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Analyzing Cost-Efficient Production Behavior Under Economies of Scope: A Nonparametric Methodology

Fund for Scientific Research—Flanders (FWO-Vlaanderen), Campus Kortrijk and Center for Economic Studies, University of Leuven, B-8500 Kortrijk, Belgium
Campus Kortrijk and Department of Mathematics, University of Leuven, B-8500 Kortrijk, Belgium
CentER, Department of Econometrics and Operations Research, Tilburg University and IZA Bonn, NL-5000 LE Tilburg, The Netherlands
laurens.cherchye{at}kuleuven-kortrijk.be
bram.derock{at}kuleuven-kortrijk.be
frederic.vermeulen{at}uvt.nl

In designing a production model for firms that generate multiple outputs, we take as a starting point that such multioutput production refers to economies of scope, which in turn originate from joint input use and input externalities. We provide a nonparametric characterization of cost-efficient behavior under these conditions, and subsequently institute necessary and sufficient conditions for data consistency with such efficient behavior that only include observed firm demand and supply data. We illustrate our methodology by examining the cost efficiency of research programs in economics and business management faculties of Dutch universities. This application shows that the proposed methodology may entail robust conclusions regarding cost-efficiency differences between universities within specific specialization areas, even when using shadow prices to evaluate the different inputs.

Subject classifications: production behavior; multiproduct firms; input externalities; joint input use; economies of scope; nonparametric tests.
History: Received December 2005; revision received August 2006; accepted December 2006.