Stochastic Cost Frontier Approach Research Articles

Economic Efficiency of the Korean Container Terminals: A Stochastic Cost Frontier Approach

Purpose - Recent issues such as vessel enlargement, strengthening of environmental regulations, and port smartization are expected to increase costs and intensify competition in the port industry. In the new normal era, when external growth has reached its limit, the efficient operation of ports is becoming indispensable for achieving sustainable growth. This study aims to identify the determinants of inefficiency by examining the cost structure and efficiency of container terminals in Korea and furthermore propose the political implications to derive the maximization of efficiency.
 Design/methodology - This study estimates the cost function of container terminal operators and identifies the efficiency of container terminals using stochastic cost frontier (SCF) in the first stage. In the second step, the SCF results are compared with the data envelopment analysis (DEA). Last, this paper proposes efficiency determinants on container terminal operation to establish appropriate strategies. Out of the 29 container terminal operators in South Korea, 13 operators participated in the survey. The translog cost function was estimated utilizing a total of 116 observations collected over the 2007-2017 period.
 Findings - Empirical analysis shows that economies of scale exist in Korea’s container ports, which provides a rationale for the government’s policy to establish the global terminal operator by integrating small terminal operators to enhance competitiveness. In addition, as a result of the determinants analysis, container throughput, weight of direct employment costs, and labour cost share have positive effects on improving cost efficiency, while inefficiency increases as the length of quay increases. More specifically, cost efficiency improves as the proportion of direct employment costs to outsourcing service costs increases.
 Originality/value - This study contributes to analyzing the inefficiency factors of container terminals through efficiency analysis with respect to a cost function. In addition, this study proposes the practical and political implications, such as establishing a long-term manpower pool, the application of the hybrid liner terminal system, and the construction of a statistical data system, to improve the cost inefficiency of terminal operators.

Heteroskedastic Stochastic Cost Frontier Approach in the Estimation of Cost Efficiency of Tunisian Water Distribution Utilities

Heteroskedastic Stochastic Cost Frontier Approach in the Estimation of Cost Efficiency of Tunisian Water Distribution Utilities

Effect of Branch Expansion on Cost Efficiency of Ethiopian Commercial BANKS. (Stochastic Cost frontier Approach)

Banks are a vital parts of a nation’s economy that catalyzed Economic growth through facilitate spending and investment in the economy.Bank institutionis one and the top from the major financial institutions in Ethiopia.The number of all branches of the industry including public banks increased from year to year aggressively.Thus, the overall objective of this study was to investigate effect of branch expansion on cot efficiency Ethiopian commercial banks.Accordingly, from the population, Commercial banks operating in the country a total of 18, among these, 2 public and 16 private commercial banks (a total of 14 commercial banks) were included in the study period 2010/11-2018/19 based on non-probability, purposefully sampling method. The research used theprice of labor, prices of capital,Number of branches, annual inflation rate, real GDP growth, Total loan output, management performances, market share, capital adequacy ratio,liquidity risk, prices of deposit and total securities variables to measure cost efficiency. To this end, the study used secondary data from the NBE, balance sheets and income statements of individual commercial banks obtained from the period from to 2010/11 to 2018/9. Then nine years’ panel data of bank levelvariables has been collected and analyzed using stochastic cost frontier regression analysis. As a resultthe researcher concluded that stochastic frontier model as appropriate to represent inefficient operation among the commercial banks of Ethiopia .The Ethiopian commercial banks expanded their branches throughout the country’s territory; most of the bank branches were opened.Despite the various challenges, banks preferred to go ahead with its plan to open more branches to reach customers. However their cost efficiency had been decreased as of aggressively opened branches in the study years.Accordingly the analysis result Zemen bank was the most cost efficiency and become the best practiced bank and CBE the most inefficiency bank and in reverses also characterizes in branch expansion profile.The researcher recommended thatEthiopianbanking institutions should continue to innovate so as to reduce their cost inefficiencies. Moreover, NBE and government stand towards policy that forbids foreign banks entry, the Reserve required ratio amount, and competition environment and policy in opening branches must revised. Keywords: Branch expansion, cost efficiency, Ethiopian commercial banks DOI: 10.7176/RJFA/12-9-04 Publication date: May 31 st 2021

Determinants of banks’ cost efficiency: a case study of selected commercial banks, Ethiopia

This study examines the determinants of cost efficiency commercial banks’ in Ethiopian using balanced panel data with a sample of 13 commercial banks over the period 2010-2017 by paying a translog stochastic cost frontier approach. The identification and selection of inputs and outputs variables was based on the intermediation approach. Accordingly, three input variables (cost of labor, cost of capital, and cost of fund) and two output variables (total loans and other earning assets) are used in the study. Furthermore, five banks specific and one macroeconomic variable are included to examine their effect on cost efficiency. So as to examine the effect of determinant variables which are associated with banks efficiency, a single stage maximum likelihood estimation method is applied to stochastic frontier cost function. The empirical estimations were accomplished by Appling a single stage maximum likelihood function assimilated into Stata software. The estimation is based on conditional mean model concepts. The finding shows that from bank specific factors, return on assets (ROA), and intermediation ratio have positive and significant for intermediation (IR) and insignificant for ROA with cost inefficiency. On the other hand, Bank size (lnTA), Credit risk (CR) and capital adequacy ratio (CAR) have a significant negative coefficient with cost inefficiency. GDP also has negative but insignificant with inefficiency. Therefore, banks are recommended to improve and sustain their efficiency by maintaining available proportion of capital adequacy ratio and attract high value, low interest-bearing demand deposits.

Estimation and evaluation of productivity change and its drivers in the English and Welsh water sector: a stochastic cost frontier approach

ABSTRACTEstimating productivity change and its determinants is of great importance when measuring the performance of a firm. A true random effect cost model was employed to measure the cost efficiency of water companies in England and Wales from 1993 to 2016. Subsequently, total factor productivity change was estimated and decomposed into cost-efficiency change, technical change, scale efficiency change, output effect and residual price effect. The results indicate that the English and Welsh water industry increased its productivity over the period examined at a rate of about 2.1%, and it was influenced primarily by technical change. The price reviews appear to have a positive impact on the productivity of water-only companies during the whole period examined. In the case of water and sewerage companies, the 1994 and 1999 price reviews had a positive impact on productivity, whereas the last two price reviews had an adverse impact.

Do optimal scale and efficiency matter in Taiwan's higher education reform? A stochastic cost frontier approach

A number of universities in Taiwan are currently confronting problems of low enrolment rates and financial distress mainly as a result of low birth rates and over-expansion of the higher education industry over the last few decades. These universities were requested by the Taiwan Ministry of Education to find a solution, including shutting down problematic departments and merging with other institutions. As such, information on cost efficiency and the optimal size of universities is important for making appropriate decisions. A stochastic cost frontier approach is adopted in the study to measure the cost efficiency and identify optimal size of Taiwanese universities by considering the heterogeneity of university quality. The results of the study indicate a positive correlation between the optimal size and the university quality. Approximately 47 percent of the selected universities are identified as either over- or under-sized. Moreover, the magnitude of cost saving from efficiency improvement is found to be no smaller than that of size adjustment. Therefore, it is suggested that universities should put more effort into efficiency improvement while considering size adjustment.

Cost and Profit Efficiency of Bangladeshi Commercial Banks: A Stochastic Frontier Approach

This paper assesses the cost and profit efficiency levels of banks consist of conventional, Islamic Shariah based and state-owned commercial banks in Bangladesh over the period of 2011 to 2015. Basic accounting ratios and stochastic cost and profit approaches originated by stochastic frontier analysis have been used in this study. From the results of accounting-based ratios used in this study, conventional private commercial banks are more efficient compared to Islamic Shariah based private commercial banks and state-owned commercial banks in the both cases of cost and profit. According to the stochastic cost frontier approach, the commercial banks in Bangladesh are not found considerable cost inefficient. The cost efficiency level of 35 commercial banks in Bangladesh is 91.4 percent. The results of this study indicate that traditional private commercial banks are more cost efficient compared to Islamic Shariah based and state-owned commercial banks. From the results of stochastic profit efficiency frontier, the conventional private commercial banks have the higher values of alternative profit efficiency levels than the state-owned and Islamic Shariah based commercial banks. It can also be drawn that around one-fourth of profits of banks are lost because of inefficiency over the period covered by this study.

Cost Efficiency of Islamic Banks in Indonesia – A Stochastic Frontier Analysis

This study aims at 1) estimating the cost efficiency of Islamic Banks –using stochastic cost frontier approach, (2) determining cost inefficiency sources and (3) analysing the influence of managerial competency and structural variable on cost efficiency. The samples of observation are three full Islamic banking system and 19 conventional banks listed on the Indonesia Stock Exchange (IDX) purposefully from 2004.03 – 2010.4. The result showed that Islamic Banks are superior in the achievement of technical efficiency, but the average cost efficiency is much lower than Conventional Banks. Cost inefficiency of Islamic-Banks come from allocative inefficiency.

Gender and relative economic efficiency in improved cassava farms of Abia State, Nigeria. A stochastic cost frontier approach

Multi-stage random sampling technique was used to select 120 improved cassava farmers (60 males and 60 females). Stochastic frontier cost function was used to estimate the level of economic efficiency and its’ determinants across gender, while descriptive statistics such as percentage response was used to capture farmers’ socioeconomic characteristics, gender participation and constraints to improved cassava production in Abia State. The results showed that the mean economic efficiency of the female group (0.78) was higher than that of male group (0.75). The cost of production of improved cassava to both gender farmer groups were affected by price of fertilizer, price of cassava cutting, land rent and output. Educational level and extension contact were positive and significant at 5% for both gender farmer groups. Credit was negative but significant at 5% amongst female farmer groups. Gender participation in improved new cassava showed that those energy sapping operations were dominated by male folk while light operation farming activities such as weeding and fertilizer application was mostly done by women and children. Both gender farmer groups encountered problems of low access to credit, high cost of labour and high cost of planting material. The study calls for policies that will improve both farmer groups access: to credits, extension contact and education. Moreso, new entrant and experienced cassava farmer groups should be encouraged through making available subsidized planting materials and capital inputs.Key word: Stochastic frontier, gender, improved cassava economic efficiency.

The relative efficiency of charter schools: A cost frontier approach

Charters represent an expansion of public school choice, offering free, publicly funded educational alternatives to traditional public schools. One relatively unexplored research question concerning charter schools asks whether charter schools are more efficient suppliers of educational services than are traditional public schools. The potential relative efficiency advantage of charters vis-a-vis traditional publics is one of the mechanisms that supports the hypotheses that charters could improve performance for their students while using the same or fewer resources, and that the systemic effect of charters could lead to improved outcomes for traditional public students without requiring an increase in education sector resources.In this paper, we provide evidence as to the cost efficiency of charter schools relative to traditional public schools, and explore the extent to which those differences are attributable to differences in hiring and compensation practices, or to differences in the length of time a campus has been operating. We generate estimates of efficiency using a stochastic cost frontier approach. We estimate a translog stochastic cost frontier model using panel data for charter campuses and traditional public campuses in Texas over the five-year period 2005–2009.Our main findings suggest that charter schools are able to produce educational outcomes at lower cost than traditional public schools—probably because they face fewer regulations—but are not systematically more efficient relative to their frontier than are traditional public schools.

Consolidation in the European banking industry: how effective is it?

The European banking industry is becoming increasingly consolidated as banks engage in domestic and cross-border merger and acquisition (M&A) activities. Due to cultural differences in cross-border consolidations, the benefits of domestic and cross-border consolidations are likely to differ. This paper examines the effectiveness of merger processes, with a detailed analysis of both domestic and cross-border consolidations in Europe from 1998 to 2004. Effectiveness is measured via several criteria: improvement in costs, return on assets (ROA), and return on equity (ROE). To analyze potential cost efficiency improvement, we use a stochastic cost frontier approach. The same methodology is used for ROA and ROE to estimate efficiency in profitability. Finally, considering cross-border mergers as a form of entry, we carry out an analysis of the entry effect in response to the performance and profitability of the incumbent market participants. Results show that mergers in the European banking industry have been effective. Although domestic M&As are more common than cross-border M&As, banks involved in cross-border M&As are more efficient. Moreover, cross-border merged banks seem to outperform incumbent banks.

Cost Efficiency in the Life Insurance Industry

The life insurance industry has pivotal impact on an entire national economy. Under the trend of liberalization and internationalization, operating efficiency is critical to sustainable operations, and cost efficiency improvements positively affect operating efficiency, since integrated utilization of resources can produce maximal economic benefit. This study covers the period from 1997 to 2007, and adopted the Stochastic Cost Frontier Approach (SCFA) to make cost efficiency and economy-of-scale analyses, and studied cost efficiency factors. Some empirical results are as follows: 1) Variable scales and variable patterns in the life insurers enable different economy-of-scale and cost efficiency values. 2) It is recommended to join financial holding company or utilize a horizontal alliance to improve cost efficiency. 3) Based on the Tobit regression analysis, total asset turnover, fixed asset turnover are positively relative to cost efficiency. However, insurance payment to net written premium ratio is negatively relative to cost efficiency.

CONSUMPTION (IN)EFFICIENCY AND FINANCIAL ACCOUNT MANAGEMENT

Consumption may be inefficient when a household cannot choose the optimal bundle of goods at a minimum cost. After discussing alternative approaches, this paper proposes the use of money metric indirect utility function motivated by Feenstra and Varian in measuring consumption inefficiency. Then, Bamoul–Tobin transactions demand for money model is extended to show how household ability to manage its income, expenditure and financial accounts may affect consumption inefficiency. Results of the stochastic cost frontier approach, which is employed in estimation and the prediction of the European Union household consumption inefficiency, suggest that household expenditure performance is partly explained by the changes in the consumption efficiency and the efficiency is not independent of financial account management.

New evidence on banking efficiency in Europe

This paper explores the issue of banking efficiency in Europe by applying the Fourier functional form and the stochastic cost frontier approach in calculating inefficiencies for a large sample of European banks between 1998 and 2004. This paper provides recent evidence on the degree of efficiency and economic viability of various sizes of banking institutions and tries to contribute a few policy recommendations to the existing literature. The findings suggest that the largest sized banks are generally the least efficient banks and the smallest sized banks are the most efficient. Inefficiencies range between 20% and 25% across different European banking samples. The strongest economies of scale are displayed by Danish, Italian and Spanish banks (scale economies range between 7% and 10%). The impact of technical change in reducing bank costs (ranging from 2.3% to 5.6% per annum) appears to be systematically increasing with bank size. Overall, the results indicate that the largest banks in our sample enjoy greater benefits from technical progress, although they do not have scale economy and efficiency advantages over smaller banks.

Bank Efficiency and Non-Performing Loans: Evidence from Malaysia and Singapore

The objective of this paper is to investigate the relationship between non-performing loans and bank efficiency in Malaysia and Singapore. To achieve the objective, cost efficiency was estimated using the stochastic cost frontier approach assuming normal-gamma efficiency distribution model proposed by Greene (1990). The cost efficiency scores were then used in the second stage Tobit simultaneous equation regression to determine the effect of non-performing loans on bank efficiency. The results indicate that there is no significant difference in cost efficiency between banks in Singapore and Malaysia although banks in Singapore exhibit a higher average cost efficiency score. The Tobit simultaneous equation regression results clearly indicate that higher non-performing loan reduces cost efficiency. Likewise, lower cost efficiency increases non-performing loans. The result also support the hypothesis of bad management proposed by Berger and DeYoung (1992) that poor management in the banking institutions results in bad quality loans, and therefore, escalates the level of non-performing loans.

Recent evidence on efficiency in Southern European banking

PurposeThe purpose of this paper is to explore the issues of efficiency, economies of scale and technical change in Southern European banking.Design/methodology/approachThe flexible Fourier functional form of the stochastic cost frontier approach is used to calculate inefficiencies for a large sample of Southern European banks between 1999 and 2004. Economies of scale estimates are calculated by estimating firm‐specific cost elasticities.FindingsThe findings suggest that the largest sized banks are generally the least efficient banks and the smallest sized banks are the most efficient. The strongest economies of scale are displayed by Spanish banks, while the weakest economies of scale are reported by Greek banks. The impact of technical change in reducing bank costs (generally about 3 and 4 per cent per annum) does not appear to differ according to bank size.Research limitations/implicationsThis study does not distinguish private banks from public or mutual banks and does not account for the effect of risk on the employment of bank capital.Originality/valueThe value of this paper is to provide new and recent evidence on the very important issue of efficiency and technical change in Southern European markets.

New Evidence on Efficiency in Southern European Banking

New Evidence on Efficiency in Southern European Banking This paper explores the issue of efficiency in Southern European banking by applying the Fourier functional form and the stochastic cost frontier approach in calculating inefficiencies for a large sample of Southern European banks between 1997 and 2003. The findings suggest that the largest sized banks are generally the least efficient, while the smallest sized banks are the most efficient. The strongest economies of scale are displayed by Spanish banks, while the weakest economies of scale are reported by Greek banks. The findings suggest that medium-sized banks report the strongest economies of scale, and the largest and smallest banks weaker economies of scale (ranging between 3,5% and 7%). Therefore, the notion that economies of scale increase with bank size cannot be confirmed. The impact of technical change in reducing bank costs (generally about 3% and 4% per annum) appears to systematically increase with bank size. The largest banks reap greater benefits from technical change. Overall, the results indicate that the largest banks in the sample enjoy greater benefits from technical progress, although they do not have scale economy and efficiency advantages over smaller banks.

Estimating the Relative Efficiency of Brazilian Publicly and Privately Owned Water Utilities: A Stochastic Cost Frontier Approach1

Abstract: This paper assesses cost efficiencies of Brazilian public and private companies of water supply. To measure the efficiency, we used a stochastic frontier model derived from the translog family – a specification similar to a Cobb‐Douglas including a quadratic term in log output. The model parameters are estimated by maximum likelihood using Brazilian data for the year 2002. Statistical inference leads to the conclusion that there is no evidence that private firms and public firms are significantly different in terms of efficiency measurements.

The Impact of Regulation on Cost Efficiency: An Empirical Analysis of Wisconsin Water Utilities

The impact of regulation of efforts to minimize costs has been widely discussed, but remains difficult to measure. The sophisticated regulation of water utilities in Wisconsin allows us to attempt such on assessment since different firms can be under different regulatory regimes (price cap or rate-of-return) in the same geographical area at the same time. To measure the impact of regulation on efficiency, we use a stochastic cost frontier approach defining the unobservable efficiency of a water utility as a function of exogeneous variables. Using a panel of 211 water utilities observed from 1998 to 2000, we show that their efficiency scores can be partly explained by the regulatory framework.

Technological Development and Concentration of Stock Exchanges in Europe

This paper provides an explanation of technical inefficiencies of financial exchanges in Europe as well as an empirical analysis of their existence and extent. A single-stage stochastic cost frontier approach is employed, which generates exchange inefficiency scores based on a unique unbalanced panel data set for all major European financial exchanges over the period 1985-1999. Overall cost inefficiency scores reveal that European exchanges operate at 20-25% above the efficiency benchmark. The results also affirm that size of exchange; market concentration and quality; structural reorganisations of exchange governance; diversification in trading service activities; and adoption of automated trading systems significantly influence the efficient provision of trading services in Europe. Over the sample period, European exchanges notably improved their ability to efficiently manage their production and input resources.