Endogenous dynamic efficiency in the intertemporal optimization models of firm behavior

Abstract

Existing methods for the measurement of technical efficiency in the dynamic production models obtain it from the implied distance functions without making use of the information about intertemporal economic behavior in the estimation beyond an indirect appeal to duality. The main limitation of such an estimation approach is that it does not allow for the dynamic evolution of efficiency that is explicitly optimized by the firm. This paper introduces a new conceptualization of efficiency that directly enters the firm's intertemporal production decisions and is both explicitly costly and endogenously determined. We build a moment-based multiple-equation system estimation procedure that incorporates both the dynamic and static optimality conditions derived from the firm's intertemporal expected cost minimization. We operationalize our methodology using a modified version of a Bayesian Exponentially Tilted Empirical Likelihood adjusted for the presence of dynamic latent variables in the model, which we showcase using the 1960-2004 U.S. agricultural farm production data. We find that allowing for potential endogenous adjustments in efficiency over time produces significantly higher estimates of technical efficiency, which is likely due to inherent inability of the more standard exogenous-efficiency model to properly credit firms for incurring efficiency-improvement adjustment costs. Our results also suggest material improvements in efficiency over time at an about 2.6% average annual rate, which contrasts with near-zero estimates of the exogenous efficiency change.

Endogenous efficiency of the dynamic profit maximization in the intertemporal production models of venture behavior

“…These methods inferred dynamic production functions from the implied distance functions but did not use information in intertemporal economic behavior, thereby limiting consideration of dynamic evolution of efficiency-a key consideration for ventures where efficiency is more likely to dynamically evolve over the course of venture life-cycle. Answering this call, Tsionas, Malikov, and Kumbhakar (2019) introduced explicitly and endogenously determined conceptualization of efficiency in firm's intertemporal production decisions. Tsionas et al (2019) used a modified version of a Bayesian Exponentially Tilted Empirical Likelihood finding that modeling for potential intertemporal endogenous adjustments produces significantly higher estimates of technical efficiency.…”

“…Answering this call, Tsionas, Malikov, and Kumbhakar (2019) introduced explicitly and endogenously determined conceptualization of efficiency in firm's intertemporal production decisions. Tsionas et al (2019) used a modified version of a Bayesian Exponentially Tilted Empirical Likelihood finding that modeling for potential intertemporal endogenous adjustments produces significantly higher estimates of technical efficiency.…”

Internal adjustment costs of firm-specific factors and the neoclassical theory of the firm

“…Note further that due to adjustment costs, applying a static model for long-run equilibrium as a consequence of such adjustment costs, even though the firm is dynamically e cient. Silva et al (2020) and Tsionas et al (2020) consider estimation of versions of an adjustment cost model without firm-specific capital. Our model rationalizes the first order autoregressive model for static ine ciency developed and estimated in Ahn and Sickles (2000).…”

“…This point is extensively developed inSilva et al (2020), who base their analysis on theTreadway (1970) model. See alsoTsionas et al (2020).…”

Internal Adjustment Costs of Firm-Specific Factors and the Neoclassical Theory of the Firm

“…efficient Silva et al (2020). andTsionas et al (2020) consider estimation of versions of an adjustment cost model without firm-specific capital. Our model rationalizes the first order autoregressive model for static inefficiency developed and estimated in Ahn and Sickles…”