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

Author

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  • Laurens Cherchye

    (Fund for Scientific Research---Flanders (FWO-Vlaanderen), Campus Kortrijk and Center for Economic Studies, University of Leuven, B-8500 Kortrijk, Belgium)

  • Bram De Rock

    (Campus Kortrijk and Department of Mathematics, University of Leuven, B-8500 Kortrijk, Belgium)

  • Frederic Vermeulen

    (CentER, Department of Econometrics and Operations Research, Tilburg University and IZA Bonn, NL-5000 LE Tilburg, The Netherlands)

Abstract

In designing a production model for firms that generate multiple outputs, we take as a starting point that such multioutput 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.

Suggested Citation

  • Laurens Cherchye & Bram De Rock & Frederic Vermeulen, 2008. "Analyzing Cost-Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology," Operations Research, INFORMS, vol. 56(1), pages 204-221, February.
    • Handle: RePEc:inm:oropre:v:56:y:2008:i:1:p:204-221
    DOI: 10.1287/opre.1070.0388
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    More about this item

    Keywords

    production behavior; multiproduct firms; input externalities; joint input use; economies of scope; nonparametric tests;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • P32 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Collectives; Communes; Agricultural Institutions
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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