Profit Maximization Framework Research Articles

Will Farmers Trade Profits for Stewardship? Heterogeneous Motivations for Farm Practice Selection

We investigate the trade-off agricultural producers face between profits and stewardly activities when selecting farm practices. Instead of the profit-maximization framework, we model producer behavior in an expanded utility framework, built on production technology, and including two utility components: self and social interests. The framework introduces inherent heterogeneity and social/environmental motivations into farmer behavior. Based on this model, we hypothesize that there are farmers that are willing to forego some profit to engage in stewardly farm practices. With an empirical study, we provide evidence that some farmers are willing to make this sacrifice. Results are consistent with the multi-utility hypothesis.

Insurer-Provider Networks in the Medical Care Market.

I use data on the hospital networks offered by managed care health insurers to estimate the expected division of profits between insurers and providers. I include a simple profit-maximization framework and an additional effect: hospitals that can secure demand without contracting with all insurers (e.g., those most attractive to consumers and those that are capacity constrained) may demand high prices that some insurers refuse to pay. Hospital mergers may also affect price bargaining. I estimate that all three types of hospitals capture higher markups than other providers. These results provide information on the hospital investment incentives generated by bargaining.

Industrial Location Modeling: Extending the Random Utility Framework*

Abstract. Given sound theoretical underpinnings, the random utility maximization‐based conditional logit model (CLM) serves as the principal method for applied research on industrial location decisions. Studies that implement this methodology, however, confront several problems, notably the disadvantages of the underlying Independence of Irrelevant Alternatives (IIA) assumption. This paper shows that by taking advantage of an equivalent relation between the CLM and Poisson regression likelihood functions one can more effectively control for the potential IIA violation in complex choice scenarios where the decision maker confronts a large number of narrowly defined spatial alternatives. As demonstrated here our approach to the IIA problem is compliant with the random utility (profit) maximization framework.

Measuring Price Responsiveness Under a Profit Maximization Framework

The distinguishing feature of the study is in using a globally flexible functional form that permits one to calculate different types of elasticities under both constant and variable output hypotheses. The Symmetric Generalized McFadden cost function alongwith the output supply condition form the basis of the econometric model. To measure inputsubstitutabilities, we used Alien-Uzawa, Morishima, and Shadow elasticities of substitution. Empirical results, based on 300 farm households from West Bengal, India, show that fertilizer is most price sensitive input. It is a gross substitute for manure and human labor but complement to bullock labor. Manure is a gross substitute for all the inputs whereas human labor is gross complement to bullock labor. Using the Morishima measure we find that the fertilizer and bullock labor are complements when the price of the latterchanges. Similar complementary relationship is found between bullock and human labor due to changes in the price of human labor. All other inputs are Morishima substitutes. The Shadow elasticity of substitution estimates indicate that all factors are substitutes. The estimate of returns to scale indicates the presence of diminishing returns to scale.

Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies

Transition has entailed the introduction of policies to stimulate product market competition, to establish effective corporate governance and to harden enterprise budget constraints. How do these policies interact; Are they substitute policy instruments or does one policy reinforce the effect of another; Although early endogenous growth models predicted a negative relationship between competition and innovation, Aghion, Dewatripont and Rey (1999) showed that this could be reversed if agency considerations were introduced. In their model competition acts as an incentive mechanism to reduce managerial slack, which produces the additional prediction that competition and corporate governance are substitutable. But in a profit-maximizing framework in which incumbent firms innovate to escape competition, there will be complementarity between increased product market competition and governance and between competition and hard budget constraints (Aghion and Howitt 2002). We use the EBRD-World Bank Enterprise survey of over 3,000 firms in 25 transition countries to test for interaction effects between policies. We find that competition and hard budget constraints are complementary. We also find that competitive pressure (a) enhances the performance of old firms, which is suggestive of a role if agency effects and hence of policy substitutability and (b) enhances the performance of new firms, which is consistent with complementarity. Finally, the evidence points to the prevalence of financing constraints facing new firms.

Working Time: Theory and Policy Implications

Brief history of working time theory basic facts working time policy - an overview the standard neoclassical view of the labour market working time, production and cost functions working time in a cost minimization problem cost minimization, heterogenous workers and asymmetric information premium pay for overtime working time in a profit maximization framework working time in a trade union model complementary labour services and working time regulation working time reduction in a vertically integrated two-sector model working hours and unemployment in a matching model deregulation of working time premium and employment dynamics.

A multidimensional approach to manufacturing quality

In this paper, we examine the conditions under which it is profitable for a firm to invest in a quality-improvement program. To do this, we model quality along two dimensions: product performance (measured by deviation from an acceptable base performance level), and timeliness of product delivery (measured by time-related penalties such as lateness or tardiness). This explicit quality formulation is incorporated into a profit maximization framework in which it is necessary to weigh the revenue associated with each job against its cost in terms of time-related penalties and cost associated with defects. In this setting, we identify cases in which there is a positive net gain from altering the quality trade-off via a quality-improvement program such as Total Quality Management (TQM).

A Parametric Approach to Efficiency Measurement Using a Flexible Profit Function

Although the idea of measuring productive efficiency goes back to Farrell [8], the econometric estimation of it began with Aigner, Lovell, and Schmidt [1] and Meeusen and van den Broeck [17]. In Aigner, Lovell, and Schmidt [1] and Meeusen and van den Broeck [17], and their extensions which incorporate either cost minimizing or profit maximizing behavior, efficiency is measured relative to a frontier. An alternative to the frontier approach that started with Hopper [10] and Lau and Yotopoulos [15], is to measure efficiency (mostly allocative) without estimating any frontier. In the latter approach, allocative inefficiency (defined as the deviations of the first order conditions of profit maximization or cost minimization) is modeled through shadow (virtual) prices which are parametric functions of observed prices. The shadow price approach is extensively used in the literature on efficiency measurement because it has an advantage over the frontier approach, which requires distributional assumptions on the error terms-especially in cross sectional models. In empirical studies on the efficiency of regulated utilities, it has been argued that due to the presence of rate of return and other regulations, these firms optimize with respect to shadow prices instead of observed prices. These studies often fail to consider the possibility that the firms under question may be technically inefficient as well, which can affect allocation of inputs.1 This issue is important in both cost minimization and profit maximization cases. This paper uses a profit maximization framework and develops a generalized profit function approach that accommodates both technical and allocative inefficiencies in the context of a panel data model. The relationship between production technical inefficiency (loss of output due to technical inefficiency) and profit technical inefficiency (profit loss due to technical inefficiency) is derived for a flexible production function. Presently, it is believed that the derivation of this relationship is only possible for the self-dual production functions. We show that if the profit function is translog, some popular approaches used in modeling technical and allocative inefficiency are incorrect. In particular, we show that: (i) models that fail to include technical inefficiency and consider only allocative inefficiency yield biased and inconsistent parameter estimates; (ii) if technical inefficiency is neglected, the measure of technical change will be biased. The generalized profit function developed here is capable of distinguishing between technical change and time-varying technical inefficiency. Such a distinction is not possible if, for example, one uses

Management Ability and the Economics of Recirculating Aquaculture Production Systems

A bioeconomic model of fish growth in recirculating aquaculture systems was constructed by developing a bioenergetic model comprised of metabolic sub-models for growth, ammonia production, and oxygen consumption. Metabolite accumulations are determined by exogenous control variables for filtration and aeration and used to indirectly represent management ability. Numerical solutions to model parameters were obtained using a two point boundary shooting algorithm within a dynamic profit maximization framework. Optimal trajectory, isoquant, and bioeconomic optimization analyses describe specific tradeoff relationships existing between nutrition, density, and technology. Results demonstrate the economic importance of these relationships changes over time in response to fish weight, and not always in ways suggested by the physical importance of individual factors. Specifically, economically viable tradeoffs between dietary protein and stocking density occur over relatively narrow regions of management ability. ...

A Revenue-Function Approach to the Measurement of Output-Substitution Possibilities in Agriculture

The purpose of this article is to calculate Hicksian and Marshallian estimates of output-substitution possibilities in an agricultural industry. The Hicksian elasticities or net substitution possibilities are measured within a revenue-maximizing framework holding input levels constant. The Marshallian elasticities that encompass both net substitution and expansion effects are measured within a profit-maximizing framework allowing both output and input levels to vary. The results are empirically reasonable and consistent with the duality theory for revenue and profit maximizing behavior. A notable empirical result is that, in the very short run or market period with input levels held constant, there exists considerable scope for changing the output composition between crops and cattle on cattle farms.

On the selection of industry location alternatives

Consider the problem of a firm contemplating a plant location in a developing country where production costs are lower but risks are higher as opposed to operating from a homecountry location. This paper extends the traditional profit maximization framework to model the linkage between profits and the investment needed to generate them. In this way, measures of relative profitability may be used as alternative location criteria. Taxes are also introduced to evaluate the potential of fiscal policies in providing some extra competitive edge to a given location. Finally, a sensitivity analysis is presented to assess the effect on the various decision criteria such as changes in the level of revenue per dollar invested, in the labour to capital ratio, in taxes and in productivity measures related to capital, equipment and labor requirements.

An Econometric Analysis of the Southern Softwood Stumpage Market: 1950-1980

Abstract This paper presents an aggregate regional model of the southern softwood solidwood (combined lumber and plywood) and pulpwood stumpage markets. The derivation of stumpage supply includes direct substitution possibilities by stumpage producers. The derivation of stumpage demand follows a profit maximization framework and includes the effects of input substitution as well as production capacity. Three-stage least squares regression techniques provide simultaneous parameter estimation of the market system. Solidwood stumpage is a complement in production with pulpwood; however, in solidwood production, an asymmetrical relationship exists as pulpwood is a substitute good. With respect to demand, solidwood stumpage responds to a greater extent to changes in final good price than does pulpwood. For. Sci. 33(4):932-945.

Managerial Objectives in Regulated Industries: Expense-Preference Behavior in Banking

Recent work on the theory of the firm under regulation suggests that managers of regulated firms may be utility maximizers rather than profit maximizers. There is, however, very little empirical evidence on managerial behavior in regulated industries. This article examines one kind of utility-maximizing behavior that seems particularly applicable to regulated firms: expense-preference behavior. Specifically, I develop a test capable of discriminating between expense-preference and profit-maximizing behavior and apply it to the banking industry, a highly regulated industry. My findings indicate that an expense-preference theoretical framework better explains the behavior of regulated firms than does a profit-maximization framework.