Underlying Production Function Research Articles

Dissecting Okun’s law beyond time and frequency

ABSTRACT The stability of Okun’s law mostly has been investigated over time. In this paper, we apply wavelet analysis to dissect the relationship between GDP growth and changes in the unemployment rate by time and frequency. Furthermore, we analyse whether changes in Okun’s law are related to changes in the underlying production function or are related to changes in the relationship between unemployment and employment. The results show that coherence of GDP growth and changes in the unemployment rates at lower frequencies vanished with the Great Moderation. Coherence at higher frequencies shows an on-off pattern with a re-emergence of Okun’s law during the Great Recession. These changes appear to be mainly driven by changes in the underlying production function.

Evaluating environmental impacts of photovoltaic technologies using Data Envelopment Analysis

This study contributes to the literature by proposing a new method of complex evaluation of multiple life cycle environmental impacts of different PV technologies based on the Data Envelopment Analysis (DEA). The main advantage of DEA as a non-parametric technique is that it does not require prior knowledge of underlying production functions. An empirical production technology frontier is estimated based on best-practice boundary of the input-output relationship. DEA evaluates comparative or relative efficiency, which means the measurement with reference to some set of units we are comparing with each other. The proposed approach allows to aggregate disparate quantitative estimates of individual negative environmental effects from the literature and special databases in a transparent and easily understandable index or coefficient of ecology efficiency. The evaluation of environmental effects is performed on data from the EcoInvent Database. The results of this study clearly show that from an environmental point of view it is more practical to prefer technologies, which are less resource and energy intensive in manufacturing and upstream activities. As of right now, this requirement is met by thin-film technologies (amorphous silicon, cadmium telluride, and copper-indium-diselenide); however, their ecologic efficiency evaluation may change as we obtain more data on the final stages of the lifecycle for PV modules of various types. Based on results of this study a number of opportunities for improving existing government incentives and rationalizing the design of state programs under elaboration can be identified.

Efficient courts? A frontier performance assessment

PurposeThe purpose of this paper is to build performance indicators to assess efficiency for First Instance Federal Courts in Argentina and study the determinants of efficiency in Criminal Instruction Courts.Design/methodology/approachThe efficiency scores were determined using data envelopment analysis with a database for the period 2006–2010. Then, a search of the efficiency determinants in the Criminal Instruction Courts was performed. Four output-oriented models were developed based on various explanatory and environmental variables.FindingsWorkload is an environmental variable that significantly increased the average levels of efficiency. When analyzing explanatory factors of the efficiency levels of the Criminal Instruction Courts, surrogate judges and temporary staff are more efficient on average than tenured judges and staff.Research limitations/implicationsThe method chosen permits flexibility in the analysis. Future research would be interesting to develop the underlying economic model using econometric methods.Practical implicationsThis paper’s contribution is twofold: first, to estimate the relative efficiency for all First Instance Federal Courts in every jurisdiction; and second, to explain the differences in efficiency in the Criminal Instruction Courts.Social implicationsThis study has the potential to greatly impact the discussion of how to structure judicial procedures (from the benchmarking between different branches of Federal justice) and in the design of incentives in a judicial career (e.g. tenured vs temporary judges and clerical employees, the role of seniority of judges and clerical employees and the impact of gender in performance).Originality/valueTo the authors’ knowledge, this paper is the first scholarly article to measure efficiency in Argentine justice system using mathematical programming and econometric methods. It has academic interest since it advances on the comprehension of the underlying production function of justice service provision. The paper also has social and practical implications since it permits contributing to the institutional design and opens the discussion for further sequels with other methods and complementary purposes.

A look behind the curtain: Measuring the complex economic effects of regional structural funds in Germany

AbstractThis paper investigates the mutual impact channels of Germany's major regional policy instrument (GRW) on regional economic development. Different from earlier studies which have predominately focused on a partial assessment of output effects, we explicitly endogenize the factor inputs of the underlying production function. This allows us to comprehensively assess the role of the GRW in driving per capita output, employment, human and physical capital intensities as well as the region's technological growth. The results from a spatial panel vector autoregressive model show that GRW funding has significant positive effects on regional output, the employment rate and human capital intensity.

A survey on measuring efficiency through the determination of the least distance in data envelopment analysis

Purpose The purpose of this paper is to provide an outline of the major contributions in the literature on the determination of the least distance in data envelopment analysis (DEA). The focus herein is primarily on methodological developments. Specifically, attention is mainly paid to modeling aspects, computational features, the satisfaction of properties and duality. Finally, some promising avenues of future research on this topic are stated. Design/methodology/approach DEA is a methodology based on mathematical programming for the assessment of relative efficiency of a set of decision-making units (DMUs) that use several inputs to produce several outputs. DEA is classified in the literature as a non-parametric method because it does not assume a particular functional form for the underlying production function and presents, in this sense, some outstanding properties: the efficiency of firms may be evaluated independently on the market prices of the inputs used and outputs produced; it may be easily used with multiple inputs and outputs; a single score of efficiency for each assessed organization is obtained; this technique ranks organizations based on relative efficiency; and finally, it yields benchmarking information. DEA models provide both benchmarking information and efficiency scores for each of the evaluated units when it is applied to a dataset of observations and variables (inputs and outputs). Without a doubt, this benchmarking information gives DEA a distinct advantage over other efficiency methodologies, such as stochastic frontier analysis (SFA). Technical inefficiency is typically measured in DEA as the distance between the observed unit and a “benchmarking” target on the estimated piece-wise linear efficient frontier. The choice of this target is critical for assessing the potential performance of each DMU in the sample, as well as for providing information on how to increase its performance. However, traditional DEA models yield targets that are determined by the “furthest” efficient projection to the evaluated DMU. The projected point on the efficient frontier obtained as such may not be a representative projection for the judged unit, and consequently, some authors in the literature have suggested determining closest targets instead. The general argument behind this idea is that closer targets suggest directions of enhancement for the inputs and outputs of the inefficient units that may lead them to the efficiency with less effort. Indeed, authors like Aparicio et al. (2007) have shown, in an application on airlines, that it is possible to find substantial differences between the targets provided by applying the criterion used by the traditional DEA models, and those obtained when the criterion of closeness is utilized for determining projection points on the efficient frontier. The determination of closest targets is connected to the calculation of the least distance from the evaluated unit to the efficient frontier of the reference technology. In fact, the former is usually computed through solving mathematical programming models associated with minimizing some type of distance (e.g. Euclidean). In this particular respect, the main contribution in the literature is the paper by Briec (1998) on Hölder distance functions, where formally technical inefficiency to the “weakly” efficient frontier is defined through mathematical distances. Findings All the interesting features of the determination of closest targets from a benchmarking point of view have generated, in recent times, the increasing interest of researchers in the calculation of the least distance to evaluate technical inefficiency (Aparicio et al., 2014a). So, in this paper, we present a general classification of published contributions, mainly from a methodological perspective, and additionally, we indicate avenues for further research on this topic. The approaches that we cite in this paper differ in the way that the idea of similarity is made operative. Similarity is, in this sense, implemented as the closeness between the values of the inputs and/or outputs of the assessed units and those of the obtained projections on the frontier of the reference production possibility set. Similarity may be measured through multiple distances and efficiency measures. In turn, the aim is to globally minimize DEA model slacks to determine the closest efficient targets. However, as we will show later in the text, minimizing a mathematical distance in DEA is not an easy task, as it is equivalent to minimizing the distance to the complement of a polyhedral set, which is not a convex set. This complexity will justify the existence of different alternatives for solving these types of models. Originality/value As we are aware, this is the first survey in this topic.

Returns to scale of Business Administration research in Germany

In order to efficiently allocate academic resources, an awareness of the properties of the underlying production function's returns to scale is of crucial importance. For instance, the question arises as to what extent an expansion of a university department's academic staff would be advisable in order to utilize increasing marginal gains of research production. On the other hand, it is disputable whether an optimal university department size exists. Empirical studies covering these questions render various answers. In this paper, we analyse which properties of returns to scale the Business Administration research of universities in Germany exhibits. On the basis of research data from 2001 until 2009 provided by the Centre for Higher Education, and using Data Envelopment Analysis, we demonstrate that typically sized business schools show nearly constant returns to scale. Furthermore, we observe tendencies of decreasing returns to scale for large-sized business schools. Diverse robustness and sensitivity analyses confirm the validity of our inferred empirical findings.

An experimentally confirmed resource planning model of services under production function uncertainties

The way in which service firms transform inputs into outputs is typically uncertain or unknown. Consequently decision makers, at best, can only make estimates of the underlying production function. The purpose of this study is to offer policy recommendations to service providers and to examine experimentally the sensitivity of estimates of production functions. The primary result of this study is a foundation for modeling manpower planning decisions for co-produced services when production functions are mis-estimated and/or mis-specified.

A New Approach to Estimating the Production Function for Housing

Dating to the classic works of Alonso, Mills, and Muth, the production function for housing has played a central role in urban economics and local public finance. This paper provides a new flexible approach for estimating the housing production function which treats housing quantities and prices as latent variables. The empirical analysis is based on a comprehensive database of recently built properties in Allegheny County, Pennsylvania. We find that the new method proposed in this paper works well in the application and provides reasonable estimates for the underlying production function. (JEL C51, D24, R11, R31)

The Advantages of Using Earnings for Compensation: Matching Delivered Performance

We show that the greater the extent to which a performance measure matches delivered performance, the simpler and more robust are the compensation plans based on it. In some settings stock price changes match delivered performance poorly because they anticipate it. This introduces three problems with price-based plans relative to an earnings-based plan. First, the price-based plans become complex because they require knowing the extent to which prices anticipate the future. Second, price-based plans are less robust to unforeseen events. Third, price-based plans require period-by-period changes in pay-for-performance relationship even when the underlying production function remains unchanged. Earnings-based plans are used in these settings if earnings better match delivered performance.

Matching Delivered Performance

We claim that the greater the extent to which a performance measure matches delivered performance, the simpler and more robust are the compensation plans based on it. Stock price changes poorly match delivered performance when they anticipate performance. This causes three problems: (1) Price-based plans become complex as they require knowing the extent to which prices lead performance; (2) Price-based plans are less robust to unforeseen events; (3) Price-based plans require period-by-period changes in pay-for-performance relationships even when the underlying production function remains unchanged. The relative use of earnings- and price-based compensation depends on the extent to which each matches delivered performance.

Use of ratios in data envelopment analysis

It is often necessary to use ratios rather than absolute numbers as inputs and outputs in data envelopment analysis. This may be necessary in order to reflect accurately the underlying production function, or because of the nature of the data available. This note explains why the Banker, Charnes and Cooper formulation of DEA must be used when a ratio model is deployed.

The Effects of Public Capital on the Growth in Spanish Productivity

The aim of the article is to provide new evidence concerning the effect of public capital on productivity growth in Spain. To this end, the article follows the growth accounting approach, which, in addition to measuring both the direct and indirect effects of public capital on the total factor productivity, allows for assessing whether there is a distinctive impact of public capital across economic sectors. The results lead to three main conclusions: (1) Public capital has a strong influence on growth when we use data from the whole economy; (2) this influence varies across sectors, being more relevant in the exposed sectors (industry) than in sheltered sectors (agriculture, construction, and services); and (3) irrespective of the definition used for public capital, these basic results remain unchanged. (JEL C30, E62, H54, O47, O52)

Euro Area Production Function and Potential Output: A Supply Side System Approach

In this paper, we present a three equation supply-side model based on aggregation across sectors with sector specific mark-ups and the technology parameters of the production function. The model has been applied to euro area data from the 1970s assuming that the underlying production function is either CES or Cobb-Douglas. Estimation results support the Cobb-Douglas case and the estimated supply-side model accounts satisfactorily for the stylised features of the data, i.e. the hump shape in the labour income share coupled with the relatively stable capital-to-labour income ratio and a noticeable change in profit margins and sectoral production shares. We also produce estimates of potential output and the output gap conditional on estimated production functions and examine the sensitivity of output gap estimates with respect to the alternative parameterisation of the production function.

Productivity growth and efficiency measurement: a dual approach

This paper derives output technical efficiency from a dual system of input demand and output supply equations using the concept of virtual prices. The underlying production function is firm-specific through intercept terms and slope parameters. The approach is used to decompose total factor productivity growth of Dutch pot-plant firms over the period 1976-1995 into a scale effect, an efficiency change effect and an exogenous technological change effect. The results show that total factor productivity has grown on average by 3.1 per cent per annum, with the main contribution (2.7 per cent) coming from improvements in technical efficiency.

Growth Empirics: A Panel Data Approach--A Reply

Research on convergence has indeed proceeded through several stages. In the first, represented by such works as Baumol [1986], convergence was studied under the implicit assumption that all countries of the sample had the same steady state levels of income. This notion of convergence later came to be known as absolute convergence. In the second stage, represented by papers such as Barro and Sala-i-Martin [1992] and Mankiw, Romer, and Weil [1992], the concept of conditional convergence was put forward and rigorously defined. It was now emphasized that the growth theory did not imply identical steady state levels of income for all countries and that, in studying convergence, these differences needed to be allowed. However, differences in steady state levels were considered under the assumption of parametric homogeneity of the underlying production function. Yet the assumption that all countries have identical production functions and differ only in the value of the variables of this function and not in its parameters was neither appealing nor tenable. In the third stage, represented by such works as Islam [1995], this assumption of strict parametric homogeneity was relaxed, and, through the use of panel data methodology, the aggregate production function was allowed to differ across countries with respect to the productivity shift parameter. However, this introduction of heterogeneity was still within the general framework of allowing only the steady state level of income to differ across countries, and it maintained the assumption that countries shared the same steady state growth rate. It is in this latter respect that Lee, Pesaran, and Smith [1995] and their current Comment [1998] on the basis of that work represent a significant change. They have extended the use of the panel data method to allow the countries to differ not only with regard to the steady state level but also with respect to the steady state growth rate (g). When this is done, the rate of convergence (A), according to their maximum likelihood estimation, jumps to 0.23. Clearly, a different estimation method is not the main reason for this substantial increase because when g is

PRIVATE SECTOR INVESTMENT AND ENDOGENOUS GROWTH IN TURKEY

In this paper factors that have affected the output expansion in Turkish economy are analyzed. The underlying production function allows to detect separately effects of development in physical (both private and govemment) and human capital stock on economic growth. It is concluded that the effect of private sector investments on economic growth is larger than that of govemment investments. The conclusion that production function analyzed in this paper exhibits increasing retums to scale gives a general support for the endogenous growth models. Therefore, it is possible to say that there are positive extemalities stemming from accumulation of both physical and human capital stock.

Resource Depletion and Technical Change: Effects on U.S. Crude Oil Finding Costs from 1977 to 1994

A dramatic decline in U.S. crude oil finding costs has provoked intense interest in the extent to which technical progress has mitigated the effects of resource depletion. Analysis of depletion and technical change using data for 27 large U.S. oil producers from 1977-1994 is conducted using a translog cost function. The translog provides a flexible representation of the underlying production function, and controls for changing factor prices. The model also controls for the effect of prospect highgrading. Results show that an accelerating rate of technical change reduced average finding cost 15 percent (onshore) and 18 percent (offshore) per year by 1994. Resource depletion increased cost at an average annual rate of 7 percent onshore and 12 percent offshore. Technical change was relatively labor-using both onshore and offshore.

Of empty boxes: Returns to scale revisited

This paper highlights the bias in returns to scale or price-cost markup coefficients when estimated from the inverse of a production relationship. Coefficients estimated from the inverse are larger than when estimated directly, and the size of the bias increases as the price-cost markup or the scale elasticity of the underlying production function gets smaller. An instrumental variables estimator, although consistent, still exhibits a small sample bias if more than one instrument is used. For comparison, direct estimates of scale elasticities are provided for two-digit SIC private business sectors and for four-digit manufacturing sectors. Little evidence is found for increasing returns to scale in the manufacturing sector.

A simulation study of hypothesis tests for differences in efficiencies

This paper reports the results of a simulation study to evaluate the performance of Banker's (1993) new asymptotic DEA tests for inefficiency differences between two groups. Their performance is evaluated relative to the performance of conventional parametric corrected ordinary least squares (COLS) tests and the Welch and Mann-Whitney tests used earlier in the DEA literature. We consider five different underlying production functions, four different inefficiency distributions and four different sample sizes in our study. Our results include the following: 1. (1) The new asymptotic DEA tests outperform COLS-based tests even when the parametric functional form employed for COLS estimation is identical to the underlying production function. 2. (2) The asymptotic DEA tests are robust in that they perform well for different underlying production functions and inefficiency distributions. 3. (3) Welch's mean and Mann-Whitney tests perform worse than both the new asymptotic DEA tests and the COLS-based tests. 4. (4) The performance of COLS-based tests is improved when Banker's (1993) new test statistics are employed using COLS estimates of production inefficiencies. 5. (5) No marked differences in Type II error are found between the various tests with one-output, two-input production technologies. But, the Welch's mean and MannWhitney tests and COLS-based tests perform slightly better than the asymptotic DEA tests in terms of proportion of Type II errors with one-output, five-input production technologies.

The market for residential real estate brokerage services: Costs of production and economies of scale

Although the market for real estate brokerage services has been the subject of intense scrutiny for many years, little empirical evidence has been forthcoming regarding the performance of this market. This paper employs a translog cost function to model the underlying production function for the residential real estate brokerage industry. The results indicate that, except for very large firms, modest economies of scale persist throughout almost the entire range of output. Our results also indicate that while average firm size is increasing, many real estate firms are too small to take full advantage of the cost reductions possible with a larger scale of operation. Equally important, large firms do not command a competitive advantage over smaller firms, as fer as unit costs are concerned.