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Modeling economies of scope in joint production: Convex regression of input distance function

Author

Listed:
  • Timo Kuosmanen

    (University of Turku)

  • Sheng Dai

    (Zhongnan University of Economics and Law)

Abstract

Modeling of joint production has proved a vexing problem. This paper develops a radial convex nonparametric least squares (CNLS) approach to estimate the input distance function with multiple outputs. We document the correct input distance function transformation and prove that the necessary orthogonality conditions can be satisfied in radial CNLS. A Monte Carlo study is performed to compare the finite sample performance of radial CNLS and other deterministic and stochastic frontier approaches in terms of the input distance function estimation. We apply our novel approach to the Finnish electricity distribution network regulation and empirically confirm that the input isoquants become more curved. In addition, we introduce the weight restriction to radial CNLS to mitigate the potential overfitting and increase the out-of-sample performance in energy regulation.

Suggested Citation

  • Timo Kuosmanen & Sheng Dai, 2025. "Modeling economies of scope in joint production: Convex regression of input distance function," Journal of Productivity Analysis, Springer, vol. 63(1), pages 69-86, February.
    • Handle: RePEc:kap:jproda:v:63:y:2025:i:1:d:10.1007_s11123-024-00739-x
    DOI: 10.1007/s11123-024-00739-x
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    More about this item

    Keywords

    Production; Convex regression; Multiple outputs; Input distance function; Energy regulation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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