Estimate Cost Inefficiency Research Articles

Appropriate Distribution of Cost Inefficiency Estimates as Predictor of Financial Instability

The study develops a hypothesis validation process to test whether estimated cost inefficiency fits the theoretical distribution of the estimate of inefficiency, given the initial assumption of a half normal distribution for the inefficiency term in the stochastic frontier model. The application of this methodology to a sample of Spanish banks in the period 2002-2007 allows us to observe the evolution of the distributions of estimated cost inefficiency. The results confirm for the existence of a relationship between estimated cost inefficiency and the financial situation of these entities. In fact, an increase in the probability of higher levels of inefficiency is observed the period of study, coinciding with the beginning of financial instability in the Spanish banking system.

Distribution of cost inefficiency in stochastic frontier approach: evidence from Spanish banking

ABSTRACTThe aim of the paper is to demonstrate the appropriateness of an a priori analysis to determine the distributional assumption of the inefficiency term in a stochastic frontier model. To this end, theoretical distributions of estimated inefficiency were obtained when the inefficiency term is assumed to be distributed as a half normal and an exponential in a cost frontier model. Comparisons of such theoretical distributions with the respective cost inefficiency estimators using the goodness of fit test allow selecting the most appropriate distributional assumption. The application on three data sets of Spanish banking system in 2009 demonstrated the relevance of the research question. First, the results of estimated cost inefficiency with a half normal assumption are larger than with an exponential distribution significantly. Besides, half normal assumption was rejected and exponential was not rejected as the most appropriate distribution of inefficiency term in Spanish banking data set. However, the adjustment of saving banks data had been better with the former distribution than the latter. In the case of banks, any distribution results appropriate. To sum up, this work demonstrate that the distributional assumption on inefficiency term in Stochastic Frontier Approach must be established in a justified way, as it can significantly bias the results of estimated inefficiency and therefore, influences improving policies and strategies in the Spanish banking sector.

Inefficiency Differences between Critical Access Hospitals and Prospectively Paid Rural Hospitals

The Medicare prospective payment system (PPS) contains incentives for hospitals to improve efficiency by placing them at financial risk to earn a positive margin on services rendered to Medicare patients. Concerns about the financial viability of small rural hospitals led to the implementation of the Medicare Rural Hospital Flexibility Program (Flex Program) of 1997, which allows facilities designated as critical access hospitals (CAHs) to be paid on a reasonable cost basis for inpatient and outpatient services. This article compares the cost inefficiency of CAHs with that of nonconverting rural hospitals to contrast the performance of hospitals operating under the different payment systems. Stochastic frontier analysis (SFA) was used to estimate cost inefficiency. Analysis was performed on pooled time-series, cross-sectional data from thirty-four states for the period 1997-2004. Average estimated cost inefficiency was greater in CAHs (15.9 percent) than in nonconverting rural hospitals (10.3 percent). Further, there was a positive association between length of time in the CAH program and estimated cost inefficiency. CAHs exhibited poorer values for a number of proxy measures for efficiency, including expenses per admission and labor productivity (full-time-equivalent employees per outpatient-adjusted admission). Non-CAH rural hospitals had a stronger correlation between cost inefficiency and operating margin than CAH facilities did.

Hospital Inefficiency: What is the Impact of Membership in Different Types of Systems?

The primary objective of this study is to assess whether systematic differences in inefficiency are associated with hospital membership in different types of systems. We employed the Battese/Coelli simultaneous stochastic frontier analysis (SFA) technique to estimate hospital cost inefficiency. Mean estimated inefficiency was 8.42%. Membership in different types of systems was related to estimated cost inefficiency (p < .05). Compared to hospitals that were members of centralized health systems, membership in centralized physician/insurance or decentralized systems was associated with decreased inefficiency; membership in independent systems was associated with increased inefficiency.

Cost efficiency in the Latin American and Caribbean banking systems

A common cost frontier with country-specific environmental variables was estimated for a panel of 481 banks from 16 Latin American countries. A stochastic frontier model was used to estimate cost inefficiency and scale and scope economies. The results suggest that there is a wide range of inefficiency levels across countries. Very small and very large banks are significantly more inefficient than large banks. Underperforming banks tend to be smaller, to be undercapitalized, to present a poor profit performance, to be more dependent on non-interest income, to be more risky, to have a less stable deposit base and to intermediate less.

Efficiency of multinational banks: an empirical investigation

This paper conducts a comparative analysis of the productive efficiency of foreign-owned and US-owned multinational commercial banks operating in the US. A multiproduct translog stochastic-cost frontier model approach is used to estimate cost inefficiency scores. Ordinary Least Squares and Tobit regressions are used to identify the key factors associated with inefficiency. The results indicate that foreign-owned multinational banks operating in the US are significantly less efficient than their US-owned counterparts and that large multinational banks in holding company networks carrying fewer foreign assets tend to be more efficient.

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.

Measurement of Economic Efficiency in Pakistani Agriculture

AbstractThe behavioral and stochastic cost frontier functions are applied to estimate cost inefficiency by farms. The behavioral approach satisfies most of the assumptions of dual cost function and the likelihood ratio test rejects the market efficiency hypothesis implying less than optimum use of manures, labor, and fertilizers. A suboptimal use is explained by holding size, education, credit, and subsistence needs. Small farms seem to be more efficient than large farms in the region. A measure of inefficiency based on a stochastic cost frontier approach confirms the results of the behavioral approach.

Measurement of cost inefficiency with safety first measure of risk

The objectives of this paper are to incorporate a measure of risk aversion in the translog frontier cost function to estimate cost inefficiency. Risk-averse behaviour of farmers is hypothesised to reduce efficiency by leading to a situation in which the marginal value product of an input is less than price. In developing agriculture, farmers are aware of their subsistence needs and seek to minimize the probability of their incomes falling below a disaster level of income. Using such a safety first principle, a measure of risk-taking is developed and explained by socio-economic characteristics. This measure is used in the translog cost function as a fixed input and, using the frontier approach (with half normal distribution of inefficiency disturbance), a measure of cost inefficiency is obtained. This is related to socio-economic characteristics such as education, assets and holding size. A survey data of 436 farmers for the North-West Frontier Province of Pakistan is used to reach policy conclusions for reducing cost inefficiency.

Measurement of cost inefficiency with safety first measure of risk

AbstractThe objectives of this paper are to incorporate a measure of risk aversion in the translog frontier cost function to estimate cost inefficiency. Risk‐averse behaviour of farmers is hypothesised to reduce efficiency by leading to a situation in which the marginal value product of an input is less than price. In developing agriculture, farmers are aware of their subsistence needs and seek to minimize the probability of their incomes falling below a disaster level of income. Using such a safety first principle, a measure of risk‐taking is developed and explained by socio‐economic characteristics. This measure is used in the translog cost function as a fixed input and, using the frontier approach (with half normal distribution of inefficiency disturbance), a measure of cost inefficiency is obtained. This is related to socio‐economic characteristics such as education, assets and holding size. A survey data of 436 farmers for the North‐West Frontier Province of Pakistan is used to reach policy conclusions for reducing cost inefficiency.