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Profits and Productivity

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  • C. A. Knox Lovell
  • E. Grifell-Tatjé

Abstract

In this study we consider the linkage between productivity change and profit change. We develop an analytical framework in which profit change between one period and the next is decomposed into three sources: (i) a productivity change effect (which includes a technical change effect and an operating efficiency effect), (ii) an activity effect (which includes a product mix effect, a resource mix effect and a scale effect), and (iii) a price effect. We then show how to quantify the contribution of each effect, using only observed prices and quantities of products and resources in the two periods. We illustrate our analytical decomposition of profit change with an empirical application to Spanish banking during the period 1987 - 1994.

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File URL: http://fic.wharton.upenn.edu/fic/papers/97/lovell.pdf
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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-18.

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Date of creation: Oct 1996
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Handle: RePEc:wop:pennin:97-18

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Keywords: Profits; Productivity;

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References

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  1. Gold, Bela, 1973. "Technology, productivity and economic analysis," Omega, Elsevier, vol. 1(1), pages 5-24, February.
  2. Eilon, S & Gold, Bela & Soesan, Judith, 1975. "A productivity study in a chemical plant," Omega, Elsevier, vol. 3(3), pages 329-343, June.
  3. Eldor, Dan & Sudit, Ephraim F, 1981. "Productivity-based financial net income analysis," Omega, Elsevier, vol. 9(6), pages 605-611.
  4. Garrigosa, E Genescá & Tatjé, E Grifell, 1992. "Profits and total factor productivity: A comparative analysis," Omega, Elsevier, vol. 20(5-6), pages 553-568.
  5. Diewert, W. E., 1973. "Functional forms for profit and transformation functions," Journal of Economic Theory, Elsevier, vol. 6(3), pages 284-316, June.
  6. 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.
  7. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
  8. A. Charnes & W. W. Cooper & E. Rhodes, 1981. "Evaluating Program and Managerial Efficiency: An Application of Data Envelopment Analysis to Program Follow Through," Management Science, INFORMS, vol. 27(6), pages 668-697, June.
  9. Forsund, F.R., 1990. "The Malmquist Productivity Index," Memorandum 28/1990, Oslo University, Department of Economics.
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