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

Author

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  • Cherchye, Laurens

    () (KU Leuven)

  • De Rock, Bram

    () (ECARES, Free University of Brussels)

  • Vermeulen, Frederic

    () (KU Leuven)

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.

Suggested Citation

  • Cherchye, Laurens & De Rock, Bram & Vermeulen, Frederic, 2006. "Analyzing Cost Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology," IZA Discussion Papers 2319, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2319
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    1. 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.
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    Cited by:

    1. repec:eee:jomega:v:75:y:2018:i:c:p:1-12 is not listed on IDEAS
    2. Stephanie McWhinnie & Kofi Otumawu-Apreku, 2013. "Evaluating Profit Efficiency of the South Australian Rock Lobster Fishery: Nerlovian and Directional Distance Function Approach," School of Economics Working Papers 2013-18, University of Adelaide, School of Economics.
    3. 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.
    4. Cherchye, Laurens & Rock, Bram De & Walheer, Barnabé, 2015. "Multi-output efficiency with good and bad outputs," European Journal of Operational Research, Elsevier, vol. 240(3), pages 872-881.
    5. Laurens Cherchye & Bram De Rock & Antonio Estache & Barnabé Walheer, 2013. "Reducing Energy Use without Affecting the Economic Objectives: a Sectoral Analysis," Working Papers ECARES ECARES 2013-11, ULB -- Universite Libre de Bruxelles.
    6. 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.
    7. Fabrice Talla Nobibon & Laurens Cherchye & Bram De Rock & Jeroen Sabbe & Frits Spieksma, 2011. "Heuristics for Deciding Collectively Rational Consumption Behavior," Computational Economics, Springer;Society for Computational Economics, vol. 38(2), pages 173-204, August.
    8. 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.
    9. Blancard, Stéphane & Boussemart, Jean-Philippe & Chavas, Jean-Paul & Leleu, Hervé, 2016. "Potential gains from specialization and diversification further to the reorganization of activities," Omega, Elsevier, vol. 63(C), pages 60-68.
    10. Laurens Cherchye & Bram De Rock & Barnabé Walheer, 2013. "Efficiency Analysis in the Presence of Bad Outputs," Working Papers ECARES ECARES 2013-12, ULB -- Universite Libre de Bruxelles.
    11. Cherchye, Laurens & De Rock, Bram & Walheer, Barnabé, 2016. "Multi-output profit efficiency and directional distance functions," Omega, Elsevier, vol. 61(C), pages 100-109.
    12. 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.
    13. Laurens Cherchye & Bram De Rock & Antonio Estache & Marijn Verschelde, 2015. "Efficiency Measures in Regulated Industries: History, Outstanding Challenges and Emerging Solutions," Working Papers ECARES ECARES 2015-09, ULB -- Universite Libre de Bruxelles.
    14. Stephanie McWhinnie & Kofi Otumawu-Apreku, 2013. "Profit Efficiency of the South Australian Rock Lobster Fishery: Nerlovian and Directional Distance Function Approach," School of Economics Working Papers 2013-13, University of Adelaide, School of Economics.

    More about this item

    Keywords

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

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • P32 - Economic Systems - - Socialist Institutions and Their Transitions - - - Collectives; Communes; Agricultural Institutions
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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