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Efficiency Measurement

William Greene Stern School of Business New York University. Efficiency Measurement. Session 9. Applications. Range of Applications. Regulated industries – railroads, electricity, public services Health care delivery – nursing homes, hospitals, health care systems (WHO)

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Efficiency Measurement

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  1. William Greene Stern School of Business New York University Efficiency Measurement

  2. Session 9 Applications

  3. Range of Applications • Regulated industries – railroads, electricity, public services • Health care delivery – nursing homes, hospitals, health care systems (WHO) • Banking and Finance • Many, many (many) other industries. See Lovell and Schmidt survey…

  4. Discrete Variables • Count data frontier • Outcomes inside the frontier: Preserve discrete outcome • Patents (Hofler, R. “A Count Data Stochastic Frontier Model,” • Infant Mortality (Fe, E., “On the Production of Economic Bads…”)

  5. Count Frontier P(y*|x)=Poisson Model for optimal outcome • Effects the distribution: P(y|y*,x)=P(y*-u|x)= a different count model for the mixture of two count variables • Effects the mean:E[y*|x]=λ(x) while E[y|x]=u λ(x) with 0 < u < 1. (A mixture model) • Other formulations.

  6. Alvarez, Arias, Greene Fixed Management • Yit = f(xit,mi*) where mi* = “management” • Actual mi = mi* - ui. Actual falls short of “ideal” • Translates to a random coefficients stochastic frontier model • Estimated by simulation • Application to Spanish dairy farms

  7. Fixed Management as an Input Implies Time Variation in Inefficiency

  8. Random Coefficients Frontier Model [Chamberlain/Mundlak: Correlation mi* (not mi-mi*) with xit]

  9. Estimated Model First order production coefficients (standard errors). Quadratic terms not shown.

  10. Inefficiency Distributions Without Fixed Management With Fixed Management

  11. Holloway, Tomberlin, Irz: Coastal Trawl Fisheries • Application of frontier to coastal fisheries • Hierarchical Bayes estimation • Truncated normal model and exponential • Panel data application • Time varying inefficiency • The “good captain” effect vs. inefficiency

  12. Sports • Kahane: Hiring practices in hockey • Output=payroll, Inputs=coaching, franchise measures • Efficiency in payroll related to team performance • Battese/Coelli panel data translog model • Koop: Performance of baseball players • Aggregate output: singles, doubles, etc. • Inputs = year, league, team • Policy relevance? (Just for fun)

  13. Macro Performance Koop et al. • Productivity Growth in a stochastic frontier model • Country, year, Yit = ft(Kit,Lit)Eitwit • Bayesian estimation • OECD Countries, 1979-1988

  14. Mutual Fund Performance • Standard CAPM • Stochastic frontier added • Excess return=a+b*Beta +v – u • Sub-model for determinants of inefficiency • Bayesian framework • Pooled various different distribution estimates

  15. Hospitals • Usually cost studies • Multiple outputs – caqse mix • “Quality” is a recurrent theme - complexity • Rosko: US Hospitals, multiple outputs, panel data, determinants of inefficiency = HMO penetration, payment policies, also includes indicators of heterogeneity • Australian hospitals: Fit both production and cost frontiers. Finds large cost savings from removing inefficiency.

  16. Law Firms • Stochastic frontier applied to service industry • Output=Revenue • Inputs=Lawyers, associates/partners ratio, paralegals, average legal experience, national firm • Analogy drawn to hospitals literature – quality aspect of output is a difficult problem

  17. Farming • Hundreds of applications • Major proving ground for new techniques • Many high quality, very low level micro data sets • O’Donnell/Griffiths – Philippine rice farms • Latent class – favorable or unfavorable climate • Panel data production model • Bayesian – has a difficult time with latent class models. Classical is a better approach

  18. Railroads and other Regulated Industries • Filippini – Maggi: Swiss railroads, scale effects etc. Also studied effect of different panel data estimators • Coelli – Perelman, European railroads. Distance function. Developed methodology for distance functions • Many authors: Electricity (C&G). Used as the standard test data for Bayesian estimators

  19. Banking • Dozens of studies • Wheelock and Wilson, U.S. commercial banks • Turkish Banking system • Banks in transition countries • U.S. Banks – Fed studies (hundreds of studies) • Typically multiple output cost functions • Development area for new techniques • Many countries have very high quality data available

  20. Sewers • New York State sewage treatment plants • 200+ statewide, several thousand employees • Used fixed coefficients technology • lnE = a + b*lnCapacity + v – u; b < 1 implies economies of scale (almost certain) • Fit as frontier functions, but the effect of market concentration was the main interest

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