Estimation Of Cost Function Research Articles

Efficiency and costs in education: year-round versus traditional schedules

This study explores the cost savings (efficiency) of a year-round schedule versus a traditional 9-month schedule for schools in Clark County, Nevada. Unlike many previous studies, the cost of real estate capital is included in the estimated cost functions. The sample includes 115 elementary schools, 26 with a year-round schedule, and the study finds that this schedule not only produces efficiencies in the cost of capital area but also in other areas such as operations. These efficiencies are evident after taking into account the usual average daily attendance, test performance scores, and socioeconomic variables that are customarily used in such studies. The existence and size of efficiencies discovered in this study have implications for those school districts that face a rapidly growing student population.

Water pollution abatement cost function: methodological issues and an application to small-scale factories in an industrial estate in India

Formulation and estimation of a correctly specified abatement cost function would be central to policy formulation regarding imposing taxes or user-fees as well as of sharing social cost in the presence of environmental pollution. Often in research, the output of an abatement activity for water pollution appears to us not to have been clearly specified. This activity is very distinct from whatever is the actual product of the plant. We propose in this paper that the output is only and exclusively the reduction in the level of the pollutant in the outflow from the plant and illustrate this with primary data for small-scale factories in Nandesari Industrial Estate in Gujarat, India. The cost function estimates provide evidence of significant scale economies and high marginal abatement cost in wastewater treatment by small-scale factories.

A quality-adjusted cost function in a regulated industry: the case of Dutch nursing homes.

The primary objective of this paper is to examine the cost structure of the Dutch nursing home industry, using econometric techniques. In this paper we present a model that combines economic behaviour and quality of services measured by a latent variable. We propose a simple method for identifying and estimating cost functions in the presence of endogenous, unobserved quality. Estimating this quality-adjusted cost function and the corresponding cost share equations indicates that quality is negatively related to the input prices of nurses and other personnel, indicating that nursing homes have a preference for labour. We also show that the quality-adjusted model is superior to a model with exogenous quality.

Economies of scale in the Swiss nursing home industry

The paper examines costs in the Swiss nursing home industry, an issue of concern to Swiss policy makers because of the explosion of elderly care costs and the ageing of the population. The paper considers estimation of a translog cost function employing panel data for a sample of 36 nonprofit nursing homes operating in Ticino, a canton of Switzerland, over the period 1993-1995. Using a set of dummy variables quality differences are considered. The results of this analysis indicate the existence of economies of scale for most output levels.

ECONOMIES AND DISECONOMIES: ESTIMATING ELECTRICITY COST FUNCTIONS

This paper presents estimates of the variable cost function ofelectricity generation. The cost function is estimated using a two dimensional definition of capacity utilization. Because electricity cannot be conveniently stored, generation facilities follow the load across demand cycles. Capacity utilization can be captured empirically in two ways. One is generation relative to capacity when a unit is connected to the system; the other is thepercent of time the unit is disconnected. The estimated cost function shows that both dimensions affect average cost, which generally declines as capacity utilization increases.

Production risk and the estimation of ex-ante cost functions

Cost function estimation under production uncertainty is problematic because the relevant cost is conditional on unobservable expected output. If input demand functions are also stochastic, then a nonlinear errors-in-variables model is obtained and standard estimation procedures typically fail to attain consistency. But by exploiting the full implications of the expected profit maximization hypothesis that gives rise to ex-ante cost functions, it is shown that the errors-in-variables problem can be effectively removed, and consistent estimation of the parameters of interest achieved. A Monte Carlo experiment illustrates the advantages of the proposed procedure as well as the pitfalls of other existing estimators.

Aviation infrastructure performance and airline cost: a statistical cost estimation approach

Abstract The relationship between the performance of the US National Airspace System (NAS) and airline costs is examined by estimating airline cost functions that include NAS performance metrics as arguments, using quarterly data for 10 US domestic airlines. Performance metrics that vary by airline and quarter are developed by applying principal component analysis to seven underlying variables, including average delay, delay variance, and the proportion of flights that is cancelled. This analysis reveals that variation in the seven variables can be adequately captured by three or fewer factors, which we term NAS performance factors. If three factors are used, they can be interpretted as “delay”, “variability”, and “disruption”, the latter two of which are merged into a single “irregularity” factor in the two-factor model. Cost function estimation results confirm the anticipated link between NAS performance and airline cost. In the cost models with two and three performance factors, the irregularity and disruption factors are found to have the strongest cost impacts. These results challenge the prevailing assumption that delay reduction is the most important benefit from NAS enhancements. Using the estimated cost models, we predict airline cost savings from substantially improved NAS performance in the range $1–4 billion annually.

Nitrogen efficiency of Dutch dairy farms: a shadow cost system approach

In this paper we analyse the cost efficiency and nitrogen efficiency of an unbalanced panel of Dutch dairy farms. Nitrogen efficiency is defined as the ratio of minimal to observed use of nitrogen (N-containing inputs), conditional on output and quasi-fixed inputs. Nitrogen efficiency is computed in a shadow cost system framework. Nitrogen-efficient production is found at the optimal mix of variable inputs, determined by the nitrogen content of these inputs. The optimal nitrogen content ratio is introduced using price distortion factors in the estimated cost function. The mean input-oriented technical efficiency is 84 per cent. The mean nitrogen efficiency is 56 per cent. The nitrogen surplus at the nitrogen-efficient point is less than half of the observed surplus, whereas production costs increase by only 3 per cent.

A translog estimation of the average cost function of the steel industry with financial accounting data

This paper proposes a measure to assess firm performance which is based in neoclassical production theory and yet can be empirically estimated with widely available financial accounting ratios. A translog cost function is estimated, and fitted per-unit average cost figures are generated based upon the firm's individual characteristics and industry norms. The deviation of a firm's actual average per-unit cost from the fitted value is proposed as a predictor of firm profitability. This measure is then tested on firms in the steel industry. It is shown that the accounting ratios generate a cost function which behaves in accordance with neoclassical microeconomic theory, and accounting profits are indeed found to be inversely related to the calculated efficiency measure.

Cost function estimation: the choice of a model to apply to dementia.

Statistical analysis of cost data is often difficult because of highly skewed data resulting from a few patients who incur high costs relative to the majority of patients. When the objective is to predict the cost for an individual patient, the literature suggests that one should choose a regression model based on the quality of its predictions. In exploring the econometric issues, the objective of this study was to estimate a cost function in order to estimate the annual health care cost of dementia. Using different models, health care costs were regressed on the degree of dementia, sex, age, marital status and presence of any co-morbidity other than dementia. Models with a log-transformed dependent variable, where predicted health care costs were re-transformed to the unlogged original scale by multiplying the exponential of the expected response on the log-scale with the average of the exponentiated residuals, were part of the considered models. The root mean square error (RMSE), the mean absolute error (MAE) and the Theil U-statistic criteria were used to assess which model best predicted the health care cost. Large values on each criterion indicate that the model performs poorly. Based on these criteria, a two-part model was chosen. In this model, the probability of incurring any costs was estimated using a logistic regression, while the level of the costs was estimated in the second part of the model. The choice of model had a substantial impact on the predicted health care costs, e.g. for a mildly demented patient, the estimated annual health care costs varied from DKK 71 273 to DKK 90 940 (US$ 1 = DKK 7) depending on which model was chosen. For the two-part model, the estimated health care costs ranged from DKK 44714, for a very mildly demented patient, to DKK 197 840, for a severely demented patient.

Comparative Cost Analyses of Conventional, Integrated Crop Management, and Organic Methods

Production costs have been analyzed in several studies using such normative approaches as budgeting and mathematical programming, and positive approaches as estimation of production, cost, or profit functions. This study used budgeting methods to analyze the costs and benefits of adopting integrated crop management (ICM) or organic methods versus conventional agriculture for tomatoes (Lycopersicon esculentum Mill.), sweet corn (Zea mays L. var. saccharada), and pumpkins (Cucurbita pepo L.). Data were collected using field studies conducted at the Rutgers University Snyder Research and Extension Farm, Pittstown, N.J. Time and motion study techniques were used to record machinery use and labor quantities. Records of production inputs and yields were also collected. These records were then converted to a 1.0-acre (0.4-ha) basis to constructed crop budgets. Results show that ICM systems are more profitable than conventional and organic systems. Organic systems had the lowest net returns. However, because of the organic price premium, the net returns were fairly close to those for conventional and ICM systems.

Exit and Inefficiency: The Effects of Ownership Type

This study uses data on hospital closures to examine the relation between exit and inefficiency in an industry where for-profit, not-for-profit, and government firms coexist. The likelihood of hospital exit over the period 1986-91 is estimated as a function of hospital relative inefficiency, ownership type, and other factors, where hospital relative inefficiency is measured using residuals from estimation of a stochastic frontier cost function. We find that less efficient hospitals were more likely to exit when ownership was for-profit or not-for-profit, but that relative inefficiency did not have a significant effect on the probability of exit for government hospitals.

Nonparametric analysis of educational costs

Traditional economic analyses of the public sector that assume cost minimization are not consistent with political models of bureaucracy. If costs are not minimized then estimated cost functions will be biased. The purpose of this paper is to provide a flexible nonparametric technique based on Farrell-type efficiency measures to estimate public sector costs. Standard indices need to be modified to fit the special nature of public sector service provision which is characterized by an influence of exogenous variables on cost. A useful by-product is an index of environmental harshness faced by local governments. For illustrative purposes, this technique is applied to a sample of New York State school districts. It is found that nearly 64% of districts are cost inefficient, spending on average $1200 per pupil above the cost minimizing level. In addition, it is estimated that the average school district faces environmental cost of over $1700 per pupil.

The Supply of Quality in Child Care Centers

We use data from a sample of day care centers to estimate the relationships between cost and the quality of the child care service provided, and between revenue and quality. We use a measure of child care quality derived from an instrument designed by developmental psychologists. This measure of quality has been found to be positively associated with child development. Taking the estimated cost-quality and revenue-quality relationships as given, we then estimate the objective functions of the firms and compute the supply function for quality. The results indicate that (1) the estimated cost function is inconsistent with the implications of cost-minimization; (2) for-profit firms operate at a positive level of marginal cost, but non-profit firms operate at zero or negative marginal cost; (3) revenue is positively but weakly associated with quality; and (4) the supply of quality is inelastic, with point estimates of the supply elasticity of .04-.05 for both for-profit and non-profit firms. Implications of the results for child care policy are discussed.

Costs and Efficiency in Botswana Commercial Banking

This paper uses cross-section and panel data econometric estimates to analyse costs and efficiency in commercial banking in Botswana over the 1991-1995 period. Cost function estimates in banking normally use cross section data which has been derived from one year. Such estimates may not fully control for differences in individual banks or branches which may lead to cost variances. The panel data technique captures the correlation between unobservable individual attributes and observable behavioural determinants, and provides different estimates from those obtained from the usual cross-section method. The cross-section methodology finds stable negative ray-scale economies(rse). In contrast, the panel method finds marginally positive rse estimates.

Factor price misspecification in bank cost function estimation

Abstract Many studies of bank productivity implicitly assume that banks face imperfect factor markets in accessing labor and capital such that, in renting the same factor of production, at the same time, one bank will pay a price that will vary greatly from that of another bank. Usually, this implicit assumption is introduced by researchers’ simple expedience in calculating a factor price by dividing total cost attributable to a factor by the number of units rented. The range of factor prices so obtained, however, exceeds the reasonable bounds commonly observed in integrated factor markets. Our study contends that the wide variety of labor factor prices implicitly assumed is in fact a reflection of a variegated labor market and that the wide variety of financial capital costs is a reflection of incomplete specification of funds’ costs. We contend that, particularly in cross-sectional studies, it would generally be better for researchers to assume that banks faced competitive factor markets, thereby allowing the factor price term of cost functions to be eliminated. Not only would such elimination allow for a better estimate of true economies of scale and efficiency; it would also simplify greatly the estimation of many models. In this paper, we review briefly the significance of specifying factor prices in cost functions. Then we look at some actual factor prices that are reported in studies and used as inputs to cost function estimation. We conduct some simple tests to show what the reported factor prices in banking may actually represent. Having shown that factor prices reported are subject to misspecification, we estimate a set of cost functions with and without factor price specifications. We conclude by demonstrating that the improper specification of factor prices can affect inferences regarding measurement of inefficiency and returns to scale. Finally, we suggest methods by which these misspecifications may be rectified by use of time series, regional and international factor pricing data.

Empirical Evaluation of Regulatory Regimes in Local Telecommunications Markets

This paper relies on an engineering optimization model of the local telecommunication exchange network to calibrate the functions entering various regulatory mechanisms, from both traditional and modern (incentive) regulation, and evaluate their relative performance. The engineering process model is used to generate data, which are econometrically synthesized in a translog economic cost function. Using this estimated cost function and some empirical and institutional information on market and regulatory conditions, we then calibrate demand, social‐surplus, and disutility‐of‐(cost‐reducing)‐effort functions. These functions, together with probability distributions reflecting the regulator's beliefs about technology characteristics, allow us to quantitatively assess the social value of regulatory transfers and of good cost auditing procedures, the redistributive consequences of the various forms of regulation, and the sensitivity of their relative performance to the cost of public funds.

Productivity growth and regulation in U.S. local telephony

The paper assesses the impact of alternative forms of regulation (price caps and incentive regulation) that are gradually substituting traditional rate-of-return regulation. A total factor productivity (TFP) growth decomposition exercise is undertaken for the period 1989–1994. A flexible translog cost function provides evidence of a non-homothetic cost function with slight diseconomies of scale and indicates labor saving technical change, corroborating previous stylized facts of the industry. The cost function estimation provided the necessary adjustment factors for the TFP growth decomposition. The evidence does not indicate differential efficiency levels accruing from alternative forms of regulation.

Receding horizon recursive state estimation

Describes a receding horizon discrete-time state observer using the deterministic least squares framework. The state estimation horizon, which determines the number of past measurement samples used to reconstruct the state vector, is introduced as a tuning parameter for the proposed state observer. A stability result concerning the choice of the state estimation horizon is established. It is also shown that the fixed memory receding horizon state observer can be related to the standard dynamic observer by using an appropriate end-point state weighting on the estimator cost function.

A neural state estimator with bounded errors for nonlinear systems

A neural state estimator is described, acting on discrete-time nonlinear systems with noisy measurement channels. A sliding-window quadratic estimation cost function is considered and the measurement noise is assumed to be additive. No probabilistic assumptions are made on the measurement noise nor on the initial state. Novel theoretical convergence results are developed for the error bounds of both the optimal and the neural approximate estimators. To ensure the convergence properties of the neural estimator, a minimax tuning technique is used. The approximate estimator can be designed offline in such a way as to enable it to process on line any possible measure pattern almost instantly.