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Lecture 5 Day 4 Malquist Productivity Index

# Lecture 5 Day 4 Malquist Productivity Index

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# Efficiency and Productivity Measurement Measuring Productivity Growth Using different methods

School of Economics, University of Queensland. Australia

1

Measuring Productivity Growth
 Now we consider the case we have data on firms over time ± output and input quantities for each firm over t.  The problem is one of measuring productivity growth ± total/multi-factor productivity (TFP/MFP) growth.  TFP index for two periods s and t would depend upon output and input quantities in the two periods. Let us denote this by F(xt,qt,xs,qs).  It should satisfy the property:
F

Qq s . P " 0 In general. q s ! Q / P for all Q . the TFP index should be homogeneous of degree +1 q and -1 in x. s .P s . 2 .

2. TFP based on Profitability ratio TFP index ! * Rt* / Rs * Ct* / C s ! .Four approaches to TFP Measurement 1. Hicks-Moorsteen Index HM TFP Index ! Growth in output Output quantity index ! Growth in input Input quantity index We may use any formula of our choice in computing this index ± as long as the formula selected is properly selected.

R .

 There is considerable interest in the decomposition of revenue and cost changes (leading to profit change). 1998 and 2000). Such decompositions can be undertaken using Bennett index numbers (see Diewert. C t t / Rs / output price index s / C input price index /  This can be viewed as a special case of Hicks-Moorsteen index. 3 .

Malmquist Productivity Index  Malmquist Productivity index makes use of distance functions to measure productivity change.  This approach was first proposed in Caves.  It can be defined using input or output orientated distance functions.  We just look at the Output-orientated Malquist productivity Index (MPI). Christensen and Diewert (1982).  Using period s-technology: d o s .

x t mo s .q t .

x s .q s .q t . x t ! s d o .

q s . x s 4 .

Malmquist Productivity Index  Using period t-technology: mo .

x t ! t d o . q t . x s .q s .

x t t d o t .q t .

the MFP is defined as the geometric average of the two: s t mo . based on period s and period t technology. x s  Since there are two possible MFP measures.q s .

q t .q s . x s . xt ! « mo .

q s . q t . x s . xt v mo .

x s .q s . xt » ­ ½ t « d os . q t .

xt . qt d o .

5 !¬ s v ¼ d o .xt . qt » 0.

x s . q s d ot .

q s ¼ ¬ ­ ½ 0.5 5 .x s .

It can be decomposed into efficiency change and technical change: mo .Properties Properties of Malmquist Productivity Index: 1.Malmquist Productivity Index .

q t . x s ! t do s do . x s .q s .

x t . q t « d os .

x t . q t v d os .

x s . q s » ¼ ¬ t .

q s ¬ d ot .x s .

q t d o .x t .

x s . q s ¼ ½ ­ Technical change 0. 6 . 5 Efficiency change 2. Malmquist productivity index is the same as the Hicks-Moorsteen index if the technology exhibits global constant returns to scale and inverse homotheticity.

5 7 .Malmquist Productivity Index r r r y yE y Efficiency change = qt / qc qs / q a Technical change = £   0 ¢ ¤   ¡ £ r r r y y yD « qt / qb qs / qa » v ¬ ¼ qt / qc qs / qb ½ ­ 0.

The input-orientated Malmquist productivity index is given by: « d s .Malmquist Productivity Index .Properties 3.

xt dt .qs .

qs . xs » TFP ! ¬ ¼ d s .

xt dt .qt .

qt .5 5. 8 . So we need to use the EKS method to make them transitive. Output-orientated and input-orientated Malmquist indexes coincide if the technology exhibits constant returns to scale. The Malmquist Productivity index does not adequately account for scale change. 6. 6. xt ½ ­ 0. The Malmquist productivity index does not satisfy transitivity property.

Properties 7. If only two data points are available.Malmquist Productivity Index . 8. If panel data on input and output quantities are available then there is no need for price data. then we need to use index number approach ± may require some behavioural assumptions 9 .

Scale efficiency change 4. Output and input mix effect Then Productivity change is measured as the product of the four changes above. Technical change 3. Efficiency change 2.Productivity Index ± components approach The last approach is to measure productivity change by identifying various sources of productivity growth: 1.t . The resulting index is: C s.

qt s « d *o . q s . s . t .

t . q t d *to .

t . q t » !¬ s ¼ t ¬ d *o .

s . q s d *o .

q s ¼ ­ ½ 0. s . 5 where (*) denotes ³cone technology´ ± the smallest CRS technology that encompasses the technology ± in periods t and s. 10 .

we have the following result from Caves.  In this case we can compute MPI provided we have additional information on prices.wt) and (ps.  The result states that: 11 .  In this case.xt) and (qs.ws) and assume that that the firms are technically and allocatively efficient. (pt.MPI using Index Numbers  This is the case where we have only two observed points (qt. Christensen and Diewert which makes it possible to compute the Malmquist productivity index using Tornqvist index numbers.xs).

m o .MPI -Index Number approach  If the output distance functions in periods s and t are represented by translog functional form with identical second order terms and then under the assumption of technical and allocative efficiency. we can use the Tornqvist output and input quantity index numbers to compute the Malmquist productivity index.

q t . x s .q s . x t ! m o .

q t .q s . x t v m o . x s .

q t . x s . x t ! Tornqvist output index Tornqvist input index K ¨x v  © kt © k !1 ª x ks ? t s A 0.5 ¸ ¹ ¹ º s k */ 2 where s* ! s kt .q s .

 I t  s kis .

It and Is are the local returns-to- 12 .  I s 1 1 k scale values in periods t and s.

1M ! § . then the MPI is simply given by the ratio of the output and input indexes computed using the Tornqvist formula.MPI -Index Number approach  If in both periods there is constant returns to scale.

ris 2 i !1 rit .

ln qit ln qis 1 K § s js 2 j !1 .

s jt .

13 . We can use EKS method to generate transitive Malmquist Productivity indexes. the Malmquist index is given by the ratio of Fisher output and input quantity index numbers.ln x jt ln x js  We note that the MPI based on Tornqvist index is not transitive.  Another useful result: If the distance functions are quadratic and under the assumption of technical and allocative efficiency.

Transitive Tornqvist TFP Index If we apply the EKS method and generate transitive index numbers. we can show that «1 M transitive ! ¬ 2 § rit ri ln qit ln qi ln st ­ i !1 M » 1  2 § ris  ri ln qis  ln qi ¼ i !1 ½ « K  ¬ 1 § s jt  s j ln x jt  ln x j 2 ¬ j !1 ­ K »  1 § s js  s j ln x js  ln x j ¼ 2 ¼ j !1 ½ .

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14 .

Example  Recall our example in session 2  Two firms producing t-shirts using labour and capital (machines)  Let us now assume that they face different input prices firm A B labour 2 4 8 9 capital 2 2 cost output 36 48 2 2 15 2 2 .

 In this example we compare productivity across 2 firms (instead of 2 periods)  First we calculate the input cost shares  Labour share for firm A = (2v80)/(2v80+2v100) = 0.44  Labour share for firm B = (4v90)/(4v90+1v120) = 0.25.75)=0.75  Thus the capital shares are (1-0.56 and (1-0.44)=0. respectively 16 .

56+0.13 TFP Index = exp(0.44+0.5(0.13 ln TFP Index = 0.Ln Output index = ln(200)-ln(200) = 0. firm A is 14% more productive than firm B 17 .5(0.75)(ln(2)-ln(4)) +0.13)=1.13) = 0.0 Ln Input index = [0.139 ie.25)(ln(2)-ln(1))] = -0.0-(-0.

mo .Malmquist Productivity Index Using DEA  We recall that the Malmquist productivity index depends upon four different distance functions.

xt ! « m .q s . x s . q t .

q s . qt . xt v m . x s .

qt . xt » ­ ½ s o t o t « d os . xs .q s .

qt d o .xt .

qt » 0.5 !¬ s v t ¼ d o .xt .

q s d o .x s .

q s ¼ ¬ ­ ½ 0.5  If we have observed output and input quantity data for a cross-section of firms in periods s and t we can identify the production frontier using DEA and use them in computing the distance needed. In general we need to solve the following four linear programming problems: 18 .x s .

P J. st -Jqis + QtP u 0.Malmquist Productivity Index Using DEA  These four LP¶s are solved under CRS assumption [dot(qt. P u 0. xt)]-1 = J. st -Jqit + QtP u 0. xs)]-1 = max J. P u 0. xit XsP u 0. P u 0.P J. xis . xt)] = max J. xis ± XsP u 0. 19 . st -Jqit + QsP u 0. [do (qs. P u 0.XtP u 0. st -Jqis + QsP u 0. xit .P J. t -1 [dos(qs. xt)]-1 = max J.P J.XtP u 0. [dos(qt.

Calculation using DEA  TFP growth can be computed using DEA and we need to run 6 different DEA LPs: ± VRS observation s versus frontier s ± VRS observation t versus frontier 1 ± CRS observation s versus frontier s ± CRS observation t versus frontier t ± CRS observation s versus frontier t ± CRS observation t versus frontier s  Repeat for each observation between each pair of adjacent periods  We note here that some VRS LPs may not have a solution ± but always guaranteed for CRS 20 .

txt 5 NUMBER OF FIRMS 12 3 NUMBER OF TIME PERIODS 1 NUMBER OF OUTPUTS 34 NUMBER OF INPUTS 43 1 1 0=INPUT AND 1=OUTPUT ORIENTATED 0=CRS AND 1=VRS 35 0 0=DEA(MULTI-STAGE).txt DATA FILE NAME OUTPUT FILE NAME 5 6 eg4-out. EG4-INS. 55 2 3=DEA(1-STAGE). 1=COST-DEA. EG4-DTA.Calculation using DEA Listing of Data File.TXT 24 3 3 ________________________________________________________________ 4 5 eg4-dta.TXT _________________________________ 12 Listing of Instruction File. 2=MALMQUIST -DEA. 4=DEA(2 -STAGE) 1 2 ________________________________________________________________ 34 43 35 55 _________________________________ 21 .

000 1.DEAP output MALMQUIST INDEX SUMMARY OF ANNUAL MEANS year 2 3 mean effch 0.955 1.155 1.000 0.155 1.918 techch 1.930 0.000 1.000 0.106 1.000 0.844 1.155 1.977 s ech 0.940 tfpch 1.949 0.225 1.061 MALMQUIST INDEX SUMMARY OF FIRM MEANS firm 1 2 3 4 5 mean effch 0.155 1.866 1.750 0.866 0.000 1.806 1.125 1.155 1.000 0.155 0.095 1.061 1.959 1.883 1.155 pech 0.977 sech 0.061 [Note that all Malmquist index averages are geometric means] 22 .949 0.000 0.000 0.000 1.333 1.866 1.000 0.155 pech 1.918 techch 1.940 tfpch 1.

I is ! § I nis n !1 a .. ec ical c a e = exp ¥ _ 1 « x ln qis 2¬ xs ­  x ln qit » ..2. 2 i=1. e e Eit=E(e (.it)|eit).2.. I 2 ° n !1 À N e e SFis ! (I is  ) / I is .... x ln xnis 23 Scale c a e = ¾ ® N 1 xp¯ § ? nis SFis  I nit SFit A n( xnit / xnis )¿ ..TFP decomposition with an SFA production function Suppose we estimate a translog production frontier of the following form using panel data under the standard distributional assumptions ln qit ! 0  § F n ln xnit  n !1 N N 1 N N § § F nj ln xnit ln xnit 2 n !1 j !1 1 F tt t 2  vit  uit .  § F tn t ln xnit  F t t  n !1 E icie c c a e = Eit/ Ei .I . xt ¼ ½ a I nis ! x ln qis . t=1.. .

475 0.036 0.592 Standard rror 00 00 3 0.391 2.033 t ratio 10 230 7.033 27.024 0.237 24 .024 0.068 0.509 0.942 0.TFP decomposition with an SFA production function M ximum-Likeli ood E im te of t e Sto ha ti Frontier Model oefficient F0 F1 F2 F3 Ft F11 F12 F13 F1t F22 F23 F2t F33 F3t Ftt W 2s K Log-lik li ood stimate 0 2 0 3 0.015 -0.018 0.215 -2.176 9.896 -70.144 0.005 -0.230 -1.622 0.232 0.026 0.539 -0.007 0.108 -2.223 0.263 3.623 6.159 0.169 0.093 0.148 0.264 0.034 0.062 0.613 0.015 0.223 4.225 0.047 -1.073 0.893 2.025 0.021 -0.007 0.286 0.

TFP decomposition ± numerical example 25 20 15 10 5 0 -5 -10 -15 90 91 92 93 94 95 96 97 tec tc sc tfpc index year 25 .

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