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The impact of inefficiency on diversification

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  • Alfons Oude Lansink
  • Spiro Stefanou
  • Magdalena Kapelko

Abstract

Diversification is often seen as a risk management tool, but specialization allows operators to exploit scale economies in single outputs and offers specialized operators more opportunities to fine-tune their skills which can promote a greater degree of technical proficiency. Measuring economies of scope facilitates the assessment of the benefits from output diversification versus specialization for operators and provides a metric for explaining and predicting trends towards specialization or diversification. However, the current literature on economies of scope provides little insight into the potential trade-off between the benefits of diversification and the presence of inefficiency in production and decision making. To remedy this shortcoming, this paper develops a measure of an effective (or behavioral) measure of scope economies which measures the benefits of diversification accounting for the contributions of allocative, congestion and technical efficiency in scaling the perfectly efficient version of scope economies. The application focuses on measuring and explaining economies of scope on Dutch crop farms. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Alfons Oude Lansink & Spiro Stefanou & Magdalena Kapelko, 2015. "The impact of inefficiency on diversification," Journal of Productivity Analysis, Springer, vol. 44(2), pages 189-198, October.
    • Handle: RePEc:kap:jproda:v:44:y:2015:i:2:p:189-198
    DOI: 10.1007/s11123-014-0423-x
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    Cited by:

    1. Kristiaan Kerstens & Ignace Van de Woestyne, 2021. "Cost functions are nonconvex in the outputs when the technology is nonconvex: convexification is not harmless," Annals of Operations Research, Springer, vol. 305(1), pages 81-106, October.
    2. Liyun Zhu & Alfons Oude Lansink, 2022. "Dynamic sustainable productivity growth of Dutch dairy farming," PLOS ONE, Public Library of Science, vol. 17(2), pages 1-19, February.
    3. Ang, Frederic & Mortimer, Simon & Areal, Francisco & Tiffin, Richard, 2015. "The Impact of Dynamic Profit Maximization on Biodiversity: A Network DEA Application to UK Cereal Farms," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205857, Agricultural and Applied Economics Association.
    4. Wimmer, Stefan G & Sauer, Johannes, 2016. "Diversification Versus Specialization: Empirical Evidence On The Optimal Structure Of European Dairy Farms," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244882, German Association of Agricultural Economists (GEWISOLA).

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    More about this item

    Keywords

    Economies of scope; Nonparametric production; Efficiency measurement; C6; D22; D24;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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