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Analyzing cost efficient production behavior under economies of scope: a nonparametric methodology

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  • Bram De Rock
  • Laurens Cherchye
  • Frederic Vermeulen

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 ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/7536.

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Date of creation: 2008
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Publication status: Published in: Operations Research (2008) v.56 n° 1,p.204-221
Handle: RePEc:ulb:ulbeco:2013/7536

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References

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  1. Niels Christian Petersen, 1990. "Data Envelopment Analysis on a Relaxed Set of Assumptions," Management Science, INFORMS, vol. 36(3), pages 305-314, March.
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  4. Laurens Cherchye & Piet Vanden Abeele, 2002. "On Research Efficiency: A Micro-Analysis of Dutch University Research in Economics and Business Management," Public Economics Working Paper Series ces0206, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  5. Banker, Rajiv D & Maindiratta, Ajay, 1988. "Nonparametric Analysis of Technical and Allocative Efficiencies in Production," Econometrica, Econometric Society, vol. 56(6), pages 1315-32, November.
  6. SIMAR, Léopold & WILSON, Paul, 1995. "Sensitivity Analysis to Efficiency Scores : How to Bootstrap in Nonparametric Frontier Models," CORE Discussion Papers 1995043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Timo Kuosmanen & Laurens Cherchye & Timo Sipiläinen, 2003. "The Law of One Price in Data Envelopment Analysis: Restricting Weight Flexibility Across Firms," Microeconomics 0312006, EconWPA, revised 18 Dec 2003.
  8. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, November.
  9. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
  10. Peter Bogetoft, 1996. "DEA on Relaxed Convexity Assumptions," Management Science, INFORMS, vol. 42(3), pages 457-465, March.
  11. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2007. "The Collective Model of Household Consumption: A Nonparametric Characterization," Econometrica, Econometric Society, vol. 75(2), pages 553-574, 03.
  12. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
  13. 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.
  14. 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.
  15. Kim, Kwansoo & Barham, Bradford L. & Chavas, Jean-Paul & Foltz, Jeremy, 2005. "Research and Development at U.S. Research Universities: An Analysis of Scope Economies," Staff Paper Series 487, University of Wisconsin, Agricultural and Applied Economics.
  16. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-97, May.
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Citations

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Cited by:
  1. Cherchye, Laurens & De Rock, Bram & Vermeulen, Frederic, 2010. "An Afriat Theorem for the collective model of household consumption," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1142-1163, May.
  2. 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.
  3. 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.
  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. 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.

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