Analyzing Cost Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology

L.J.H. Cherchye, B. de Rock, F.M.P. Vermeulen

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Abstract

In designing a production model for firms that generate multiple outputs, we take as a starting point that such multi-output production refers to economies of scope, which in turn originate from joint input use and input externalities. We provide a nonparametric characterization of cost efficient behavior under these conditions, and subsequently institute necessary and sufficient conditions for data consistency with such efficient behavior that only include observed firm demand and supply data.We illustrate our methodology by examining the cost efficiency of research programs in Economics and Business Management faculties of Dutch universities.This application shows that the proposed methodology may entail robust conclusions regarding cost efficiency differences between universities within specific specialization areas, even when using shadow prices to evaluate the different inputs.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages31
Volume2006-81
Publication statusPublished - 2006

Publication series

NameCentER Discussion Paper
Volume2006-81

Keywords

  • production behavior
  • multi-product firms
  • input externalities
  • joint input use
  • economies of scope
  • nonparametric tests

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    Cherchye, L. J. H., de Rock, B., & Vermeulen, F. M. P. (2006). Analyzing Cost Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology. (CentER Discussion Paper; Vol. 2006-81). Econometrics.