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Decompositions of Profitability Change Using Cost Functions: A Comment

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Recently Diewert (2014) decomposed cost change into the product of four drivers. He then combined three of these drivers with a novel measure of returns to scale to decompose profitability change. We use an implicit Konus input quantity index to show that his expression for profitability change is the product of a price recovery index and an implicit productivity index, and we extend his analysis by exploiting new relationships between theoretical Konus and empirical Fisher price indexes to obtain two new decompositions of profitability change. One pairs a Konus price recovery index with a Fisher implicit productivity index, the other has pure Fisher structure, and we note the advantages of each.

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  • E. Grifell-TatjeÌ & C. A. K. Lovell, 2015. "Decompositions of Profitability Change Using Cost Functions: A Comment," CEPA Working Papers Series WP032015, School of Economics, University of Queensland, Australia.
    • Handle: RePEc:qld:uqcepa:101
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    File URL: https://economics.uq.edu.au/files/5112/WP032015.pdf
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    1. Diewert, W. Erwin, 2014. "Decompositions of profitability change using cost functions," Journal of Econometrics, Elsevier, vol. 183(1), pages 58-66.
    2. Grifell-Tatjé,Emili & Lovell,C. A. Knox, 2015. "Productivity Accounting," Cambridge Books, Cambridge University Press, number 9780521709873.
    3. Ray, Subhash C & Mukherjee, Kankana, 1996. "Decomposition of the Fisher Ideal Index of Productivity: A Non-parametric Dual Analysis of US Airlines Data," Economic Journal, Royal Economic Society, vol. 106(439), pages 1659-1678, November.
    4. Timo Kuosmanen & Timo Sipiläinen, 2009. "Exact decomposition of the Fisher ideal total factor productivity index," Journal of Productivity Analysis, Springer, vol. 31(3), pages 137-150, June.
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    Cited by:

    1. Agrell, Per J. & Grifell-Tatjé, Emili, 2016. "A dynamic model for firm-response to non-credible incentive regulation regimes," Energy Policy, Elsevier, vol. 90(C), pages 287-299.

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    More about this item

    Keywords

    Profitability; Productivity; Implicit Index Numbers;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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