The Impact of GDP on Cross-Country Efficiency in Wealth Maximization: a Joint Analysis Through the Stochastic Frontier and Generalized Method of Moments

Abstract

Wealth maximization is still the principal objective of a corporation and income plays a pivotal role in this regard. Taking this to the country context, wealth maximization can be a more refined objective alongside GDP growth. Considering GDP as the key wealth maximizer for a nation, the present work was undertaken to determine cross-country wealth efficiency and its determinants based on GDP covariates. The relationship between aggregate net wealth and GDP of 106 different countries for a period of 2009 to 2018 were analyzed to estimate annual incremental wealth efficiency based on their GDP covariates using input-output stochastic frontier analysis (SFA). Further, the determinants of incremental wealth efficiency were identified using multiple regression models. The SFA analysis shows significant negative impact of GDP on wealth maximization efficiency, like the law of diminishing marginal return to scales advocates. With the increase of GDP of a country, its marginal efficiency in wealth maximization decreases though aggregate wealth increases. The robust regression models show that imports, broad money and exchange rate undermine the wealth efficiency of a country and country’s past efficiency positively influences the subsequent year’s efficiency. These findings are expected to open new horizons for policymakers in policy analyses. JEL classification numbers: E1, E2, F4 Keywords: Wealth Maximization, GDP, SFA, Technical Efficiency, GMM, Driscoll Kraay.