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Nonparametric Measures of Scale Economies and Capacity Utilization: An Application to U.S. Manufacturing

  • Subhash C. Ray

    (University of Connecticut)

An economic measure of scale efficiency is the ratio of the minimum average cost to the average cost at the actual output level of a firm. It is easily measured by the ratio of the total cost of this output under the constant and variable returns to scale assumptions. This procedure does not identify the output level where the average cost reaches a minimum. This paper proposes a nonparametric method of measuring this output level using DEA. The relation between this efficient production scale, the short run physical capacity output, and the most productive scale size (MPSS) is also discussed. An empirical application using state level data from U.S. manufacturing is used to illustrate the procedure.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2013-09.

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Length: 26 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:uct:uconnp:2013-09
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  2. Léopold Simar & Paul W. Wilson, 1998. "Sensitivity Analysis of Efficiency Scores: How to Bootstrap in Nonparametric Frontier Models," Management Science, INFORMS, vol. 44(1), pages 49-61, January.
  3. Coelli, Tim & Grifell-Tatje, Emili & Perelman, Sergio, 2002. "Capacity Utilization and Profitability: A Decomposition of Short Run Profit Efficiency," Efficiency Series Papers 2002/01, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
  4. Rajiv Banker & Hsihui Chang & Ram Natarajan, 2007. "Estimating DEA technical and allocative inefficiency using aggregate cost or revenue data," Journal of Productivity Analysis, Springer, vol. 27(2), pages 115-121, April.
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  6. Segerson, Kathleen & Squires, Dale, 1990. "On the measurement of economic capacity utilization for multi-product industries," Journal of Econometrics, Elsevier, vol. 44(3), pages 347-361, June.
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  8. Dupont, Diane P. & Grafton, R. Quentin & Kirkley, James & Squires, Dale, 2002. "Capacity utilization measures and excess capacity in multi-product privatized fisheries," Resource and Energy Economics, Elsevier, vol. 24(3), pages 193-210, June.
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  10. Holland, D. S. & Lee, S. T., 2002. "Impacts of random noise and specification on estimates of capacity derived from data envelopment analysis," European Journal of Operational Research, Elsevier, vol. 137(1), pages 10-21, February.
  11. Fare, Rolf & Grosskopf, Shawna & Kirkley, Jim, 2000. "Multi-output Capacity Measures and Their Relevance for Productivity," Bulletin of Economic Research, Wiley Blackwell, vol. 52(2), pages 101-12, April.
  12. Sahoo, Biresh K. & Tone, Kaoru, 2009. "Decomposing capacity utilization in data envelopment analysis: An application to banks in India," European Journal of Operational Research, Elsevier, vol. 195(2), pages 575-594, June.
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  15. Subhash C. Ray & Kankana Mukherjee & Yanna Wu, 2005. "Direct and Indirect Measures of Capacity Utilization: A Nonparametric Analysis of U.S. Manufacturing," Working papers 2005-36, University of Connecticut, Department of Economics.
  16. Lindebo, Erik & Hoff, Ayoe & Vestergaard, Niels, 2007. "Revenue-based capacity utilisation measures and decomposition: The case of Danish North Sea trawlers," European Journal of Operational Research, Elsevier, vol. 180(1), pages 215-227, July.
  17. Kim, Seung-Chul & Horowitz, Ira & Young, Karl K. & Buckley, Thomas A., 1999. "Analysis of capacity management of the intensive care unit in a hospital," European Journal of Operational Research, Elsevier, vol. 115(1), pages 36-46, May.
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  19. Lawrence R. Klein & Virginia Long, 1973. "Capacity Utilization: Concept, Measurement, and Recent Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 743-764.
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