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Application of The Cobb-Douglas Production Model To Libraries
Application of The Cobb-Douglas Production Model To Libraries
Overview
Production Functions in Economics Applicable to Libraries? Testing on Public Library Data Optimization Application to Academic Library Data
Production Functions - 1
In economics, a production function" describes an empirical relationship between specified output and inputs. A production function can be used to represent output production for a single firm, for an industry, or for a nation. Just to illustrate, a production function of a wheat farm might have the form: W=F(L,A,M,F,T,R) That is, production of wheat in tons (W) depends on the use of labor measured in days (L), land in acres (A), machinery in dollars (M), fertilizer in tons (F), mean summer temperature in degrees (T), and rainfall in inches (R).
Production Functions - 2
In most applications of production functions, the input variables are simply labor (L) and capital (C). The output is usually measured by physical units produced or, perhaps, by their value. Labor is typically measured in man-hours or number of full-time-equivalent (FTE) employees. Capital is the variable that usually is most problematic. While data on output and labor are readily available, those for capital are not. It represents aggregations of diverse components, of different characteristics and vintage. Furthermore, only capital that is actually utilized should be treated as input, but it is difficult to determine the extent to which that is so.
F(L,0) = 0, F(0,C) = 0 (both factor inputs are required for output) dF/dL > 0, dF/dC > 0 (an increase in either input increases output)
At a given set of inputs (L,C), the production function may show decreasing, constant, or increasing returns to scale:
If F( L, C) < F(L,C), there are decreasing returns to scale If F( L, C) = F(L,C), there are constant returns to scale If F( L, C) > F(L,C), there are increasing returns to scale
Constant returns to scale imply that the total income from output production equals the total costs from inputs:
pF(L,C) = wL + rC (p the price per unit output, w and r costs of labor and capital) .
Q=aLbCc
where Q stands for output, L for labor, and C for capital. The parameters a, b, and c (the latter two being the exponents) are estimated from empirical data. If b + c = 1, the Cobb-Douglas model shows constant returns to scale. If b + c > 1, it shows increasing returns to scale, and if b + c < 1, diminishing returns to scale.
Alternative forms
Equivalent is a linear function of the logarithms of the three variables: log(Q) = log(a) + b log(L) + c log(C) If b + c = 1, another equivalent form exhibits an underlying heuristic for the Cobb-Douglas model: log(Q/L) = log(a) + (1 - b) log(C/L). which says that the "production per employee" (Q/L) is a function of the capital investment per employee (C/L).
It should be recognized that allocation decisions must be concerned not only with productivity but with response to market demand. The manager must decide both how much should be invested in total, as determined by the market, as well as how resources should be divided between capital and labor but. If the relationship is homogeneous, the two decisions may be treated as independent, but if it is not homogeneous an optimum allocation from the standpoint of productivity could be inconsistent with the optimum from the standpoint of market.
The Capital component of the Cobb-Douglas model will be measured by the size of the Collection of the library. It is assumed that costs in acquisition of it, in facilities to house it, and in the technical services staff for building the collection are proportional to the size of the collection. The Labor component will be measured by the services staff, which will be calculated as the total staff minus the technical services staff The Production will be measured by the circulation, as a surrogate for all of the uses of the library and its services.
Circ is the circulation Srvst is the service staff Coll is the collection size
These data present a qualitatively consistent picture, showing a high correlation between circulation per staff member and size of collection per service staff member.
The overall size of libraries in each of these states is relatively smaller than those in California:
State California Illinois Missouri Ohio Number of Libraries 173 567 129 251 Average Collection 253,000 40,000 100,000 151,000 Average Budget $1,107,000 $143,000 $192,000 $254,000
In order to make comparison more meaningful, the estimation of the parameters was limited to libraries with income of less than $1,000,000 in California and each of the other states.
120 of 173 California 454 af 567 Illinois 230 of 251 Ohio 122 of 121 Missouri
In summary, the Cobb-Douglas equation appears consistently to describe the behavior of libraries of a size determined by budget of less than $1 million, across a set of four states (California, Illinois, Ohio, and Missouri). In each case, there is a relatively high correlation. There is close agreement among the values for the parameters for the four regressions.
Discussion of Variance
Effect of Multi-collinearity Effect of Demographic Factors
Effect of Multi-Collinearity - 1
The use of regression equations is an easy way to deal with the kind of analyses involved in evaluating the Cobb-Douglas equation. However, although easy, it is a way fraught with pitfalls. In particular, the variables involved are closely interrelatedmulti-collinear. Both staff and collection are highly correlated with each other and with circulation. It is therefore easy to investigate equations that will almost automatically result in high correlation, but will simply reflect the self-evident correlations. In particular, different forms of the Cobb-Douglas equation, though arithmetically equivalent, can exhibit radically different correlations.
Effect of Multi-Collinearity - 2
To illustrate, consider the following two equations: log CIRC = log(a) + blog(SRVST) + (1 - b)log(COLL) log CIRC/SRVST = log(a) + (1 b)log(COLL/SRVST) The correlations for these two equations, for the largest 78 California libraries and for the same values of a and (1 - b), (viz., log(a) = .804 and 1 - b = .590) are, respectively, R = .96 and R = .68. The reason is simple: The first equation is controlled by the close relationship between circulation, on the one hand, and service staff and collection size on the other; the second equation depends upon the less clear-cut relation between the ratios.
Effect of Multi-Collinearity - 3
If this problem were treated as a multiple regression problem, in which an effort were made to represent log(CIRC) as a function of the two independent variables log(SRVST) and log(COLL), several technical problems would arise:
1. The determinant of the matrix of inter-variable correlations would be near zero, making it difficult to calculate the regression coefficients; 2. As a result, the computation would provide imprecise, highly variable estimates of those coefficients; and 3. There would be large sampling variances.
The use of the ratios, CIRC/SRVST and COLL/SRVST, significantly reduces the impact of the multi-collinearity. It permits one to obtain consistent estimates and to avoid the technical problems of multi-collinearity.
log(y0) = ailog(yi)
i=0
y0 = circ/popl, y1 = a(srvst)b(coll)1-b/popl, y2 = (average income), y3 = (average years of education) y4 = (number in school)/popl, y5 = (area/popl) y6 = (average distance)
Optimization
Central Library Branch Libraries Division Between Central Library and Branches
where m is the minimum staffing required per branch. We want to choose B and X2 so as to maximize XB, subject to the boundary condition that the total resources available for the branch library system are fixed: BmC1 + X2C2 = TB Using a Langranian multiplier, let P = (B/B0)a(Bm)b (X2)(1-b) - y (BmC1 + X2C2 - TB) = (B(1+b)/B0)a(m)b (X2)(1-b) - y (BmC1 + X2C2 - TB)
For each, data were acquired from ARL statistics and, for institutional productivity, from Social Science Citation Index.
The following variables were acquired for each ARL library and institution:
Number of interlibrary loans Number of Ph.D.s graduated Number of faculty Number of publications Number of Reader Services staff Number of faculty Size of library collection Index of library rank (from ARL) Index of library size (from ARL)
Statistics were acquired for the ARL libraries and institutions for academic year 1973/74 and for the total number of publications attributable to each institution for the period 1971/-1981. Data of a similar nature were obtained for each of the past 17 years; for each of them, the analyses are quite consistent in the overall patterns. Ordinary least squares regression analyses are applied to these data for the several ARL libraries. In addition to these regression analyses, some effort was made to identify major differences among the libraries.
Library Productivity
Measures of Production Measures of Labor Measures of Capital Investment Results
Measures of Production- 1
The characterizing function of the academic research library is support to research of faculty and students, primarily doctoral students. However, this is a very difficult function to measure. Unfortunately, statistics for "circulation" were not reported in ARL statistics until 1995, but even so it is a matter of some debate concerning whether they are an adequate measure of research use. On the one hand, the claim has been made that circulation is a reasonably reliable index of all use, including the unrecorded, consultative, or browsing use within the library". On the other hand, other analyses that in-house use is significantly different.
Measures of Production- 2
The Faculty. If we regard the faculty as the primary research users, might not the number of them be a measure of the amount of research use made of the collection? Underlying that view are a number of assumptions (e.g., the average use of the collection by a faculty member is not a function of the library as such and will be uniform from institution to institution, even if not from faculty member to faculty member). Ph.D. Graduates. In the same vein, the Ph.D. students also are heavy research users of a collection. With the same kinds of assumptions that apply to faculty, might not the number of Ph.D. graduates be a measure of the research use?
Measure of Labor - 1
The costs involved in technical services (basically, in selecting, acquiring, processing, and cataloging of acquired materials) are regarded as part of the capital investment. Doing this requires that the staff involved in technical services be estimated, since the published data do not clearly identify it. The basis for doing so was identical with that used for public libraries In the following tabulation, the FTE estimates are based on acquisitions (ACQ), using a standard ratio of 1.5 for volumes per title Serial titles are assumed to account for about one-fourth of the volumes acquired based on the apparent ratio of serial volumes to total volumes and one volume per year per serial).
Measure of Labor - 2
.43 FTE/l000 volumes .56 FTE/l000 volumes .05 FTE/l000 volumes .08 FTE/l000 volumes .14 FTE/l000 volumes 1.26 FTE/1000 volumes
Measure of Labor - 3
Those figures are all for acquisitions. In addition, continuing with the same pattern followed in the analysis of public libraries, the labor required to maintain the physical facilities in which the collection is housed has been estimated to be .012 FTE per 1000 volumes of collection. Thus, the technical services staff has been estimated as: (1.26 x ACQ) + (.012 x COLL) To obtain the estimates for Reader Services Staff, this estimate of technical processing staff is then subtracted from the data, that are available, on total staff.
Measures of Capital - 1
The underlying rationale for applying the CobbDouglas model to libraries is that "information" is at least analogous to if not identical with "capital investment". It seems evident that the primary capital resource of the library in fact is its collection, so the size of collection will be used as the measure for x2. However, there are serious difficulties in measuring even so basic a variable as the size of the collection. Libraries differ in whether or not they include microforms, government documents, special collections, etc. They differ in the means by which they measure any of those.
Measures of Capital - 2
Despite that difficulty, the analysis took the number of volumes in the collection, as reported in ARL Statistics, as the primary value for this variable. An alternative measure of library resources could be the Library Resources Index, which was derived from three component variables: total volumes held volumes added current serials.
Measures of Capital - 3
A third alternative is the ARL Library Index. Through factor analysis, the ARL data variables were reduced from 22 down to 10. A weight is derived for each of the variables on the factor to which they relate. These weights are then applied to the variables for a given library to derive the index value for that library. The weights for the ten variables in that principal factor analysis for 1980/81 were as follows (the comparable values reported for 1979/80 are quite similar):
Measures of Capital - 4
- 27.01014 + .57460 log (volumes held) + .56469 log (volumes added, gross) + .42692 log (microforms) + .53595 log (current serials) + .75211 log (expend., materials) + .43553 log (expend., binding) + .62256 log (total salaries) + .39022 log (expend., other operating) + .67798 log (professional staff) + .58385 log (nonprofessional staff)
Results
Using Faculty as the measure of productivity
ARLYEAR ARL7374 ARL7475 ARL7576 ARL7677 ARL7778 ARL7879 A .53 .75 .62 .45 .63 .38 B .56 .36 .46 .61 .42 .63 R .40208 .20672 .34135 .54628 .28101 .57489
ARL-2000 Data
Since 1995, ARL statistics have included circulation and reference use data, so it is now possible to apply the CobbDouglas model with them as output measures. The results are the following two regression equations: log(Circ/Srvst) = -0.095 + 0.887 log(Coll/Srvst), R = 0.52 log((Circ+Ref)/Srvst) = 5.92 + 0.478(Coll/Srvst), R = 0.62 The following charts show the scattergrams for the ARL libraries that reported circulation and reference data (eight did not). While the correlation values of R = 0.52 and R = 0.62 are not large, they are substantial.
6.60
6.50
log(Coll/Srvst)
6.40
6.30
6.20
6.10
6.00
5.90 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80
log(Circ/Srvst) - 4.5
6.7
6.6
6.5
log(Coll/Srvst)
6.4
6.3
6.2
6.1
Institutional Productivity
Measures of Labor Measures of Capital Investment Measures of Production The Results
Measure of Labor
The "producing labor" for the university is almost self-evident. It's the faculty, with all other university staff simply being supportive to them.
Measures of Production
The university serves many functions: education, research, and public service. The measure of "production" for the first two, at least, appears to be straightforward. Number of students graduated should measure the function of education reasonably well; number of doctoral students or number of papers published should measure the second. Focusing attention on the research functions, though, it is that which will be measure and using the two measures appropriate to it.
Results
YEAR
ARL7778 ARL7879
A
-0.452 -0.700
B
0.882 0.808
R
0.820 0.685
THE END