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Analyzing Cost Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology

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Author Info

  • Cherchye, Laurens

    ()
    (K.U.Leuven)

  • De Rock, Bram

    ()
    (ECARES, Free University of Brussels)

  • Vermeulen, Frederic

    ()
    (Tilburg University)

Abstract

In designing a production model for firms that generate multiple outputs, we take as a starting point that such multi-output production refers to economies of scope, which in turn originate from joint input use and input externalities. We provide a nonparametric characterization of cost efficient behavior under these conditions, and subsequently institute necessary and sufficient conditions for data consistency with such efficient behavior that only include observed firm demand and supply data. We illustrate our methodology by examining the cost efficiency of research programs in Economics and Business Management faculties of Dutch universities. This application shows that the proposed methodology may entail robust conclusions regarding cost efficiency differences between universities within specific specialization areas, even when using shadow prices to evaluate the different inputs.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2319.

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Length: 32 pages
Date of creation: Sep 2006
Date of revision:
Publication status: published in: Operations Research, 2008, 56(1), 204-221
Handle: RePEc:iza:izadps:dp2319

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Keywords: nonparametric tests; production behavior; multi-product firms; input externalities; joint input use; economies of scope;

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References

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  1. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, vol. 106(1), pages 1-25, January.
  2. Cherchye, L. & Abeele, P. Vanden, 2005. "On research efficiency: A micro-analysis of Dutch university research in Economics and Business Management," Research Policy, Elsevier, vol. 34(4), pages 495-516, May.
  3. Kuosmanen, Timo & Cherchye, Laurens & Sipilainen, Timo, 2006. "The law of one price in data envelopment analysis: Restricting weight flexibility across firms," European Journal of Operational Research, Elsevier, vol. 170(3), pages 735-757, May.
  4. Léopold Simar & Paul W. Wilson, 1998. "Sensitivity Analysis of Efficiency Scores: How to Bootstrap in Nonparametric Frontier Models," Management Science, INFORMS, vol. 44(1), pages 49-61, January.
  5. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  6. Banker, Rajiv D & Maindiratta, Ajay, 1988. "Nonparametric Analysis of Technical and Allocative Efficiencies in Production," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1315-32, November.
  7. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
  8. Cherchye, L.J.H. & Rock, B. de & Vermeulen, F.M.P., 2007. "The collective model of household consumption: A nonparametric characterization," Open Access publications from Tilburg University urn:nbn:nl:ui:12-194157, Tilburg University.
  9. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
  10. Adonis Yatchew, 1998. "Nonparametric Regression Techniques in Economics," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 669-721, June.
  11. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, 9.
  12. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
  13. Peter Bogetoft, 1996. "DEA on Relaxed Convexity Assumptions," Management Science, INFORMS, vol. 42(3), pages 457-465, March.
  14. Kim, Kwansoo & Barham, Bradford L. & Chavas, Jean-Paul & Foltz, Jeremy D., 2005. "Research and Development at U.S. Research Universities: An Analysis of Scope Economies," 2005 Annual meeting, July 24-27, Providence, RI 19147, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  15. Niels Christian Petersen, 1990. "Data Envelopment Analysis on a Relaxed Set of Assumptions," Management Science, INFORMS, vol. 36(3), pages 305-314, March.
  16. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 579-97, May.
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Citations

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Cited by:
  1. Fabrice Talla Nobibon & Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frits Spieksma, 2011. "Heuristics for Deciding Collectively Rational Consumption Behavior," Computational Economics, Society for Computational Economics, vol. 38(2), pages 173-204, August.
  2. Carvalho, Pedro & Marques, Rui Cunha, 2014. "Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods," European Journal of Operational Research, Elsevier, vol. 234(1), pages 292-307.
  3. Cherchye, Laurens & De Rock, Bram & Vermeulen, Frederic, 2008. "An Afriat Theorem for the Collective Model of Household Consumption," IZA Discussion Papers 3794, Institute for the Study of Labor (IZA).
  4. De Witte, Kristof & Rogge, Nicky & Cherchye, Laurens & Van Puyenbroeck, Tom, 2013. "Economies of scope in research and teaching: A non-parametric investigation," Omega, Elsevier, vol. 41(2), pages 305-314.
  5. Cherchye, Laurens & De Rock, Bram & Hennebel, Veerle, 2014. "The economic meaning of Data Envelopment Analysis: A ‘behavioral’ perspective," Socio-Economic Planning Sciences, Elsevier, vol. 48(1), pages 29-37.

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