The Effects of Management on Production: A Survey of Empirical Studies

Eleven months later, the chapter has just been released on line.

Contributed chapter to Handbook of Production Economics vol. 2, Springer,
https://doi.org/10.1007/978-981-10-3450-3 45-1. On-line: July 16, 2021.

ABSTRACT: We review econometric studies that attempt to estimate the effects of management on production, being on output, productivity, or efficiency. We group the studies mainly by a methodological criterion: whether they treat management as a latent variable, whether they proxy it by some other variable(s), or whether they attempt to construct a direct measure of management and use it as a regressor in an econometric model. A large part of the literature uses data from small-size agriculture, while in recent years national surveys have started to collect more systematically data related to management and management practices from various industries. Rather than being mentioned by telegraphic references, most of the studies presented are given a somewhat detailed summary so that the reader can acquire a good sense of the methodological choices made, the estimation techniques adopted, and the results obtained on the effects of management.

Download here.

Modeling dependence in two-tier stochastic frontier models

This paper just got aired on the website of Journal of Productivity Analysis, https://doi.org/10.1007/s11123-021-00611-2. It is jointly written with Chris F. Parmeter and Subal Kumbhakar.

Abstract: The two-tier stochastic frontier model has seen widespread application across a range of social science domains. It is particularly useful in examining bilateral exchanges where unobserved side-specific information exists on both sides of the transaction. These buyer and seller specific informational aspects offer opportunities to extract surplus from the other side of the market, in combination also with uneven relative bargaining power. Currently, this model is hindered by the fact that identification and estimation relies on the potentially restrictive assumption that these factors are statistically independent. We present three different models for empirical application that allow for varying degrees of dependence across these latent informational/bargaining factors.

Is Quantile Regression useful in Stochastic Frontier Analysis?

Here is a presentation I recently made in the (virtual) North American Productivity Workshop XII (vNAPW-XII). Quantile regression has seen a large number of applications in econometrics, especially in Treatment Effects models, because it can capture also the “indirect” effects of the regressors on the dependent variable, along the quantiles of the latter.

But does the trick work in Stochastic Frontier Analysis (SFA)? My conclusion is that it doesn’t. Fundamentally, this is because in Treatment Effects models we consider equilibrium relations and we care about the total effect of the regressors on the dependent variable. But in SFA, we consider frontier relations, and we want to keep clearly separate the effects of the regressors on the “deterministic frontier”, from any other indirect effect they may have.

Moreover, the defining property of the estimator used in Quantile Regression (the Q-estimator), is not harmless in SFA models – in fact, it is devastating and we need distributional assumptions to mend the damage. This does not mean that we cannot use the “quantile approach” in SFA at all, it only means that we should expect different benefits, and perhaps, after all said and done, fewer: currently it appears that the value-added in using Quantile Regression in SFA is smaller than when using it in Treatment Effects models.

Download the presentation and think for your self. Hopefully, it will appear eventually as a paper somewhere. The paper will contain some more material than the presentation, and its current abstract goes like this:

We review fundamental properties of quantile regression and we examine the degree to which they are compatible with the special statistical and economic characteristics of stochastic frontier models, and with the goals of stochastic frontier analysis. We find that the scope and focus of quantile regression changes when applied to stochastic frontier models, compared to the conventional regression setup. We show that a “corrected” quantile estimator can be used to estimate the quantile probability of the deterministic frontier, given a distributional assumption. We examine the quantile estimator in the benchmark case of independence between the regressors and the error term, but also when “predictors of inefficiency” enter the model, in which case we obtain a non-linear median stochastic frontier regression model, where the deterministic frontier can be estimated without distributional assumptions. We show how quantiles can be used to obtain information on individual levels of inefficiency, and also as a basis for specification tests for the distributional assumptions.

Accounting for endogeneity in regression models using Copulas: A step-by-step guide for empirical studies

Papadopoulos, A (2021). “Accounting for endogeneity in regression models using Copulas: A step-by-step guide for empirical studies.” Journal of Econometric Methods, https://doi.org/10.1515/jem-2020-0007 . Download the pre-print incl. the on-line supplement.

Abstract : We provide a detailed presentation and guide for the use of Copulas in order to account for endogeneity in linear regression models without the need for instrumental variables. We start by developing the model from first principles of likelihood inference, and then focus on the Gaussian Copula. We discuss its merits and propose diagnostics to assess its validity. We analyze in detail and provide solutions to the various issues that may arise in empirical applications for applying the method. We treat the cases of both continuous and discrete endogenous regressors. We present simulation evidence for the performance of the proposed model in finite samples, and we illustrate its application by a short empirical study. A supplementary file contains additional simulations and another empirical illustration.

Type II failure and specification testing in the Stochastic Frontier Model

This has just been accepted in European Journal of Operational Research and the Author’s accepted version has been uploaded here. It has been written together with Christopher Parmeter of Miami University.

There are some nice theoretical results related to Skewness and Excess Kurtosis for the composite distributions used in Stochastic Frontier Analysis, but to me the main contribution is a specification test that uses only OLS residuals and it appears the most powerful such test to date. With this test, one can first test for the error specification after just an OLS regression, and then code the maximum likelihood estimator.

Abstract. The distributional specifications for the composite regression error term most
often used in stochastic frontier analysis are inherently bounded as regards their skewness
and excess kurtosis coefficients. We derive general expressions for the skewness and excess
kurtosis of the composed error term in the stochastic frontier model based on the ratio
of standard deviations of the two separate error components as well as theoretical ranges
for the most popular empirical specifications. While these simple expressions can be used
directly to assess the credibility of an assumed distributional pair, they are likely to over
reject. Therefore, we develop a formal test based on the implied ratio of standard deviations
for the skewness and the kurtosis. This test is shown to have impressive power compared
with other tests of the specification of the composed error term. We deploy this test on
a range of well-known datasets that have been used across the efficiency community. For
many of them we find that the classic distribution assumptions cannot be rejected.

Stochastic frontier models using the Generalized Exponential distribution

UPDATE: The paper went on-line on February 2, 2021, https://link.springer.com/article/10.1007/s11123-020-00591-9

The paper “Stochastic frontier models using the Generalized Exponential distribution” has just been approved for publication in the Journal of Productivity Analysis.

Abstract: We present a new, single-parameter distributional specification for the one-sided error components in single-tier and two-tier stochastic frontier models. The distribution has its mode away from zero, and can represent cases where the most likely outcome is non-zero inefficiency. We present the necessary formulas for estimating production, cost and two-tier stochastic frontier models in logarithmic form. We pay particular attention to the use of the conditional mode as a predictor of individual inefficiency. We use simulations to assess the performance of existing models when the data include an inefficiency term with non-zero mode, and we also contrast the conditional mode to the conditional expectation as measures of individual (in)efficiency.

Download the pre-print here.

The Two-Tier Stochastic Frontier Framework (2TSF): Measuring Frontiers Wherever They May Exist

This survey has just been published in the collection Parmeter, C. F., & Sickles, R. C. (2020) Advances in Efficiency and Productivity Analysis. Springer. Naturally, it is based on my PhD, and it is a comprehensive survey of the state-of-the-art of the Two-tier Stochastic Frontier Framework, surveying theoretical foundations, estimation tools, and the large variety of application this modeling framework has been used for. Indicatively, it has been used to measure the impact of informational asymmetry in wage negotiations, in the house market, in the Health Services market, the impact of asymmetric bargaining power in International donors-recipients relationship but also in Tourist shopping, or to measure the effects of “optimism” and “pessimism” in self-reported quality of life. And may more, economic and not-so-economic situations.

Anywhere where we can perceive of opposing latent forces operating on the outcome, this model can be applied. This is why I use as its pet name the “noisy Tug-of-War” model -“noisy” because there is also a “noise” component in the composed error specification.

 

 

Efficiency gains in least squares estimation: a new approach

This paper is a joint effort with prof. Mike Tsionas. It has just been accepted for publication in Econometric Reviews. It really has a new least-squares method to propose that reduces the variance of the estimator in linear regression. And it is very easy to implement.

ABSTRACT. In pursuit of efficiency, we propose a new way to construct least squares estimators, as the minimizers of an augmented objective function that takes explicitly into account the variability of the error term and the resulting uncertainty, as well as the possible existence of heteroskedasticity. We initially derive aninfeasible estimator which we then approximate using Ordinary Least Squares (OLS) residuals from a first-step regression to obtain the feasible “HOLS” estimator. This estimator has negligible bias, is consistent and outperforms OLS in terms of finite-sample Mean Squared Error, but also in terms of asymptotic efficiency, under all skedastic scenarios, including homoskedasticity. Analogous efficiency gains are obtained for the case of Instrumental Variables estimation. Theoretical results are accompanied by simulations that support them.

Download the pre-print and the on-line Appendix.

Measuring the effect of management on production: a two-tier stochastic frontier approach

 

This has just been approved for publication in Empirical Economics.

ABSTRACT. We revisit the production frontier of a firm and we examine the effects that the firm’s management has on output. In order to estimate these effects using a cross-sectional sample while avoiding the costly requirement of obtaining data on management as a production factor, we develop a two-tier stochastic frontier (2TSF) model where management is treated as a latent variable. The model is consistent with the microeconomic theory of the firm, and it can estimate the effect of management on the output of a firm in monetary terms from different angles, separately from inefficiency. The approach can thus contribute to the cost-benefit analysis related to the management system of a company, and it can facilitate research related to management pay and be used in studies of the determinants of management performance. We also present an empirical application, where we find that the estimates from our latent-variable model align with the results obtained when we use the World Management Survey scores that provide a measure of management.

 

The effects of management on production

This came out of nowhere, but it led to a very interesting journey over 70 years of research in very different fields, and a 50-page survey on the many different ways scholars have attempted to define, measure and assess the effects of management on production, output, productivity and efficiency.

TL;DR: we are still at the beginning of measuring the effects of management on production reliably.

Here is the survey, destined to be a chapter in the Handbook of Production Economics vol.2