New Economics Papers
on Efficiency and Productivity
Issue of 2007‒08‒08
sixteen papers chosen by

  1. Are African Electricity Distribution Companies Efficient? Evidence from the Southern African Countries By Antonio Estache; Beatriz Tovar; Lourdes Trujillo
  2. A Comparison of the Efficiency in Manufacturing in the Centre and Periphery of Europe By Aykut Lenger
  3. Excellence for productivity? By Bert Minne; Marieke Rensman; Björn Vroomen; Dinand Webbink
  4. Finance and growth - a macroeconomic assessment of the evidence from a European angle By Elias Papaioannou
  5. Business services and the changing structure of European economic growth By Henk Kox; Luis Rubalcaba
  6. Spatial Stochastic Frontier Models: accounting for unobserved local determinants of inefficiency By Alexandra M. Schmidt; Ajax R. B. Moreira; Thais C. O. Fonseca; Steven M. Helfand
  7. The Impact of Teams on Output, Quality and Downtime: An Empirical Analysis Using Individual Panel Data By Derek C. Jones; Takao Kato
  8. Panel data estimates of the production function and product and labor market imperfections By Sabien Dobbelaere; Jacques Mairesse
  9. Efficiency Analysis of General Hospitals in Turkey And Welfare Losses Due to Congestion And Slacks By Ensar Yesilyurt; Filiz Yesilyurt
  10. Productivity and Firm Selection: Intra- vs International Trade By Gregory Corcos; Massimo Del Gatto; Giordano Mion; Gianmarco I.P. Ottaviano
  11. International research and development spillovers through foreign direct investment and productivity growth. By Philip Bodman; Thanh Le
  12. Evaluating hedge fund performance: a stochastic dominance approach By Sheng Li; Oliver Linton
  13. Inflation, Investment Composition and Total Factor Productivity By Stefan Niemann; Michael Evers; Marc Schiffbauer
  14. Environmental Policy, Innovation and Performance : New Insights on the Porter Hypothesis By Paul Lanoie; Jérémy Laurent-Lucchetti; Nick Johnstone; Stefan Ambec
  15. Credit Ratings, Economic Performance and Transition to Default: Evidence on Firm Selection at Work By Giulio Bottazzi; Marco Grazzi; Angelo Secchi; Federico Tamagni
  16. Country Size, Trade, and Productivity: An Analysis of Heterogenous Firms and Differential Beachhead Costs By Akerman, Anders; Forslid, Rikard

  1. By: Antonio Estache; Beatriz Tovar; Lourdes Trujillo (Department of Economics, City University, London and DAEA, Universidad de Las Palmas de Gran Canaria)
    Abstract: This paper is a first attempt at documenting economic efficiency levels in Africa’s electricity distribution, their evolution and the sources of this evolution. The analysis is based on a sample of 12 operators providing services in the 12 countries members of the Southern Africa Power Pool. We focus on the changes in total factor productivity (TFP) of the largest operators in each country between 1998 and 2005. We then rely on a DEA decomposition to identify the sources of the changes in TFP. The results suggest fairly comparable levels of efficiency in the region and performance levels and evolution quite independent of the degree of vertical integration, the presence of a private actor or the main sources of energy supply. The analysis suggest that although the companies have not made significant improvements during the period of analysis in using their capital and human assets, they have done much better in adopting better technologies and better commercial practices. No clear correlation could be associated with the adoption of reforms during the last decade and data limitations impede a more refined assessment of the impact of reforms on efficiency at this stage.
    Keywords: Malmquist productivity, electricity, efficiency
    Date: 2007–06
  2. By: Aykut Lenger (Department of Economics, Ege University)
    Abstract: The objective of this paper is to estimate efficiency in manufacturing activities in some selected countries in Europe and to provide an answer to the question of whether or not contiguity to an efficient country contributes to the efficiency levels of manufacturing industries. The Stochastic Frontier Analysis (SFA) is conducted for a limited sample of countries in the periphery and centre of Europe for this purpose. Our estimates show that the more efficient manufacturing industries in our sample are generally in centre countries. Peripheral countries have also increased their efficiency levels some of which were quite low in the beginning of the period. The spatial correlation analysis provided a weak evidence for the spatial dependence of efficiencies, thus a weak base for the argument such that countries were affected by the more efficient manufacturing activity around them. A wider sample of countries may provide stronger evidence, though.
    Keywords: Efficiency, manufacturing industry, spatial spillovers
    JEL: O14 L60
    Date: 2007–07
  3. By: Bert Minne; Marieke Rensman; Björn Vroomen; Dinand Webbink
    Abstract: This report surveys the recent literature on human capital and productivity. Recent studies suggest that the right-hand side of the skill distribution is important for productivity, especially in countries that already have a high level of productivity. An empirical analysis of the Dutch skill distribution reveals that the Netherlands is not positioned among the best-performing countries at the right-hand side of the distribution. On average, the Dutch skill level is high, but this level is mainly based on the relatively high skill level at the left-hand side of the skill distribution. The Dutch position declines when moving to the right-hand side. At the very highest skill level, the Netherlands is not among the best of the world. This is true for both secondary education and higher education. The Dutch share of graduates from higher education is also not among the highest in the OECD. The findings on the skill distribution are robust for several skill surveys, age groups and over time. This robustness may be the result of the structure of the Dutch educational system. The findings indicate that there is scope for improvement of skills at the right-hand side of the distribution. Therefore, policies that raise the Dutch performance at high- and top skill levels in higher education or in earlier stages of education may improve Dutch productivity. Further research is needed to assess these policies.
    Keywords: skill levels; education; knowledge economy; productivity
    JEL: J24 I28
    Date: 2006–06
  4. By: Elias Papaioannou (Dartmouth College, Economics Department, Hanover, NH 03755, USA.)
    Abstract: This paper reviews the literature on the finance-growth nexus within a neoclassical growth framework, placing an emphasis on the policy implications in the current European environment, that has placed financial reforms high on the policy Agenda. While more research is needed to establish causality and verify the theoretical channels linking access to finance and growth, firm-level, industry-level, macro, and country-specific studies all tend to show a significant correlation between financial efficiency and economic performance. The empirical evidence hint that in underdeveloped and emerging countries financial development fosters aggregate growth mainly by lowering the cost of capital, while in advanced economies by raising total-factor-productivity. JEL Classification: G00, O00.
    Keywords: Finance, Financial Institutions, Development, Growth Decomposition, Financial Intermediation, Europe, Productivity.
    Date: 2007–07
  5. By: Henk Kox; Luis Rubalcaba
    Abstract: A pervasive trend that characterised the past two decades of European economic growth is that the share in the economy of commercial services, and particularly business services, grows monotonically, and this mainly to the expensive of the manufacturing sector. The structural shift reflects a changing and increasingly complex social division of labour between economic sectors. The fabric of inter-industry relations is being woven in a new way due to the growing specialisation in knowledge services, the exploitation of scale economies for human capital, lowered costs of outsourcing in-house services, and the growing encapsulation of manufacturing products in a ‘service jacket’. Business services, which inter alia includes the software industry and other knowledge-intensive business services (KIBS), play a key role in many of these processes.<BR> We argue that in recent decades business services contributed heavily to European economic growth, in terms of employment, productivity and innovation. A direct growth contribution stems from the businessservices sector’s own remarkably fast growth, while an indirect growth contribution was caused by the positive knowledge and productivity spill-overs from business services to other industries. The spill-overs come in three forms: from original innovations, from speeding up knowledge diffusion, and from the reduction of human capital indivisibilities at firm level. The external supply of knowledge and skill inputs exploits positive external scale economies and reduces reduces the role of internal (firm-level) scale (dis)economies associated with these inputs. The relatively low productivity growth that characterises some business-services sectors may be a drag on the sector's direct contribution to overall economic growth. The paper argues that there is no reason to expect a "Baumol disease" effect as long as the productivity and growth spill-overs from KIBS to other economic sectors are large enough.<BR> Finally, the paper concludes by pinpointing some policy 'handles' that could be instrumental in boosting the future contibution of business services to overall European economic growth.
    JEL: E32 L2 L8 L16 O3 O4 O52
    Date: 2007–06
  6. By: Alexandra M. Schmidt; Ajax R. B. Moreira; Thais C. O. Fonseca; Steven M. Helfand
    Abstract: In this paper, we analyze the productivity of farms across n = 370 municipalities located in the Center-West region of Brazil. We propose a stochastic frontier model with a latent spatial structure to account for possible unknown geographical variation of the outputs. This spatial component is included in the one-sided disturbance term. We explore two different distributions for this term, the exponential and the truncated normal. We use the Bayesian paradigm to fit the proposed models. We also compare between an independent normal prior and a conditional autoregressive prior for these spatial effects. The inference procedure takes explicit account of the uncertainty when considering these spatial effects. As the resultant posterior distribution does not have a closed form, we make use of stochastic simulation techniques to obtain samples from it. Two different model comparison criteria provide support for the importance of including these latent spatial effects, even after considering covariates at the municipal level.
    Date: 2006–10
  7. By: Derek C. Jones (Hamilton College, WDI and SKOPE); Takao Kato (Colgate University, Columbia Business School, Tokyo Center for Economic Research, Aarhus School of Business and IZA)
    Abstract: To investigate the size and the timing of the direct impact of participatory arrangements on business performance, we assemble and analyze extraordinary daily data - for rejection, production and downtime rates for all operators in a single plant during a 35 month period, more than 77,000 observations. Consistent with core hypotheses that employee involvement enhances productivity and quality through mechanisms including employees becoming better motivated, more informed and paying greater attention to product details, we find that membership in offline teams: (i) initially enhances individual productivity by about 3%; (ii) and lowers rejection rates by about 27%. We also find that: (iii) these improvements are dissipated, typically at 10 to 16% per 100 days in a team; (iv) while initially teams lead to more downtime, these costs diminish over time; (v) the performance-enhancing effects of team membership are generally greater and more long-lasting for team members who are solicited by management; and (vi) similar relationships exist for more educated team members. These findings square with diverse hypotheses concerning predicted gains from complementarities in organizational design, the benefits that flow from management solicitation and enhanced education, but are inconsistent with hypotheses based on Hawthorne effects.
    Keywords: teams, employee involvement, productivity, quality, econometric case study
    JEL: M54 J50 J41 D20
    Date: 2007–07
  8. By: Sabien Dobbelaere (Corresponding author: Ghent University, K.U.Leuven, IZA Bonn, visiting CREST. Postdoctoral Fellow of the Research Foundation - Flanders (FWO), Tweekerkenstraat 2, B-9000 Gent, Belgium.); Jacques Mairesse (CREST, Institut National de la Statistique et des Etudes Economiques (INSEE), MERITMaastricht University, NBER; 15, Boulevard Gabriel Peri, 92245 Malakoff Cedex, France.)
    Abstract: Embedding the efficient bargaining model into the Hall (1988) approach for estimating price-cost margins shows that both imperfections in the product and labor markets generate a wedge between factor elasticities in the production function and their corresponding shares in revenue. This article investigates these two sources of discrepancies both at the industry and the firm level using an unbalanced panel of 10646 French firms in 38 manufacturing industries over the period 1978-2001. By estimating standard production functions, we are able to derive estimates of average price-cost mark-up and rent sharing parameters. Our industry-level results indicate that industry differences in these parameters are quite sizeable. To determine the degree of true firm-level heterogeneity, we adopt the Swamy (1970) methodology. The Swamy robust estimates of true dispersion show sizeable within-industry firm heterogeneity. Firm size, capital intensity, distance to the industry technology frontier and investing in R&D seem to account for part of this heterogeneity. JEL Classification: C23, D21, J51, L13.
    Keywords: Rent sharing, price-cost mark-ups, production function, panel data.
    Date: 2007–07
  9. By: Ensar Yesilyurt (Department of Economics, Pamukkale University); Filiz Yesilyurt (Department of Economics, Ege University)
    Abstract: Data Envelopment Analysis is frequently used in the measurement of hospital efficiency as in several other institutions, whereas not enough emphasis has been laid on the concepts of ‘congestion’ and ‘slack’, which widen the application field of this analysis and broaden the possibility of its usage as a means of politics. In this study, besides the efficiency levels of 600 general hospitals currently active in Turkey, their congestion and slacks have also been calculated. Moreover, welfare losses due to the existence of congestion and slacks, which have been ignored up to now in relation to the costs of input, have been determined. The present study, above all, constitutes a sample case about the possibility that the slacks can occur in DEA even when in an entirely efficient state. As a result, the hospitals affiliated to the Social Security Organization (SSK in Turkish) have been found out to be the most efficient and the private hospitals have been found to take the second order while the hospitals operating under the Ministry of Health have taken the third order. Considering all the hospitals altogether, the total welfare loss has been calculated to be $94.523.320.
    Keywords: Data Envelopment Analysis, Hospital, Congestion, Slack
    JEL: I1 P3
    Date: 2007–06
  10. By: Gregory Corcos; Massimo Del Gatto; Giordano Mion; Gianmarco I.P. Ottaviano
    Abstract: Recent theoretical models predict gains from international trade coming from intra-industry reallocations, due to a firm selection effect. In this paper we answer two related questions. First, what is the magnitude of this selection effect, and how does it compare to that of intra-national trade? Second, would the removal of ’behind-the-border’ trade frictions between integrated EU countries lead to large productivity gains? To answer these questions, we extend and calibrate the Melitz and Ottaviano (2005) model on productivity and trade data for European economies in 2000, and simulate counterfactual trade liberalization scenarios. We consider 11 EU countries and a total of 31 economies, including 21 French regions. Our first result is that, in the French case, international trade has a sizeable impact on aggregate productivity, but smaller than that of intra-national trade. Second, substantial productivity gains (around 20%) can be expected from ’behind-the-border’ integration. In both experiments, we predict the corresponding variations in average prices, markups, quantities and profits. We show that the model fits sales and exports data reasonably well, and we perform a number of robustness checks. We also suggest some explanations for the substantial cross-economy and cross-industry variations in our estimates of productivity gains, highlighting the importance of accessibility and competitiveness.
    Keywords: European integration, intra-national trade, firm-level data, firm selection, gains from trade, total factor productivity
    JEL: F12 R13
    Date: 2007
  11. By: Philip Bodman (MRG - School of Economics, The University of Queensland); Thanh Le (MRG - School of Economics, The University of Queensland)
    Abstract: This study further examines the role of research and development (R&D), both domestic and foreign, in the development of national productivity. A key focus is on the role played by foreign direct investment (FDI) in facilitating technological transfer. The research empirically investigates the significance of FDI as an effective channel of R&D spillovers within a group of 15 OECD countries. It also examines whether the technology transfer through FDI is bi-directional: from an investing country to a host country and vice versa. In addition, the impact of human capital accumulation on a country’s capacity to learn from a foreign technology base is also examined empirically. The paper considers the possible effects of FDI on human capital accumulation process, in particular, whether FDI helps channel more resources towards the promotion of education activities. Empirical results obtained all lend strong supports to these hypotheses.
  12. By: Sheng Li; Oliver Linton
    Abstract: We introduce a general and flexible framework for hedge fund performance evaluation and asset allocation: stochastic dominance (SD) theory. Our approach utilizes statistical tests for stochastic dominance to compare the returns of hedge funds. We form hedge fund portfolios by using SD criteria and examine the out-of-sample performance of these hedge fund portfolios. Compared to performance of portfolios of randomly selected hedge funds and mean-variance efficient hedge funds, our results show that fund selection method based on SD criteria greatly improves the performance of hedge fund portfolio.Keywords: Alpha; Mean Variance analysis; Portfolio; Risk Return
    Date: 2007–07
  13. By: Stefan Niemann; Michael Evers; Marc Schiffbauer
    Abstract: This paper employs a dynamic stochastic general equilibrium model with a financial market friction to rationalize the empirically observed negative relationship between inflation and total factor productivity (TFP). Specifically, an empirical analysis of US macroeconomic time series establishes that there is a negative causal effect of inflation on aggregate productivity. Rather than taking the productivity process as exogenous, the model is therefore set up to feature an endogenous component of TFP. This is achieved by allowing physical investment to be channelled into two distinct technologies: a safe, but return-dominated technology and a superior technology which is subject to idiosyncratic liquidity risk. An agency problem prevents complete insurance against liquidity risk, and the scope for insurance is endogenously determined via the relevant liquidity premium. Since the liquidity premium is positively related to the rate of inflation, the model demonstrates how nominal fluctuations have an influence not only on the overall amount, but also on the qualitative composition of aggregate investment and hence on TFP. The quantitative relevance of the underlying transmission mechanism which links nominal fluctuations to TFP via corporate liquidity holdings and the composition of aggregate investment is corroborated by means of the quantitative analysis of the calibrated model economy as well as a detailed analysis of industry-level and firm-level panel data. Notably, the empirical findings are consistent with both the properties of the agency problem postulated in the theoretical model and its implications for corporate liquidity holdings and physical investment portfolios.
    Date: 2007–07–13
  14. By: Paul Lanoie (IEA, HEC Montréal); Jérémy Laurent-Lucchetti; Nick Johnstone; Stefan Ambec
    Abstract: Jaffe and Palmer (1997) present three distinct variants of the so- called Porter Hypothesis. The “weak” version of the hypothesis posits that environmental regulation will stimulate certain kinds of environmental innovations. The “narrow” version of the hypothesis asserts that flexible environmental policy regimes give firms greater incentive to innovate than prescriptive regulations, such as technology-based standards. Finally, the “strong” version posits that properly designed regulation may induce cost-saving innovation that more than compensates for the cost of compliance. In this paper, we test the significance of these different variants of the Porter Hypothesis using data on the four main elements of the hypothesised causality chain (environmental policy, research and development, environmental performance and commercial performance). The analysis is based upon a unique database which includes observations from approximately 4200 facilities in seven OECD countries. In general, we find strong support for the “weak” version, qualified support for the “narrow” version, and qualified support for the “strong” version as well.
    Keywords: Porter hypothesis, environmental policy, innovation, environmental performance, business performance.
    JEL: L21 M14 Q52 Q55 Q58
    Date: 2007–06
  15. By: Giulio Bottazzi; Marco Grazzi; Angelo Secchi; Federico Tamagni
    Abstract: The study of firms' default has attracted wide interest among both practitioners and scholars. However, attention has often been limited to a relatively small set of financial variables. In this work, we try to increase the scope of analysis extending our investigation to other possible determinants of default. In particular, we rely on credit rating as a way to summarize firms' financial conditions, and we address the potential predictive power of a set of economic dimensions -- size, growth, profitability and productivity -- which industrial economics suggest to be meaningfull determinants of survival. We present novel results based on a large Italian dataset reporting credit ratings for all the firms in the sample. As far as financial conditions and default are concerned, we find that the firms dislaying the worst credit ratings are quite turbulent, but also exhibit non-negligible chances to recover. Moreover, the analysis of the distribution of firms' economic performance reveals that profitability stands up as the only relevant economic variable telling apart defaulting firms from `surviving' ones, at different time distance to default. Finally, probit and logit estimation of default probabilities, simultaneously controlling for economic and financial dimensions, suggests that growth, in addition to credit ratings, significantly affects the likelihood of default, albeit in a positive (and as such unexpected) way among manufacturing firms.
    Keywords: Default probability, Credit ratings, Firm growth dynamics, selection
    Date: 2007–07–13
  16. By: Akerman, Anders (Dept. of Economics, Stockholm University); Forslid, Rikard (Dept. of Economics, Stockholm University)
    Abstract: This paper modifies the heterogenous firms and trade model by Melitz (2003) by explicitly modelling the beachhead cost of a firm in a new market as a function of market size. This leads to several new predictions compared to the standard model. In particular, the productivity of non exporters and exporters depends on market size. Moreover, manufacturing export shares vary inversely with market size. However, export shares converge (upwards) as markets are integrated. The empirical part of the paper offers support for our model specification.
    Keywords: Heterogenous Firms; Market Size; Beachhead Costs
    JEL: H32 P16
    Date: 2007–07–30

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