Shadow Profit Maximization and a Generalized Measure of Inefficiency

Determining the profit maximizing input-output bundle of a firm requires data on prices. This paper shows how endogenously determined shadow prices can be used in place of actual prices to obtain the optimal input-output bundle where the firm.s shadow profit is maximized. This approach amounts to an application of the Weak Axiom of Profit Maximization (WAPM) formulated by Varian (1984) based on shadow prices rather than actual prices. At these prices the shadow profit of a firm is zero. Thus, the maximum profit that could have been attained at some other input-output bundle is a measure of the inefficiency of the firm. Because the benchmark input-output bundle is always an observed bundle from the data, it can be determined without having to solve any elaborate programming problem. An empirical application to U.S. airlines data illustrates the proposed methodology.

Efficiency in Managing the Environment and the Opportunity Cost of Pollution Abatement

Using the directional distance function we study a cross section of 110 countries to examine the efficiency of management of the tradeoffs between pollution and income. The DEA model is reformulated to permit 'reverse disposability' of the bad output. Further, we interpret the optimal solution of the multiplier form of the DEA model as an iso-inefficiency line. This permits us to measure the shadow cost of the bad output for a country that is in the interior, rather than on the frontier of the production possibilities set. We also compare the relative environmental performance of countries in terms of emission intensity adjusted for technical efficiency. Only 10% of the countries are found to be on the frontier. Also, there is considerable inter-country variation in the imputed opportunity cost of CO2 reduction. Further, differences in technical efficiency contribute substantially to differences in the observed levels of CO2 intensity.

Technical Efficiency in Public and Private Sectors in India: Evidence from the Post-Reform Years

While India's state-owned enterprises are widely believed to be inefficient, there is a dearth of studies that document such inefficiency on any rigorous basis. Yet, since improvement in firm efficiency is one of the basic objectives of privatization, it is important to assess whether efficiency is indeed lower in the public sector than in the private sector. This paper compares the performance of state-owned enterprises with those of private sector firms in respect of technical efficiency. The comparison is made in eight different sectors over the period 1991-92 to 1998-99. We measure technical efficiency using the method of Data Envelopment Analysis. Judging by the average levels of technical efficiency, no conclusive evidence of superior performance on the part of the private sector is found.

A Simple Statistical Test of Violation of the Weak Axiom of Cost Minimization

A problem with a practical application of Varian.s Weak Axiom of Cost Minimization is that an observed violation may be due to random variation in the output quantities produced by firms rather than due to inefficiency on the part of the firm. In this paper, unlike in Varian (1985), the output rather than the input quantities are treated as random and an alternative statistical test of the violation of WACM is proposed. We assume that there is no technical inefficiency and provide a test of the hypothesis that an observed violation of WACM is merely due to random variations in the output levels of the firms being compared.. We suggest an intuitive approach for specifying a value of the variance of the noise term that is needed for the test. The paper includes an illustrative example utilizing a data set relating to a number of U.S. airlines.

Economies of Scale and Cost Efficiencies: A Panel-Data Stochastic-Frontier Analysis of Real Estate Investment Trusts

This paper extends the existing research on real estate investment trust (REIT) operating efficiencies. We estimate a stochastic-frontier panel-data model specifying a translog cost function, covering 1995 to 2003. The results disagree with previous research in that we find little evidence of scale economies and some evidence of scale diseconomies. Moreover, we also generally find smaller inefficiencies than those shown by other REIT studies. Contrary to previous research, the results also show that self-management of a REIT associates with more inefficiency when we measure output with assets. When we use revenue to measure output, selfmanagement associates with less inefficiency. Also contrary with previous research, higher leverage associates with more efficiency. The results further suggest that inefficiency increases over time in three of our four specifications.

Are Indian Firms too Small? A Nonparametric Analysis of Cost Efficiency and Industry Structure of Indian Manufacturing

In this paper we use the 2004-05 Annual Survey of Industries data to estimate the levels of cost efficiency of Indian manufacturing firms in the various states and also get state level measures of industrial organization (IO) efficiency. The empirical results show the presence of considerable cost inefficiency in a majority of the states. Further, we also find that, on average, Indian firms are too small. Consolidating them to attain the optimal scale would further enhance efficiency and lower average cost.

A Dynamic Stochastic Frontier Production Model with Time-Varying Efficiency

In this paper we introduce technical efficiency via the intercept that evolve over time as a AR(1) process in a stochastic frontier (SF) framework in a panel data framework. Following are the distinguishing features of the model. First, the model is dynamic in nature. Second, it can separate technical inefficiency from fixed firm-specific effects which are not part of inefficiency. Third, the model allows one to estimate technical change separate from change in technical efficiency. We propose the ML method to estimate the parameters of the model. Finally, we derive expressions to calculate/predict technical inefficiency (efficiency).

Explaining Recent Connecticut Bank Failures

Significant numbers of U.S. commercial bank failures in the late 1980s and early 1990s raise important questions about bank performance. We develop a failure-prediction model for Connecticut banks to examine events in 1991 and 1992. We adopt data envelopment analysis to derive measures of managerial efficiency. Our findings can be briefly stated. Managerial inefficiency does not provide significant information to explain Connecticut bank failures. Portfolio variables do generally contain significant information.

Pricing and Policy Problems in the Northeast Fluid Milk Industry

This article documents the need for reform of milk pricing in the Northeast. The New York price gouging law can be recast as a fair share law. This new milk policy “kills two birds with one stone.” It corrects regional inequities in raw milk pricing by reforming the pricing of milk at retail by limiting and redistributing excessive retail margins to farmers and consumers. The fair share policy relieves allocative price inefficiency, improves the performance of the federal milk market order pool, and the general performance of the Northeast dairy farming and fluid milk industries.

Tax Motivated Takings

Tax motivated takings are takings by a local government aimed purely at increasing its tax base. Such an action was justified by the Supreme Court's ruling in Kelo v. New London, which allowed the use of eminent domain for a private redevelopment project on the grounds that the project promised spillover public benefits in the form of jobs and taxes. This paper argues that tax motivated takings can lead to inefficient transfers of land for the simple reason that assessed values understate owners' true values. We therefore propose a reassessment scheme that greatly reduces the risk of this sort of inefficiency.