides new evidence in the same direction, extending the computation of the effects of job security provisions to deadweight losses. Hamermesh (1993) surveys several studies on the estimation of labor demand and remarks that estimates of the labor cost employment elasticity should be interpreted and compared cautiously depending on the specification adopted. Capital is an explanatory variable in a short-run labor demand estimation; it is not in a long-run labor demand estimation. Similarly, output is included in the estimation of a conditional labor demand but excluded in the estimation of an unconditional labor demand. …

Are sports teams multiproduct firms?

The appropriate conception of team outputs is investigated by estimating a two-output factor demand system for baseball teams, relative to which single-output models are rejected. This finding is robust to alternative approaches to testing and model choice. The factor demands are those of the symmetric generalized McFadden cost function, which has several advantages in this context. The team factor inputs are the skill characteristics of players, the prices of which are obtained hedonically. In addition to investigating one- versus two-output models, the estimation results are used to obtain demand and substitution elasticities, factor input elasticities with respect to output, cost elasticities, and measures of economies of scale and scope. Although the results support a multiproduct conception of team production, output separability is not rejected, suggesting that team outputs may sometimes be adequately treated as a production aggregate.

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Do waiting times reduce hospital costs?

Using a sample of 137 hospitals over the period 1998–2002 in the English National Health Service, we estimate the elasticity of hospital costs with respect to waiting times. Our cross-sectional and panel-data results suggest that at the sample mean (103 days), waiting times have no significant effect on hospitals’ costs or, at most, a positive one. If significant, the elasticity of cost with respect to waiting time from our cross-sectional estimates is in the range 0.4–1. The elasticity is still positive but lower in our fixed-effects specifications (0.2–0.4). In all specifications, the effect of waiting time on cost is non-linear, suggesting a U-shaped relationship between hospital costs and waiting times. However, the level of waiting time which minimises total costs is always below ten days.

Cost recovery from congestion tolls with random capacity and demand

According to the Cost Recovery Theorem the revenues from congestion tolls pay for optimal capacity of a facility if user costs are homogeneous of degree zero in usage and capacity, and if capacity is perfectly divisible and supplied with a unit cost elasticity. This paper examines the robustness of the Theorem to demand and capacity uncertainty in the context of highway travel. Three main results are derived. (1) The Theorem holds in expected values when users are perfectly informed about the state and the toll is set optimally as a function of the state. (2) The Theorem also holds in expected values when users are imperfectly informed about the state, the toll is set optimally given the information that users have, and the price elasticity of demand is the same in all states. (3) The Theorem does not hold if the toll is set using less information than users have. Whether an expected surplus or deficit results depends on the sign of the correlation across states between the Pigouvian toll and the ratio of the price elasticity of demand to the price. Examples show that the correlation can be positive or negative depending on the functional form of the demand and cost curves and the way the curves shift between states.

Equilibrium Unemployment, Job Flows, and Inflation Dynamics

In order to explain the joint fluctuations of output, inflation and the labor market, this paper develops and estimates a general equilibrium model that integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The estimated model accounts for the responses of employment, hours per worker, job creation, and job destruction to a monetary policy shock. Moreover, search frictions in the labor market generate a lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output that are observed in the data.

A Modest Proposal for a Two Sided Market Clearing Institution Under Asymmetric Supply Constraints with Skewed Pricing: The Market for Adoption and Abortion in the United States

Abortion is arguably the most fundamentally divisive issue in American politics. Abortion and childbirth research has generally omitted theoretical considerations focusing instead on empirical analysis of policy and economic incentives for unwanted pregnancies. This paper presents a theoretical model matching the potential supply of terminated pregnancies with the total demand for children within certain modeling constraints. First, the demand and supply of pregnancies should be studied within the theoretical framework of a market with economic incentives. Second, a theoretical model for the demand for abortion must incorporate the total market for children, which implies the market for pregnancy, abortion, and adoption. Third, there exist in the overall market for procreative goods and services certain unique characteristics that need to be carefully considered. Producers and suppliers within the procreative goods and services market have radically different price and cost elasticity functions and unique production asymmetries which create a potential net benefit for buyer and seller alike. The market for abortion and adoption, while seemingly related and similar, suffer from a fundamental disconnect, preventing a simple exchange of goods and services: abortion implies potential supply which does not flow to potential consumers, those seeking to adopt. Studying this market inefficiency will benefit from a two sided market analysis used in situations where an intermediary business must attract both producers and suppliers. The supply side of the procreative goods market faces poor incentives and production asymmetries and the demand side suffers from too many people chasing too little product. First, I find that the producer decision to supply the good depends primarily on exogenous preference formation and not on consumer provided incentives. Second, I find that the market would benefit from legal framework for a market clearing institution using the market for real estate as the blue print.

Determining elasticities in discrete choice models

The objective of this paper is to determine the changes in the probability of choosing a private car for travelling, these changes being caused by variations in the generic variables of travel time and cost. For that purpose, we adjust discrete choice models in relation to private or public transport election, analysing passenger behaviour with regard to the different reasons for travelling and the time of the day of the trip. In addition, we determine the time and cost elasticities of transport demand in discrete choice models. This research shows that the elasticities with respect to the time difference variable are higher than the ones obtained considering cost difference and, for trips with study purposes, the elasticities are higher than those calculated for other travel purposes. Finally, an empirical application for the city of Santander (Spain) is offered.

Exponential or Power Distance-Decay for Commuting? An Alternative Specification

In this paper we investigate the functional form of distance decay for commuting flows between municipalities in Denmark. Our inference is based on a single equation that includes variables to capture the effect of spatial structure. Special attention is given to a proper estimation method: we estimate the distance-decay parameters by nonlinear weighted least-squares with balancing factors. It appears that neither an exponential nor a power distance-decay function fits the data well. Using a spline regression we find a cost elasticity of – 4 for distances around 20 km and a much smaller value for shorter and longer distances. It appears that the logarithm of distance decay can be described adequately as a (downward) logistic function of log cost.

Taxation, Liquidity Constraints and Entrepreneurial Investment — Evidence from Taiwan's 1998 Tax Integration

This study utilizes the natural experiment of Taiwan's 1998 tax integration to investigate the tax effect on sole proprietors' investment. Based on panel data of 1995 and 1999 firm-level surveys, we find that the user cost elasticity of capital significantly equals -0.239. This estimate suggests that a sole proprietorship would increase its capital stock by 6.9 percent in response to the 1998 tax integration if it faced the top tax rates both before and after the integration. Moreover, this study suggests that large-size sole proprietorships are more liquidity constrained than their smaller counterparts.

The cost of capital, finance and high‐tech investment

Investment is the most volatile component of aggregate demand and it is often considered central to business cycles fluctuations. The responsiveness of business investment to changes in its price is thus crucial to our understanding of economic activity. In spite of the key role played by the user cost of capital in economic analysis, there is little empirical support for the existence of substantial user cost elasticity. However, most of the evidence to date is based on aggregate user cost data, which may have introduced downward biases in the estimated user cost. This paper contributes to the literature by constructing a disaggregated, industry‐specific micro user cost variable and focusing on a special class of firms – the high‐tech firms. To provide a benchmark for the results, the user cost estimates for the high‐tech sector are compared with those for the rest of the manufacturing sector. The results suggest that there is little response of investment to variations in its user cost. The findings also suggest that high‐tech firms’ investment behavior is not, after all, that different from the rest of the manufacturing sector.

Demand for Piped and Non-piped Water Supply Services: Evidence from Southwest Sri Lanka

In many countries water supply is a service that is seriously underpriced, especially for residential consumers. This has led to a call for setting cost recovery policies to ensure that the tariffs charged for water supply cover the full cost of service provision. Identification of factors driving piped and non-piped water demand is a necessary prerequisite for predicting how consumers will react to such price increases. Using cross-sectional data of 1,800 households from Southwest Sri Lanka, we estimate water demand functions for piped and non-piped households using appropriate econometric techniques. The (marginal) price elasticity is estimated at − 0.15 for households exclusively relying on piped water, and at − 0.37 for households using piped water but supplementing their supply with other water sources. The time cost elasticity for households relying on non-piped water only is estimated at − 0.06 on average, but varying across sources. For both piped and non-piped households, we find evidence of substitutability between water from different sources. We discuss the implications of these results in terms of pricing policy.