Journal
ANNALS OF OPERATIONS RESEARCH
Volume 305, Issue 1-2, Pages 81-106Publisher
SPRINGER
DOI: 10.1007/s10479-021-04069-1
Keywords
Data envelopment analysis; Economics; Technology; Cost analysis
Categories
Ask authors/readers for more resources
This study focuses on testing the empirical impact of the convexity assumption in estimating costs, revealing that cost estimates based on convex technologies are 21% to 38% lower than those based on non-convex technologies. The characterization of returns to scale and economies of scale using production and cost functions for individual units also yields conflicting results in 19% to 31% of observations.
This contribution focuses on testing the empirical impact of the convexity assumption in estimating costs using nonparametric specifications of technology and cost functions. Apart from reviewing the scant available evidence, the empirical results based on two publicly available data sets reveal the effect of the convexity axiom on cost function estimates: cost estimates based on convex technologies turn out to be on average between 21% and 38% lower than those computed on nonconvex technologies. These differences are statistically significant when comparing kernel densities and can be illustrated using sections of the cost function estimates along some output dimension. Finally, also the characterization of returns to scale and economies of scale using production and cost functions for individual units yields conflicting results for between 19% and 31% of individual observations. The theoretical known potential impact as well as these empirical results should make us reconsider convexity in empirical production analysis: clearly, convexity is not harmless.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available