Stochastic Cost Frontier Model Research Articles

Performance analysis of Chilean water companies after the privatization of the industry: the influence of ownership

ABSTRACT This study examines the efficiency and productivity of the Chilean water and sewerage industry over the period 2010–2017 using a stochastic cost frontier model. This methodological approach allowed us to evaluate the impact of water companies´ ownership on their productivity. This is very relevant for the Chilean water and sewerage industry which involves a public, full private and concessionary water companies. The results evidenced that the Chilean water and sewerage industry improved its productivity across years. However, the increase in the productivity of full private and concessionary water companies was larger than the one experienced by the public water company.

Airport use agreements and cost efficiency of U.S. airports

In this study, we examined the impact of airport use agreements on the cost efficiency of large and medium U.S. hub airports in the years between 2009 and 2019 using a stochastic cost frontier model. We found that residual airports were less cost-efficient than compensatory and hybrid airports. The cost inefficiency in turn may translate into higher user fees for the signatory airlines. The result suggests that the residual rate-setting method may exert a moral hazard problem of airport management, because under such method, any cost deficit incurred by the airport will be covered by the signatory airlines, and this arrangement effectively shifts the risk of airport budget shortfall away from airport management.

Cost Efficiency Status of Rice Farmers Participating in IFAD/VCD Programme in Niger State of Nigeria

This research empirically determined the cost efficiency of the farmers that participated in the IFAD/VCD programme in Niger State of Nigeria. The study elicited cross-sectional data of the 2018 cropping season viz. well-structured questionnaire complemented with interview schedule from a sample size of 110 respondents selected through a multi-stage sampling technique. The sampled data were analysed using the stochastic cost frontier model. The empirical evidence showed that none of the farmers was on the cost frontier surface i.e. inability to attain optimal minimum cost in the cultivation of rice in the studied area. The identified significant idiosyncratic variables militating against cost efficiency were the poor health status of the farm family which led to the extra cost incurred in labour substitution and diseconomies of scale due to their small-scale mode of operation. Therefore, the study recommends that the policymakers should sensitize the farmers on the importance of health preventive measures and should endeavour to improve on the existing basic health centres both in human capital and logistics. In addition, the farmers should be encouraged to explore cooperative marketing so as to take advantage of the bulk discount in input purchase and have bargaining power in the marketing of their output, thus tackling the problem of diseconomies of scale in their farm operations.

Economic resources utilisation in maize production: Evidence from Central Region, Ghana

This study was undertaken to improve the efficiency of maize farming in the Central Region of Ghana. A stochastic frontier cost function, applied to cross-sectional data, was used to analyse firm level cost efficiency of production and its determinants. Efficiency of resource utilization was analysed using marginal value product of inputs. Results from the Cobb-Douglas stochastic cost frontier model and a farm-specific efficiency model showed that the mean cost efficiency was 94.95%. Furthermore, all production inputs were inefficiently allocated. Access to extension services, experience and access to credit had positive relationships with cost efficiency. The study concludes that maize farmers are not fully efficient in resource combination and allocation. Improved technologies and innovations should be made accessible to farmers by public and private extension service providers to increase efficiency of their maize farms. Key words: Cost efficiency, allocative efficiency, cost frontier, marginal value product, maximum likelihood estimates.

Cost efficiency of recycling and waste disposal in Japan

This study uses the stochastic cost frontier models to investigate recycling cost efficiencies for 1,809 municipalities in Japan from 2011 to 2018. Our major findings are as follows. A U-shaped relationship exists between the waste management cost per ton and recycling rate. The current recycling rate in Japan is much higher than the per ton cost-minimizing recycling rate. The cost-minimizing recycling rate is 7.6%, in detail it is 6.9% for organized and 6.8% for non-organized municipalities. However, the actual mean recycling rate is 21.7%, and the policy target is 27.0%. By decreasing the cost inefficiency, the predicted waste management cost per ton can be reduced from 34,521 yen (approximately USD 336) to 32,849 yen (USD 385) for organized municipalities and from 39,612 yen (USD 320) to 37,422 yen (USD 364) for non-organized municipalities, even though the actual mean recycling rate is 21.7%. Furthermore, as recycling rates change from 21.7% to 6.9% and 6.8%, the costs would reduce to 28,198 yen and 31,624 yen for organized and non-organized municipalities, respectively. Cooperation among adjacent municipalities and the outsourcing of the waste collection function to private companies would reduce waste management costs per ton. The collection frequency of glass is a cost-inefficient factor, whereas that of paper is a cost-efficient one. For the robustness check, we divide the sample into small, medium, and large municipalities. The U-shaped relationship between the waste management cost per ton and recycling rate still holds for small and medium municipalities.

Determinants of profitability of community banks in the USA: a cost-frontier-based decomposition approach

This paper investigates the determinants of the poor profitability of community banks relative to that of large banks in the USA over the period 2001–2017, by decomposing the relative profitability of community banks into five multiplicative cost-frontier-based explanatory factors. To compute these explanatory factors, we estimate a Bayesian true fixed effects stochastic cost frontier model, which has the advantages of allowing the unobserved heterogeneity term to be correlated with the observed explanatory variables and providing statistical inferences on the cost-frontier-based explanatory factors. Our decomposition shows that community banks’ lower profitability was attributable mainly to their lower technical change, lower scale efficiency and higher funding costs. In addition, the latter two factors were also the two main contributors to the deterioration in the profitability of community banks.

Cost efficiency of principal crops in Bihar (India) – A stochastic frontier approach

In the present study, an attempt has been made to test the cost efficiency of cereal crops like paddy, wheat and maize separately in the state of Bihar using Stochastic Cost Frontier model. It has been tried to determine the determinants of cost inefficiencies. The study is also aimed to know the factors affecting the cost inefficiencies in production of major cereals of the state so as to ascertain proper steps to increase cost efficiency in production. Most important observation emerged that there existed non-linear relationship between cost inefficiency and farm category. Cost inefficiency first increased with the increase of farm size then it decreased. In case of paddy mechanization could negatively affect the cost inefficiency and proportion to family labour in total labour was found positive implying increase in cost inefficiency. But in wheat, family labour showed positive value, indicating thereby increase in cost inefficiency. In case of maize, coefficient of fertilizer use was observed positive indicating increase in cost inefficiency. Coefficients of land holding size were positive in all the crops for all categories of farms. This advocated non-linear relation between farm category and cost inefficiency which showed larger farms were less cost efficient. The cost inefficiency depends on proportion of family labour, mechanization, type of seed used. The result enables to identify the determinants of cost inefficiency, which will certainly guide the state to adopt suitable policies. Farmers may be made aware about rational allocation of resources to reduce cost and make farming cost efficient.

Sustainable agricultural intensification practices and cost efficiency in smallholder maize farms: Evidence from Ethiopia

AbstractSustainable agricultural intensification (SAI) practices have been promoted in developing countries to improve farm productivity and environmental services. However, it is still unclear whether use of a combination of SAI practices has a significant influence on the cost efficiency of smallholder farms. This study investigates whether the cost efficiency of smallholder maize producers in Ethiopia depends on use of input‐augmenting and agronomic SAI practices. Stochastic cost frontier models that account for heterogeneity across farms are used for estimation. We find that the use of individual SAI practices increases cost while the combined use of the practices reduces it. The marginal effect on cost reduction is substantial when SAI practices are set at their sample maximum levels. Overall, the results demonstrate the benefit of using a combination of SAI practices in minimizing production cost while addressing the adverse effects of soil degradation and climate variability. To enhance food security, smallholder farm incomes and the sustainability of production in developing countries, policy programs should focus on promoting packages of input‐augmenting and agronomic SAI practices.

Economic Analysis of Rice Production in Central Agricultural Zone of Adamawa State, Nigeria

This paper analysed the economics of rice production in central agricultural zone of Adamawastate, Nigeria. Purposive and simple random sampling techniques were used to collect primary data from 130rice farmers through field survey using well designed pre-tested schedule. Descriptive statistics, costconcept, stochastic frontier cost model, as well as Garrett’s ranking technique were used to analysed the data.The results revealed that rice production was dominated by young literate men who had been in riceproduction for more than 20 years. Rice production was found to be profitable with net income over cost A1which is the direct cost involved in rice production as N146,049.11; while over cost C3 which is the total costof cultivation of rice was N100,083.62. The stochastic cost frontier model shows three parameters seed,family labour and agro-chemicals had positive and significant effect on the revenue of the rice farmers.Inadequate rainfalls, shortage of labour, clashes with pastoralist were the major constrains associated withrice production in the study area. The study suggest that government policies should be geared towardsdeveloping and establishing new fertilizer and agro-chemicals industries to ease the cost of farm inputs, aswell as intensify farmer grazer conflict resolution programmes.

Contributory Pension Fund Administrations in Nigeria: Stochastic Frontier Analysis of Its Efficiency and Implications for Policy Designs

The study assessed the technical efficiency of pension fund administrators in Nigeria using Stochastic Cost Frontier Model to generate efficiency scores for each of the eleven (11) selected pension fund administrators from a population of twenty-one (21). Panel data gathered from the annual reports of the selected pension fund administrators and the National Pension Commission were analysed using the maximum likelihood technique. The result showed that inefficiency, in varying degrees, existed in the selected fund administrators due to input costs on labour, equipment and premises and the mean and median efficiency scores were about 75% and 72% respectively. While the most efficient pension fund administrator recorded inefficiency score of 0.077, the least efficient pension fund administrator had inefficiency score of 0.388. The study concluded that increase in profitability, number of contributors, engaging in open fund investment activities and merger and acquisition reduce operating cost. It was therefore recommended that there should be a regulator-initiated merger and acquisition in the industry to eliminate waste, with positive impact on investment income. Besides, the regulatory agency should ease and expand transfer windows for existing contributors to transfer their pension contributions from an inefficient pension manager to efficient one to engender competition in the pension industry.

Voters’ Information, Corruption, and the Efficiency of Local Public Services

This paper explores the link between voters’ information, corruption, and efficiency in the context of a career concern model, where politically connected local monopolies are in charge of the provision of a local public service. We find that both a corrupt environment and a low level of voters’ information on managerial actions induce managers to reduce effort levels, thereby contributing to drive down efficiency. We test our predictions using data on solid waste management services provided by a large sample of Italian municipalities. We estimate a stochastic cost frontier model that provides robust evidence that services produced in more corrupted regions with low voters’ information are substantially less cost-efficient.

Assessing the influence of exogenous and quality of service variables on water companies´ performance using a true-fixed stochastic frontier approach

ABSTRACTImproving the cost efficiency and quality of service across time corresponds to two important targets for regulated water companies. Following a pioneering approach, we have evaluated the influence of a set of exogenous and quality of service variables on the English and Welsh water companies’ costs over the period of 1996–2009. A true-fixed effects stochastic cost frontier model was applied since it also allowed computing of the productivity change of the water companies and their drivers. Results have shown that quality of service has an influence on water companies´ costs. This issue is very relevant for bursts in water mains since investments in reducing them will lead to a reduction in the water supply interruptions and water losses. Results of this study illustrate the importance of developing long-term planning investment programmes in the water industry.

The effects of using different output measures in efficiency analysis of public transport operations

There is growing interest in measuring efficiency and productivity in the public sector. Most commonly this is done using data envelopment analysis (DEA) or Stochastic frontier analysis (SFA) to determine the level of (in)efficiency of different decision-making units. These methods have also been applied to public transport. However, in this context their application presents some problems, including how to define what is produced and how that should be measured. Several options have been suggested including vehicle-kilometres, number of trips, number of passenger-kilometres, and scores in passenger satisfaction surveys.The primary aim of this paper is to discuss how production of public transport should be defined and measured in efficiency studies. It is argued that output should be measured by number of trips and vehicle-kilometres as these together represent consumers' willingness to pay for public transport services.A proposed model for evaluating the efficiency of public transport operations is presented and estimated. This model is evaluated by comparing its results to those obtained from competing models estimated using the same data from 27 Swedish counties from 1986 to 2015. The data are used to estimate stochastic cost frontier models and it is concluded that the models using only vehicle-kilometres or only passenger trips tend to underestimate efficiency compared to a model using both at the same time. It is also concluded that smaller models (using only a single output measure) result in different rankings of the decision-making units.

Choice of reserve capacity by hospitals: a problem for prospective payment.

This contribution analyzes the impact of prospective payment on hospital decisions with regard to reserve capacity, using Swiss hospital data covering the years 2004-2009. This data set is unique because it permits distinguishing of institutional characteristics (e.g., ownership status) from the mode of payment as determinants of hospital efficiency, due to the fact that some Swiss cantons introduced prospective payment early while others waited for federal legislation to be enacted in 2012. Since a hospital's choice of reserve capacity depends also on the risk preferences of management while affecting the cost function, heterogeneity is predicted even in the presence of identical technology and factor prices. For estimating hospitals' marginal costs, we employ the flexible representation of risk preferences by Pope and Chavas [Am J Agric Econ 76, 196-204 (1994)]. Production uncertainty is measured as the difference between actual admissions and admissions predicted by an autoregressive moving average model. Its effect on hospital cost is analyzed using a multilevel stochastic cost frontier model with random coefficients reflecting unobserved differences in technology. Public hospitals are found to opt for a higher probability of meeting unexpected demand, as predicted. Their operating cost is 1.1% higher than for private hospitals and even 1.9% higher than for teaching hospitals, creating an incentive to turn away patients or to keep them waiting for treatment.

Assessment of Banking Efficiency as Applied on Palestinian Banks

This study aims at measuring and analyzing the efficiency of conventional banks operating in Palestine as applied on a sample of 11 banks during the period 2007 to 2014 using Data Envelopment Analysis (DEA) and Stochastic Cost Frontier (SFA) models. Results indicate that there are insignificant differences in the average scores of efficiency according to the bank size or type, while these differences seem to be significant when analyzing according to the model used.

Are Charters the Best Alternative? A Cost Frontier Analysis of Alternative Education Campuses in Texas

Previous research on the relative efficiency of charter schools focused on schools that serve a general student population. In Texas, as in many other states, some charter schools have been designed specifically to serve students who are at risk of dropping out of school. Such “alternative education campuses” may have very different cost and efficiency profiles than schools designed to serve students in regular education programs. In this article, we estimate a translog stochastic cost frontier model using panel data for alternative public high school campuses in Texas over the five‐year period 2007–2011, and find that alternative education high school campuses operated by charter schools are systematically more efficient than alternative education high school campuses operated by traditional public school districts. Policies that encourage the formation of alternative education charter campuses may thus be a sensible component of strategies to combat the pervasive and pernicious problem of high school dropouts.

Efficiency of microfinance institutions in sub – Saharan Africa: a stochastic frontier approach

The push for microfinance institutions (MFIs) to achieve sustainability in recent years has made efficiency a prerequisite. Assessment of efficient operations of MFIs is vital for both policy and investment decision making and guaranteeing financial access to the poor. This study investigates the cost efficiency of MFIs operating in 10 Sub-Saharan Africa (SSA) countries over the period 2003-2013 and the factors that drive efficiency. The authors considered the Cobb-Douglas stochastic cost frontier model with truncated normal distribution and time variant inefficiency were estimated. The results show that MFIs are cost inefficient in their intermediation role as they currently achieve a mean cost efficiency of 40.09 percent. The main determinants of MFIs efficiency are total assets, operating expense to assets ratio, average loan balance per saver, the percentage of the female borrower and borrower per staff member. The study recommends that practitioners and managers of MFIs should improve on productivity through technical training in portfolio quality management and offer diverse financial products and services innovatively at minimised cost. Keywords: Efficiency, Microfinance Institutions, Stochastic Frontier Analysis, Sub-Saharan Africa

Estimating the Environmental Pollution Index from Stochastic Cost Frontier Models and Analysis of Impact Factors

본 연구의 목적은 2011년 176개국을 대상으로 이산화탄소에 대한 환경오염지수와 소득의 관계를 추정하고 영향요인을 분석하고자 함이다. 1단계 추정법에서는 확률적 비용 변경 분석을 활용하여 이산화탄소에 대한 환경오염지수를 계측하고, 2단계 추정법에서는 토빗 모형을 활용하여 EKC 가설을 검증하고 국토면적당 숲면적 비중, OECD 더미, 경제 요소들에 대한 영향요인을 분석한다. 분석결과에 의하면 EKC 가설이 성립하였고 어느 경제 변수가 추가되더라도 환경오염지수와 소득 간의 관계는 역 U자형을 보였다. 추가적으로 숲면적, 제조업비중, OECD국가 등은 이 지수와 유의적인 관계를 보였다.

Unobserved Heterogeneous Effects in the Cost Efficiency Analysis of Electricity Distribution Systems

The purpose of this study is to analyze the cost efficiency of electricity distribution systems in order to enable regulatory authorities to establish price- or revenue cap regulation regimes. The increasing use of efficiency analysis in the last decades has raised serious concerns among regulators and companies regarding the reliability of efficiency estimates. One important dimension affecting the reliability is the presence of unobserved factors. Since these factors are treated differently in various models, the resulting estimates can vary across methods. Therefore, we decompose the benchmarking process into two steps. In the first step, we identify classes of similar companies with comparable network and structural characteristics using a latent class cost model. We obtain cost best practice within each class in the second step, based on deterministic and stochastic cost frontier models. The results of this analysis show that the decomposition of the benchmarking process into two steps has reduced unobserved heterogeneity within classes and, hence, reduced the unexplained variance previously claimed as inefficiency.

The Effect of Governance Forms on North American Airport Efficiency: A Comparative Analysis of Airport Authority vs. Government Branch

This paper applies a stochastic cost frontier model to a panel of 54 major airports over 2002-2008 to examine how the two dominant governance forms of publicly owned airports in the United States and Canada, namely, operation and governance by a government (city, county, or state) branch, or by an airport authority, affect airport efficiency performance. Our key findings are (a) airports operated by an airport authority achieve higher cost efficiency (on average, 14% higher technical efficiency) than those operated by a government branch; (b) airports operated by a government branch have lower labor share than those operated by an airport authority; and (c) there is no statistically significant difference in the efficiency performance between airports operated by U.S. airport authorities and Canadian airport authorities.