Stochastic Cost Frontier Analysis Research Articles

Does regulation induce cost efficiency in electricity distribution utilities? Use of stochastic cost frontier analysis for the Indian states

To overcome the macroeconomic crisis of the early 1990s, the Government of India persuaded the state governments to adopt market-oriented reforms for loss-making state public sector undertakings in general and power sector utilities in particular with an aim to limit the overall size of the public sector. This led the state governments to undertake unbundling of their vertically integrated State Electricity Boards (SEBs), establish independent regulatory bodies in the form of State Electricity Regulatory Commissions (SERCs) to regulate the power sector, and allow for an active participation of private sector. Given this backdrop, the present study attempts to examine the effect of establishment of SERCs on the cost-efficiency of electricity distribution in the Indian states. Thereby, it evaluates whether the establishment of SERCs has induced efficiency gains in the electricity distribution. Estimating a Cobb-Douglas stochastic cost frontier function, it finds that the establishment of independent regulators in various states has resulted in significant improvements in the cost-efficiency in the electricity distribution.

India’s calorie consumption puzzle: insights from the stochastic cost frontier analysis of calorie purchases

Between the early 1970s and very nearly the present, Indians’ per capita calorie consumption declined. This decline, perplexing in the face of rising per capita income when malnutrition is rampant, has been termed India’s Calorie Consumption Puzzle. It has been partially attributed to a squeeze in the household food budget. This study employs Stochastic Cost Frontier Analysis to evaluate this explanation, upon the logic that such a squeeze shall likely result in the rising cost-efficiency of calorie purchases, that is, the more economical purchase of calories. Analysis of household expenditure data from India’s National Sample Survey reveals that Indian households’ purchase of calories did become more cost-efficient at every level of income, suggesting that there was indeed a squeeze in the household food budget, making this a viable explanation of the Calorie Consumption Puzzle. Besides thus investigating India’s Calorie Consumption Puzzle, this study demonstrates a novel application of Stochastic Cost Frontier Analysis, to consumption instead of the more common production, in that the method has not previously been applied to the consumption of multiple items treated as inputs yielding an output. Stochastic Cost Frontier Analysis applied to calorie acquisition may be a new way of gauging changes over time in food security, with a rise in cost-efficiency indicating a squeeze in the food budget or declining food security.

India's Calorie Consumption Puzzle: Insights from the Stochastic Cost Frontier Analysis of Calorie Purchases

Between the early 1970s and very nearly the present, Indians' per capita calorie consumption declined. This decline, perplexing in the face of rising per capita income when malnutrition is rampant, has been termed India's Calorie Consumption Puzzle. It has been partially attributed to a squeeze in the household food budget. This study employs Stochastic Cost Frontier Analysis to evaluate this explanation, upon the logic that such a squeeze shall likely result in the rising cost-efficiency of calorie purchases, that is, the more economical purchase of calories. Analysis of household expenditure data from India's National Sample Survey reveals that Indian households' purchase of calories did become more cost-efficient at every level of income, suggesting that there was indeed a squeeze in the household food budget, making this a viable explanation of the Calorie Consumption Puzzle. Besides thus investigating India's Calorie Consumption Puzzle, this study demonstrates a novel application of Stochastic Cost Frontier Analysis, to consumption instead of the more common production, in that the method has not previously been applied to the consumption of multiple items treated as inputs yielding an output. Stochastic Cost Frontier Analysis applied to calorie acquisition may be a new way of gauging changes over time in food security, with a rise in cost-efficiency indicating a squeeze in the food budget or declining food security.

Measurement of Farm Productivity of Rice: A Case of Bangladesh

The focus of this study is to assess rice production in the different category of farms in Bangladesh. The relevant data were collected from secondary source collected by International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) under the Village Dynamics Studies in South Asia (VDSA) project. A total of 280, 318, 365 and 349 sample farmers were selected for the years of 2009, 2010, 2011 and 2012, respectively and the selected farmers were categorized into marginal, small, medium and large categories. Descriptive statistics were used to measure the profitability of rice production. In the study areas, rice farming was profitable for the selected years for all category of farmers but large and medium scale farmers received more profit than small and marginal farmers. Per hectare net return from rice production by small farmers was Tk.31324.28 in 2009 and Tk. 21776.97 in 2012 which provides a decreasing picture of profit for them. Cobb-Douglas stochastic cost frontier analysis was used to measure economic efficiencies. The regression result shows that estimated values of the relevant coefficients i.e., fertilizer cost, machinery cost, human labour cost, seed cost and herbicides cost had the positive and significant impact on the gross return of rice production and the coefficient of pesticide was negatively significant. So, there is a scope for increasing return from rice production by increasing human labour, seed, fertilizer, machinery and herbicide uses since the coefficients of these parameters were positive and significant. The study will help to policymakers for the development of all category rice farmers especially the small and marginal farmers of Bangladesh.

Is the mere threat enough? An empirical analysis about competitive tendering as a threat and cost efficiency in public bus transportation

In public transport governance, competitive tendering has often demonstrated good results in ensuring cost efficiency. To achieve other goals, such as a high service quality, ridership growth, or building trusting partnerships between public transport operators and public transport authorities (PTAs), however, more cooperative governance instruments may be suitable. One proposition is to use competitive tendering only occasionally but keep the threat to apply it whenever necessary; thereby, it is assumed that operators behave as if there were competition for the market. In addition, PTAs can overcome information asymmetries and establish effective benchmarking schemes. This paper empirically assesses this indirect effects of (the threat of) competition on cost efficiency using stochastic cost frontier analysis with a panel data set containing more than 850 concessionary regional bus lines in Switzerland from 2008 to 2017. Results show that inefficiency is indeed lower for bus lines where any indirect effect of competitive tendering can be assumed. Although preliminary, these findings indicate that a more flexible use of competitive tendering and its combination with other, rather cooperative governance instruments such as negotiations could support PTAs pursuing cost efficiency as well as additional goals and thereby maximise overall welfare.

Production Costs, Inefficiency, and Source Water Quality: A Stochastic Cost Frontier Analysis of Canadian Water Utilities

This analysis employs a stochastic cost frontier to estimate relationships between source water quality, production costs, and cost efficiency in Canadian municipal water treatment facilities. Data for the analysis are obtained primarily from a census of water providers that contains detailed information on operational costs, source water quality, and treatment technologies. Results show water quality, as measured by turbidity, is a significant determinant of production costs. The estimated elasticity for turbidity is 0.1, with a 95% confidence interval of 0.06 to 0.14. We find no significant differences in cost efficiency across regions, treatment technologies, output, or turbidity levels.

Stochastic cost frontier analysis – a sensitivity analysis on cost measures

Purpose This paper aims to examine alternative methods for recording and treating costs in studies of bank efficiency. Design/methodology/approach This study used stochastic frontier analysis (SFA) models with core costs and total costs to estimate the cost efficiency of banks in two different economies, Vietnam where the banking system is under-developed (and thus is dominated by traditional banking activities) and New Zealand where the banking system is well-developed (and thus non-traditional banking activities play an important role). Findings The authors found that models using total cost tend to underestimate the banks’ cost efficiency. This underestimation relates to the extent of modern activities in a banking system: it is larger in an advanced banking system (i.e. New Zealand) and smaller in a less-developed banking system (i.e. Vietnam). Research limitations/implications Research is limited to two countries, and it would be useful to apply the same technique to other data sets. Practical implications The paper suggests a new approach to cost SFA studies in banking. Originality/value The paper provides a much more searching analysis of costs in banking than has generally been seen in previous research.

Global CO2 efficiency: Country-wise estimates using a stochastic cost frontier

This paper examines global carbon dioxide (CO2) efficiency by employing a stochastic cost frontier analysis of about 170 countries in 1997 and 2007. The main contribution lies in providing a new approach to environmental efficiency estimation, in which the efficiency estimates quantify the distance from the policy objective of minimum emissions. We are able to examine a very large pool of nations and provide country-wise efficiency estimates. We estimate three econometric models, corresponding with alternative interpretations of the Cancun vision (Conference of the Parties 2011). The models reveal progress in global environmental efficiency during a preceding decade. The estimates indicate vast differences in efficiency levels, and efficiency changes across countries. The highest efficiency levels are observed in Africa and Europe, while the lowest are clustered around China. The largest efficiency gains were observed in central and eastern Europe. CO2 efficiency also improved in the US and China, the two largest emitters, but their ranking in terms of CO2 efficiency deteriorated. Policy implications are discussed.

Does Capitalization Enhance Efficient Risk Undertaking? A Comparison between Islamic and Conventional Banks

This paper investigates the relative impact of capitalization on risk-taking efficiency in Islamic and conventional banks. In particular, we test whether changes occurring to the capital structure of different types of banks unevenly affect their behavior in terms of risk-taking efficiency. Results, obtained both by regressions and a stochastic cost frontier analysis in the period 2000-2011 show that higher capitalized Islamic banks are associated to less risky policies in terms of their assets structure. In particular, they exhibit higher liquidity standards compared to other – less capitalized – Islamic banks. This corresponds to lower non-performing loans, leading to weak delayed positive effects on profitability and no substantial impact on efficiency. On the other hand, more capitalized conventional banks tend to shift from more traditional lending activities to investment in other assets, including off balance sheet items. Such policy provides higher profitability and profit efficiency although raising impaired loans. The analysis has important implications when considering capital adequacy as a regulatory tool for managing the risk of Islamic banks’ activity.

Privatization, foreign bank entry and bank efficiency in Croatia: a Fourier-flexible function stochastic cost frontier analysis

Using bank balance sheet data for Croatia for 1994 to 2000, this study estimates a Fourier-flexible frontier cost function. Specification tests indicate that the stochastic frontier model with a Fourier-flexible form with a truncated normal distribution of the inefficiency term allowing for time varying cost efficiency is preferred. The results show that new private and privatized banks, contrary to some expectations, are not the most efficient banks through most of the period. Privatization also does not seem to have an immediate effect on improved efficiency. However, better cost efficiency is associated with a lower likelihood of failure, suggesting that better risk management and better cost management are signs of better management in general. Finally, foreign banks have substantially better efficiency scores than all categories of domestic banks.

State Versus Private Sector Provision of Water Services in Africa: a Statistical, DEA and Stochastic Cost Frontier Analysis

Under pressure from donor agencies such as the World Bank, a number of developing countries have experimented with the privatisation of water services. This study reviews the existing econometric evidence on the effects of water privatisation in developing economies before presenting new results using statistical, data envelopment analysis (DEA) and stochastic cost frontier techniques and data from Africa. The study finds evidence of better performance in private utilities compared to state-owned utilities according to the statistical and DEA performance measures. But no statistically significant cost differences were discovered between private and public suppliers in the stochastic cost frontier analysis. The paper then considers reasons why water privatisation may prove problematic in lower-income economies, identifying the technology of water provision and nature of the product, transaction costs and possible regulatory weaknesses. However, a second-stage cost function analysis introducing a regulatory variable produced statistically insignificant results.

Cost Structure and Efficiency of the Credit Departments of the Farmers' Associations in Taiwan

This study addresses the cost structure and operational efficiency of the credit departments of the farmers' associations in Taiwan, adopting both stochastic cost frontier analysis and data envelopment analysis. The factors that influence operational efficiency are also examined. In particular, problems of loan quality are considered to account for the considerable amount of non-performing loans. The results of this study indicate that economies of scale exist. However, the credit departments of the farmers' associations do not benefit from economies of scope. Non-performing loans are associated with a cost increase of approximately 17.6%. Regression analysis verifies that the non-performing loan ratio significantly and negatively influences all indicators of efficiency and that the 1997 Asian financial crisis also has a negative impact on efficiencies.

Capitalization Requirements, Efficiency and Governance: A Comparative Experiment on Islamic and Western Banks

The profit and loss sharing principle that is peculiar to Islamic banks reformulates the allocation of risk between shareholders and depositors. In this work we focus on monitoring as a determinant of bank efficiency, under the assumption that equity is a better device than deposits for reducing excessive risk undertaking. Since in Islamic banks depositors are closer to stockholders in terms of residual claiming on profits, the positive relationship between capitalization and efficiency should in principle be weaker in than in their Western counterparts. Results, obtained by means of a stochastic cost frontier analysis on samples of European-15 and Islamic banks during the period 1996-2002, show that the ratio of equity to deposits negatively affects inefficiency in both types of banks, but this effect is considerably undersized in Islamic banks as compared to European ones, thus providing a justification to the reluctance that has accompained the proposal of capital coefficient revision for Islamic banks in accordance to Basel I and II Agreements.

The Economic Effect of Information Technology in Japanese Local Governments

In order to reduce fiscal expenditure, local governments attempt to implement policies, such as personnel reduction, private consignment of public services and so on. The introduction of information technology is also one of the policies related to cost reduction. However, we believe that due to the current fiscal crisis faced by many local governments, the implementation of information technology investment policy could contribute to a further financial burden because information technology investment is costly. Therefore, we think we should examine whether or not information technology investment within local governments is necessary and to what extent. In this paper, we investigate whether or not information technology contributes to cost efficiency in municipal governments in Kinki area, using the stochastic cost frontier analysis. The hypotheses that we test are whether or not, the use of information technology equipment (e.g. computer, software, telecommunication equipment) and outsourcing of information technology operations by local governments result in greater cost efficiency. The results show that the increased use of information technology equipment contributes to cost efficiency, however, outsourcing of information technology operations does not.JEL classification: H11, H72

Do Banking Crises Enhance Efficiency? A Case Study of 1994 Turkish and 1997 Indonesian Crises

Drawing together the concepts of inefficiency and banking crisis is directly inspired by business cycles theory where a crisis is the turning point from which the market/economy is recovering. If inefficiency plays a role in the occurrence of banking crisis, the post-crisis period should be the time for recovering efficiency. Moreover, traditional banking theory predicts that the crisis should eliminate bad banks from the system, leading to a more efficient banking sector. We tested this hypothesis on the 1994 Turkish and 1997 Indonesian banking crises using stochastic cost frontier analysis. Our results show an interesting pattern, opposed to what theory predicts: we find that inefficiency increase after the crises in both banking sectors.

The measurement of English and Welsh police force efficiency: A comparison of distance function models

Since the Labour government came to power in 1997, it has introduced a regime whereby public services are accountable in respect of best value performance indicators (BVPIs). A recent Public Services Productivity Panel (PSPP) (2000) report has developed a set of criteria whereby the economic analysis of police force efficiency by the Home Office is to be made standard. In this paper we utilise an innovative distance function strategy in contrast to the standard efficiency techniques (data envelopment analysis, DEA and stochastic cost frontier analysis) advocated in PSPP (2000). We present results from four different distance function models: DEA; free disposal hull (FDH); super-efficiency; and stochastic frontier analysis; in order to assess police force efficiency during the sample period 1996–1999.

What Can Regulators Regulate? The Case of Electricity

What Can Regulators Regulate? The Case of Electricity