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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. 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, Elsevier, vol. 170(3), pages 735-757, May.
  2. Niels Christian Petersen, 1990. "Data Envelopment Analysis on a Relaxed Set of Assumptions," Management Science, INFORMS, INFORMS, vol. 36(3), pages 305-314, March.
  3. Léopold Simar & Paul W. Wilson, 1998. "Sensitivity Analysis of Efficiency Scores: How to Bootstrap in Nonparametric Frontier Models," Management Science, INFORMS, INFORMS, vol. 44(1), pages 49-61, January.
  4. Cazals, Catherine & Florens, Jean-Pierre & Simar, Leopold, 2002. "Nonparametric frontier estimation: a robust approach," Journal of Econometrics, Elsevier, Elsevier, vol. 106(1), pages 1-25, January.
  5. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 579-97, May.
  6. 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.
  7. 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, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19147, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  8. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
  9. Peter Bogetoft, 1996. "DEA on Relaxed Convexity Assumptions," Management Science, INFORMS, INFORMS, vol. 42(3), pages 457-465, March.
  10. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, Elsevier, vol. 46(1-2), pages 125-140.
  11. Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2007. "The Collective Model of Household Consumption: A nonparametric characterization," ULB Institutional Repository 2013/98559, ULB -- Universite Libre de Bruxelles.
  12. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521497695.
  13. Cherchye, L. & Abeele, P. Vanden, 2005. "On research efficiency: A micro-analysis of Dutch university research in Economics and Business Management," Research Policy, Elsevier, Elsevier, vol. 34(4), pages 495-516, May.
  14. Adonis Yatchew, 1998. "Nonparametric Regression Techniques in Economics," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 36(2), pages 669-721, June.
  15. 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.
  16. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, Elsevier, vol. 2(6), pages 429-444, November.
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Cited by:
  1. De Witte, Kristof & Rogge, Nicky & Cherchye, Laurens & Van Puyenbroeck, Tom, 2012. "Economies of scope in research and teaching: a non-parametric investigation," Working Papers, Hogeschool-Universiteit Brussel, Faculteit Economie en Management 2012/14, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
  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, 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. Fabrice Talla Nobibon & Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frits C.R. Spieksma, 2008. "Heuristics for deciding collectively rational consumption behavior," Center for Economic Studies - Discussion papers, Katholieke Universiteit Leuven, Centrum voor Economische Studiën ces0824, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  5. Laurens Cherchye & Bram De Rock, 2013. "The Economic Meaning of Data Envelopment Analysis: a "Behavioral" Perspective," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2013/137577, ULB -- Universite Libre de Bruxelles.

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