New Economics Papers
on Efficiency and Productivity
Issue of 2007‒04‒09
twenty-two papers chosen by

  1. The Effect of Scale on Productivity of Turkish Banks in the Post-Crises Period: An Application of Data Envelopment Analysis By Chambers, Nurgul; Cifter, Atilla
  2. Labor productivity in Europe: Evidence from a sample of regions By Lionel Artige; Rosella Nicolini
  3. The Shadow of Death: Pre-exit Performance of Firms in Japan By Kozo Kiyota; Miho Takizawa
  4. Do Employment Protections Reduce Productivity? Evidence from U.S. States By William Kerr; Adriana Kugler; David Autor
  5. The Role of Production Organization, Infrastructure, and R&D in the Catching-up Process of Japanese to German Industries By Conrad, Klaus; Wastl, Dieter
  6. The Importance of Reallocations in Cyclical Productivity and Returns to Scale: Evidence from Plant-Level Data By Yoonsoo Lee
  7. Male-Female Wage and Productivity Differentials: A Structural Approach Using Japanese Firm-level Panel Data By ASANO Hirokatsu; KAWAGUCHI Daiji
  8. Cost and Technical Efficiency of German Hospitals – A Stochastic Frontier Analysis By Annika Frohloff
  9. Estimating the Distribution of Plant-Level Manufacturing Energy Efficiency with Stochastic Frontier Regression By Gale Boyd
  10. On the use of data envelopment analysis in hedge fund performance appraisal By NGUYEN-THI-THANH Huyen
  11. Do Stock Opiton Schemes Affect Technical Inefficiency? Evidence from Finland By Mikko Mäkinen
  12. Explaining the gaps in labour productivity in some developed countries By Weshah Razzak
  13. Geographic concentration and firm productivity By David C. Maré; Jason Timmins
  14. Measuring U.S. Innovative Activity By B.K. Atrostic
  15. International Differences in Lean Production, Productivity and Employee Attitudes By Susan Helper; Morris M. Kleiner
  16. Public Sector Efficiency: The Roles of Political and Budgetary Institutions, Fiscal Capacity and Democratic Participation By Lars-Erik Borge; Torberg Falch; Per Tovmo
  17. How Efficient is Public Spending in Education? By Santiago Herrera; Gaobo Pang
  18. CEO Compensation, Firm Size and Firm Performance: Evidence from Finnish Panel Data By Mikko Mäkinen
  19. Assessing the performance of the public sector By Pierre Pestieau
  20. The Relationship between Corporate Governance Indicators and Firm Value: A Case Study of Karachi Stock Exchange By Attiya Y. Javed; Robina Iqbal
  21. On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents. By Andres Erosa; Ana Hidalgo
  22. Policy Distortions and Aggregate Productivity with Heterogeneous Plants By Diego Restuccia; Richard Rogerson

  1. By: Chambers, Nurgul; Cifter, Atilla
    Abstract: The purpose of this paper is to investigate the productivity of Turkish Banks according to the effect of scale in the Post-Crises Period. The data used in this study covers the period from 2002:1 to 2004:3. We applied Data Envelopment Analysis (DEA), which is a non-parametric linear programming-based technique for measuring relative performance of decision-making units (DMUs). We calculated DEA as constant & variable return-to-scale based on output oriented Malmquist Index. Although the scale effect can be measured with DEA scale efficiency measurement, we used scale indicators as input variables in order to find out not only scale efficiency but also scale affect directly. We applied DEA by using financial ratios (Athanassopoulos and Ballantine, 1995; Yeh, 1996) and branch & personel number indicators. This study uses five input variables as i) branch numbers, ii) personnel number per branch, iii) share in total assets, iv) share in total loans, v) share in total deposits; and five output variables as i) net profit-losses/total assets (ROA), ii) net profit-losses/total shareholders equity (ROE), iii) net interest income/total assets, iv) net interest income/ total operating income, and v) noninterest income/total assets. We find that difference in efficiency is mainly from technical efficiency rather than scale efficiency in the post-crises period. The other finding reveals that efficiency approximate between selected banks and supporting that advantage of scale economies can be lost in Turkish banking. Overall, the results confirm that Turkish banking has U shaped Scale Efficiency on selected profitability ratios. The application of this paper based on other financial ratios with decreasing and increasing return-to-scale DEA is left to future research.
    Keywords: Turkish Banks; Return to Scale; Scale Efficiency; Profit Efficiency; Data Envelopment Analysis
    JEL: G21 C23 G2
    Date: 2006–05–01
  2. By: Lionel Artige; Rosella Nicolini
    Abstract: The present paper aims at analyzing the sources of labor productivity in Europe at regional level. We study the productivity performance in a sample of twenty European regions belonging to four countries (France, Germany, Italy and Spain). Exploiting the increasing availability of disaggregated data at regional level, we propose both a descriptive statistics and an econometric analysis of productivity sources since 1995. Our main finding is that the levels and sources of labor productivity are rather heterogeneous across the sample. This heterogeneity is found to be associated with disparities both across sectors and regions.
    Keywords: Labor productivity, productivity determinants, European regions.
    JEL: J24 O11 O18 O52
    Date: 2006
  3. By: Kozo Kiyota; Miho Takizawa
    Abstract: This paper examines the pre-exit productivity performance and asks how productivity affects future survival, using firm-level data in Japan for 1995-2002. We found that firms did not face "sudden death" but there was a "shadow of death." Future exiting firms had lower performance four years before their exit. Besides, within a hair 's breadth of death, the unobserved heterogeneity of firm such as management effort played an important role in the firm survival.
    Keywords: Pre-exit performance, Productivity, Size, Unobserved heterogeneity, Firm survival
    JEL: D21 D24 L25
    Date: 2007–01
  4. By: William Kerr; Adriana Kugler; David Autor
    Abstract: Theory predicts that mandated employment protections may reduce productivity by distorting production choices. Firms facing (non-Coasean) worker dismissal costs will curtail hiring below efficient levels and retain unproductive workers, both of which should affect productivity. These theoretical predictions have rarely been tested. We use the adoption of wrongful discharge protections by U.S. state courts over the last three decades to evaluate the link between dismissal costs and productivity. Drawing on establishment-level data from the Annual Survey of Manufacturers and the Longitudinal Business Database, our estimates suggest that wrongful discharge protections reduce employment flows and firm entry rates. Moreover, analysis of plant-level data provides evidence of capital deepening and a decline in total factor productivity following the introduction of wrongful discharge protections. This last result is potentially quite important, suggesting that mandated employment protections reduce productive efficiency as theory would suggest. However, our analysis also presents some puzzles including, most significantly, evidence of strong employment growth following adoption of dismissal protections. In light of these puzzles, we read our findings as suggestive but tentative.
    Keywords: Dismissal Costs, Employment Fluctuations, Entry and Exit, Labor Productivity, TFP, Entrepreneurship
    JEL: J11 J21 J31 J61
    Date: 2007–03
  5. By: Conrad, Klaus; Wastl, Dieter (Institut für Volkswirtschaft und Statistik (IVS))
    Abstract: This paper presents an empirical study of productivity comparison between Japan and Germany with focus on the R&D and infrastructure. By using time-series datasets from auto vehicle industry and electronic engineering industry, the study shows the reversal of productivity advantage from Germany to Japan around 1980. We argue that Japanese productivity gains from better infrastructure and cost-reducing innovations such as lean production methods . An econometric model determines the causes for the observed differences in the quantities of inputs used. It shows that frequent external procurement among Japanese manufactures has shifted the factor inputs from labor and capital to material, a result which is in line with the philosophy of lean production.
    JEL: D24 C51 L2 L6 O57
  6. By: Yoonsoo Lee
    Abstract: This paper provides new evidence that estimates based on aggregate data will understate the true procyclicality of total factor productivity. I examine plant-level data and show that some industries experience countercyclical reallocations of output shares among firms at different points in the business cycle, so that during recessions, less productive firms produce less of the total output, but during expansions they produce more. These reallocations cause overall productivity to rise during recessions, and do not reflect the actual path of productivity of a representative firm over the course of the business cycle. Such an effect (sometimes called the cleansing effect of recessions) may also bias aggregate estimates of returns to scale and help explain why decreasing returns to scale are found at the industry-level data.
    Keywords: Entry, Exit, Productivity, Returns to Scale
    JEL: D24 E32 O47
    Date: 2007–03
  7. By: ASANO Hirokatsu; KAWAGUCHI Daiji
    Abstract: In an attempt to explain the male-female wage differential, we estimated the relative marginal productivity and relative wage of female workers compared to those of male workers, using panel data from Japanese firms. The estimation results indicate that firms hiring 10 percentage points more women produce 0.8 percent more given the total wage bill and other inputs. Crosssectional estimates that neglect firm fixed effects indicate that female workers' marginal productivity is 45 percent of male workers', while female wage is 30 percent of male wage. These estimates indicate that part of the wage differential cannot be explained by the productivity differential. The estimation that allows for the correlated productivity/demand shocks suggests the robustness of the results. The IV estimator that allows for firm-level fixed effects seems to suffer from the bias due to the positive correlation between productivity/demand shocks and female employee proportion. Evidence found in this study is consistent with the existence of employer sex discrimination.
    Date: 2007–03
  8. By: Annika Frohloff
    Abstract: Using a newly available and multifaceted dataset provided by the German Federal Statistical Office, this paper is the first to investigate both technical and cost efficiency of more than 1500 German general hospitals conducting a stochastic frontier analysis. The empirical results for the years from 2000 to 2003 indicate that private and non-profit hospitals are on average less cost and technical efficient than publicly owned hospitals. One explanation for this result may be that German private and non-profit hospitals produce at a longer average length of stay and, thereby, a higher cost per case than public institutions due to the incentives provided by reimbursement schemes until 2004. Furthermore, the paper reveals that non-subsidised hospitals are less efficient than their respective counterparts. Controlling for patients’ characteristics (in addition to the constructed case-mix weights), it can be shown that a high ratio of old patients decreases efficiency whereas a high ratio of female patients and a high surgery rate increase it.
    Keywords: Hospital efficiency, ownership, privatisation
    JEL: C13 I11 L33
    Date: 2007–03
  9. By: Gale Boyd
    Abstract: A feature commonly used to distinguish between parametric/statistical models and engineering models is that engineering models explicitly represent best practice technologies while the parametric/statistical models are typically based on average practice. Measures of energy intensity based on average practice are less useful in the corporate management of energy or for public policy goal setting. In the context of company or plant level energy management, it is more useful to have a measure of energy intensity capable of representing where a company or plant lies within a distribution of performance. In other words, is the performance close (or far) from the industry best practice? This paper presents a parametric/statistical approach that can be used to measure best practice, thereby providing a measure of the difference, or “efficiency gap” at a plant, company or overall industry level. The approach requires plant level data and applies a stochastic frontier regression analysis to energy use. Stochastic frontier regression analysis separates the energy intensity into three components, systematic effects, inefficiency, and statistical (random) error. The stochastic frontier can be viewed as a sub-vector input distance function. One advantage of this approach is that physical product mix can be included in the distance function, avoiding the problem of aggregating output to define a single energy/output ratio to measure energy intensity. The paper outlines the methods and gives an example of the analysis conducted for a non-public micro-dataset of wet corn refining plants.
    Date: 2007–03
  10. By: NGUYEN-THI-THANH Huyen (Laboratoire d'Economie d'Orléans, Université d'Orléans)
    Abstract: Previous studies have documented that Data Envelopment Analysis (DEA) could be a good tool to evaluate fund performance, especially the performance of hedge funds as it can incorporate multiple risk-return attributes characterizing hedge fund's non normal return distribution in an unique performance score. The main purpose of this paper is to enlarge the use of DEA to the context of hedge fund selection when investors face up multiple objectives, each one associated to a different important level. We show that DEA can be a powerful decision-making supplement to assist investors in selecting funds that correspond the most to their risk-aversion, financial, diversification and investment horizon constraints
    JEL: G2 G11 G15
    Date: 2007–02–02
  11. By: Mikko Mäkinen
    Abstract: In this paper we study whether stock option schemes affect firm technical inefficiency. We estimate Cobb-Douglas stochastic production frontier models using a novel panel data set on the publicly listed Finnish firms in the manufacturing and ICT sectors over the period from 1992 to 2002. We find evidence that the mean inefficiency estimates in the ICT sector are clearly higher than in the manufacturing sector. Furthermore, our empirical findings suggest that broad-based option firms may have higher mean inefficiency than selective and non-option firms in the manufacturing sector. The quantitative assessments of the marginal effects on the inefficiency support the view that especially broad-based schemes affect the mean and the variance of the inefficiency term uit in the manufacturing sector, but not in the ICT sector. Our findings do not provide empirical support for the view that stock option schemes reduce firm technical inefficiency
    Keywords: stochastic frontier, technical inefficiency, production function, stock options
    Date: 2007–04–02
  12. By: Weshah Razzak (Department of Labour - New Zealand)
    Abstract: Modern economic theories explain differences in productivity and economic growth by differences in political and economic institutions, and differences in culture, geographical location, policies, and laws. Another new strand of the literature explains productivity and economic growth differentials by gaps in general purpose technology and information and communication technology, while another literature cites real exchange rate depreciations as the main explanatory variable. These gaps might explain differences in economic performances between developed and developing countries, but they are too small to explain differences between developed industrial economies such as New Zealand and Australia or Canada and the United States. In this paper, more than eighty percent of labour productivity gaps between New Zealand and Australia and Canada and the United States are explained by endogenous technology shocks (TFP) and capital intensities.
    Keywords: Productivity, nontradable prices, real exchange rate
    JEL: O57 C13 C32
    Date: 2007–02–02
  13. By: David C. Maré (Motu Economic and Public Policy Research); Jason Timmins (New Zealand Department of Labour)
    Abstract: Firms operating in dense labour markets are more productive, although understanding the mechanisms behind this relationship is both challenging and contentious. This paper uses a newly assembled dataset on location and labour productivity of most New Zealand firms to examine the role of location patterns at the industry, local labour market, and industry*location levels. We derive estimates in the presence of firm, location, and period fixed effects, paying particular attention to controlling for unobserved local and industry factors. Our findings confirm that labour productivity is higher for firms in geographically-concentrated industries ("localisation"), for firms in more industrially-diversified labour markets ("urbanisation"), and for firms operating in larger labour markets. Controlling for heterogeneity of industries, locations, and firms, we find some support for a positive productivity effect of changes in both localisation and urbanisation, although not all estimated effects are statistically and economically significant.
    Keywords: Labour Productivity, Geographic concentration; agglomeration
    JEL: R12 R3
    Date: 2006–10
  14. By: B.K. Atrostic
    Abstract: Innovation has long been credited as a leading source of economic strength and vitality in the United States because it leads to new goods and services and increases productivity, leading to better living standards. Better measures of innovative activities–activities including but not limited to innovation alone–could improve what we know about the sources of productivity and economic growth. The U.S. Census Bureau either currently collects, or has collected, data on some measures of innovative activities, such as the diffusion of innovations and technologies, human and organizational capital, entrepreneurship and other worker and firm characteristics, and the entry and exit of businesses, that research shows affect productivity and other measures of economic performance. But developing an understanding of how those effects work requires more than just measures of innovative activity. It also requires solid statistical information about core measures of the economy: that is, comprehensive coverage of all industries, including improved measures of output and sales and additional information on inputs and purchased materials at the micro (enterprise) level for the same economic unit over time (so the effects can be measured). Filling gaps in core data would allow us to rule out the possibility that a measure of innovative activity merely proxies for something that is omitted from or measured poorly in the core data, provide more information about innovative activities, and strengthen our ability to evaluate the performance of the entire economy. These gaps can be filled by better integrating existing data and by more structured collections of new data.
    Keywords: innovation, productivity, economic measurement
    Date: 2007–03
  15. By: Susan Helper; Morris M. Kleiner
    Abstract: The study examines US-European productivity and worker attitude differences, focusing on changes in incentive structures. We analyze productivity and worker attitudes in five plants in the UK and US belonging to the same multinational producer of automotive sensors and actuators. We examine the firm's efforts to make complementary changes in product strategy and human-resource policies. In particular, we look at the impact of a Value-Added Gainsharing plan (VAG) that was introduced at different times among the four plants. Our analysis draws on multiple plant visits, surveys of almost all of the workforce, and confidential financial data. Our study offers a rare look inside a low-wage, non-union firm. We find that the VAG had an impact on productivity and profitability. We find that the UK plant's productivity and worker satisfaction was well below that of the US plants. However, neither our analysis nor interviews with managers suggest that differences in national institutions play a key role in explaining these results.
    JEL: D21 D24 J31 J33 J53 J81 L11 L2 L23 L25 L6
    Date: 2007–04
  16. By: Lars-Erik Borge (Department of Economics, Norwegian University of Science and Technology); Torberg Falch (Department of Economics, Norwegian University of Science and Technology); Per Tovmo (Department of Economics, Norwegian University of Science and Technology)
    Abstract: The purpose of this paper is to investigate whether efficiency in public service provision is affected by political and budgetary institutions, fiscal capacity, and democratic participation. In order to address this issue we take advantage of a new global efficiency measure for Norwegian local governments. There is strong evidence that high fiscal capacity and a high degree of party fragmentation contributes to low efficiency. In addition we find that increased democratic participation tends to increase efficiency, while a centralized top down budgetary process is associated with low efficiency.
    Keywords: Public sector efficiency; Political and budgetary institutions; Fiscal capacity; Democratic Participation
    JEL: H72 H75
    Date: 2007–05–01
  17. By: Santiago Herrera; Gaobo Pang
    Abstract: Governments of developing countries typically spend between15 and 30 percent of GDP. Hence, small changes in the efficiency of public spending could have a major impact on GDP and on the attainment of the government’s objectives. The first challenge that stakeholders face is measuring efficiency. This paper attempts such quantification and has two major parts. The first one estimates efficiency as the distance between observed input-output combinations and an efficiency frontier (defined as the maximum attainable out put for a given level of inputs). This frontier is estimated for several health and education output indicators by means of the Free Disposable Hull (FDH) and Data Envelopment Analysis (DEA) techniques. Both input-inefficiency (excess input consumption to achieve a level of output) and output-inefficiency (output shortfall for a given level of inputs) are scored in a sample of 140 countries using data from 1975 to 2002. The second part of the paper seeks to verify empirical regularities of the cross-country variation in efficiency. Results show that countries with higher expenditure levels register lower efficiency scores, as well as countries where the wage bill is a larger share of the government’s budget. Similarly, countries with higher ratios of public to private financing of the service provision score lower efficiency, as do countries plagued by the HIV/AIDS epidemic and those with higher income inequality. Countries with higher aid-dependency ratios also tend to score lower in efficiency, probably due to the volatility of this type of funding that impedes medium term planning and budgeting. Though no causality may be inferred from this exercise, it points at different factors to understand why some countries might need more resources than others to achieve similar educational and health outcomes.
    Date: 2006–07–01
  18. By: Mikko Mäkinen
    Abstract: This paper examines how CEO pay is related to firm size and to firm performance in Finland by using new individual-level compensation data in 1996-2002. We find robust evidence that CEO average compensation has increased substantially between 1996 and 2002. For example, the ratio between CEO and industrial worker mean total compensation was 7 in 1996, peaked at 24 in 2000, and thereafter dropped to 13 in 2002. We argue that the change in CEO compensation, and especially in total compensation, is highly related to changes in stock market measures of firm performance. Our shareholder wealth measure suggests that the salary and bonus change in CEO wealth is €6.84 per €1,000 change in shareholder wealth. Respectively, the total compensation change is €21.85 per €1,000 change in shareholder wealth. We find no evidence on the contemporaneous link between a change in CEO compensation and change in ROA% (Return on Assets). However, one-year lagged accounting and stock market based firm performance measures are associated with the change in CEO total compensation. In line with previous studies, our findings suggest that pay-for-firm size elasticity is close to 0.3. We also find interesting corporate governance findings. First, the share of foreign ownership is positively and statistically significantly associated with the level of compensation. Also, foreign ownership parameter estimates are about three times larger for total compensation than for salary and bonuses in most specifications. Second, ownership concentration, as measured by the voting share of a largest shareholder, is negatively related to the level of compensation, but only in the pooled model. Third, the size of the board is positively related to the level of compensation, especially to the level of base salary and bonus.
    Keywords: CEO compensation, pay for performance, stock options, firm size
    JEL: J33 M52 L25
    Date: 2007–04–02
  19. By: Pierre Pestieau
    Abstract: Amazingly, one is used to hearing harsh statements about inefficient public services. Nor is it surprising to see public sector performance questioned. What is surprising is that what is meant by performance, and how it is measured, does not seem to matter to either the critics or the advocates of the public sector. The purpose of this paper is to suggest a definition, and a way to measure the performance of the public sector or rather of its main components. Our approach is explicitly rooted in the principles of welfare and production economics. We will proceed in four stages. First of all we present what we call the "performance approach" to the public sector. This concept rests on the principal-agent relation that links a principal, i.e., the State, and an agent, i.e., the person in charge of the public sector unit, and on the definition of performance as the extent to which the agent fulfils the objectives assigned by the principal. The performance is then measured by using the notion of productive efficiency and the "best practice" frontier technique. In the second stage we move to the issue of measuring the performance of some canonical components of the public sector (education, health care and railways transport), assuming that there is no constraint as to data availability. The idea is to disentangle the usual confusion between conceptual and data problems. In the third stage, we move to real world data problems. The question is then that given the available data, does it make sense to assess and measure the performance of such public sector activities. The final stage is to explain performance or rather lack thereof and to look at the contribution of such an exercise for public policy. Finally we argue that when the scope is not components but the entirety of the public sector, one should restrict the performance analysis to the outputs and not relate it to inputs.
    Date: 2007
  20. By: Attiya Y. Javed (Pakistan Institute of Development Economics, Islamabad); Robina Iqbal (Quaid-i-Azam University, Islamabad)
    Abstract: We investigated whether differences in quality of firm-level corporate governance can explain the firm-level performance in a cross-section of companies listed at Karachi Stock Exchange. Therefore, we analysed the relationship between firm-level value as measured by Tobin’s Q and total Corporate Governance Index (CGI) and three sub-indices: Board, Shareholdings and Ownership, and Disclosures and Transparency for a sample of 50 firms. The results indicate that corporate governance does matter in Pakistan. However, not all elements of governance are important. The board composition and ownership and shareholdings enhance firm performance, whereas disclosure and transparency has no significant effect on firm performance. We point out that those adequate firm-level governance standards can not replace the solidity of the firm. The low production and bad management practices
    Keywords: Corporate Governance, Firm Performance, Tobin’s Q, Agency Problem, Board Size, Shareholdings, Disclosures, Leverage, Code of Corporate Governance
    JEL: G12 G34 G38
    Date: 2007
  21. By: Andres Erosa; Ana Hidalgo
    Abstract: We develop a theory of capital-market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, low development of financial markets, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications of our theory are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.
    Keywords: Macroeconmics, Capital Market Imperfections, Total-factor Productivity, Relative Prices, Sectorial Allocation, Limited Enforcement
    JEL: E2 E5 O16
    Date: 2007–04–03
  22. By: Diego Restuccia; Richard Rogerson
    Abstract: We formulate a version of the growth model in which production is carried out by heterogeneous plants and calibrate it to US data. In the context of this model we argue that differences in the allocation of resources across heterogeneous plants may be an important factor in accounting for cross-country differences in output per capita. In particular, we show that policies which create heterogeneity in the prices faced by individual producers can lead to sizeable decreases in output and measured TFP in the range of 30 to 50 percent. We show that these effects can result from policies that do not rely on aggregate capital accumulation or aggregate relative price differences. More generally, the model can be used to generate differences in capital accumulation, relative prices, and measured TFP.
    Keywords: Plant heterogeneity, productivity, policy
    JEL: O1
    Date: 2007–03–29

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