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Cost Improvements, Returns to Scale, and Cost Inefficiencies for Real Estate Investment Trusts

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Author Info
Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
Thomas M. Springer (Clemson University)

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Abstract

This paper extends the existing research on real estate investment trust (REIT) operating efficiencies. We estimate stochastic-frontier, panel-data models specifying a translog cost function. The specified model updates the cost frontier with new information as it becomes available over time. The model can identify frontier cost improvements, returns to scale, and cost inefficiencies over time. The results disagree with most previous research in that we find no evidence of scale economies and some evidence of scale diseconomies. Moreover, we also generally find smaller inefficiencies than those shown by other REIT studies. Contrary to previous research, higher leverage associates with more efficiency.

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File URL: http://www.econ.uconn.edu/working/2007-05.pdf
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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-05.

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Length: 36 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:uct:uconnp:2007-05

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Postal: University of Connecticut 341 Mansfield Road, Unit 1063 Storrs, CT 06269-1063
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Related research
Keywords: Real Estate Investment Trusts; X-efficiency; scale economies;

Find related papers by JEL classification:
G2 - Financial Economics - - Financial Institutions and Services
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

This paper has been announced in the following NEP Reports:

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  1. Brent W. Ambrose & Michael J. Highfield & Peter D. Linneman, 2005. "Real Estate and Economies of Scale: The Case of REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(2), pages 323-350, 06. [Downloadable!] (restricted)
  2. Stigler, George J, 1976. "The Xistence of X-Efficiency," American Economic Review, American Economic Association, vol. 66(1), pages 213-16, March.
  3. Martina Bers & Thomas M. Springer, 1997. "Economies of Scale for Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 14(3), pages 275-290. [Downloadable!]
  4. Forsund, Finn R. & Lovell, C. A. Knox & Schmidt, Peter, 1980. "A survey of frontier production functions and of their relationship to efficiency measurement," Journal of Econometrics, Elsevier, vol. 13(1), pages 5-25, May. [Downloadable!] (restricted)
  5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  6. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August. [Downloadable!] (restricted)
  7. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  8. Lawrence, Colin, 1989. "Banking Costs, Generalized Functional Forms, and Estimation of Economies of Scale and Scope," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(3), pages 368-79, August. [Downloadable!] (restricted)
  9. Bauer, Paul W., 1990. "Recent developments in the econometric estimation of frontiers," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 39-56. [Downloadable!] (restricted)
  10. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211. [Downloadable!] (restricted)
  11. Brent W. Ambrose & Michael J. Highfield & Peter Linneman, . "Economies Of Scale," Zell/Lurie Center Working Papers 358, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania. [Downloadable!] (restricted)
  12. Noulas, Athanasios G & Ray, Subhash C & Miller, Stephen M, 1990. "Returns to Scale and Input Substitution for Large U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 94-108, February. [Downloadable!] (restricted)
  13. Stephen M. Miller & Terrence M. Clauretie & Thomas M. Springer, 2006. "Economies Of Scale And Cost Efficiencies: A Panel-Data Stochastic-Frontier Analysis Of Real Estate Investment Trusts," Manchester School, University of Manchester, vol. 74(4), pages 483-499, 07. [Downloadable!] (restricted)
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  14. Berger, Allen N. & Humphrey, David B., 1991. "The dominance of inefficiencies over scale and product mix economies in banking," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 117-148, August. [Downloadable!] (restricted)
    Other versions:
  15. Brent W. Ambrose & Peter Linneman, 2001. "Reit Organizational Structure and Operating Characteristics," Journal of Real Estate Research, American Real Estate Society, vol. 21(3), pages 141-162. [Downloadable!]
  16. Capozza, Dennis R & Seguin, Paul J, 2000. "Debt, Agency, and Management Contracts in REITs: The External Advisor Puzzle," The Journal of Real Estate Finance and Economics, Springer, vol. 20(2), pages 91-116, March. [Downloadable!] (restricted)
  17. Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
  19. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200. [Downloadable!] (restricted)
    Other versions:
  20. Peter Schmidt, 1985. "Frontier production functions," Econometric Reviews, Taylor and Francis Journals, vol. 4(2), pages 289-328. [Downloadable!] (restricted)
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