Emir Malikov

Estimation of Input Distance Functions: A System Approach

This article offers a methodology to address the endogeneity of inputs in the input distance function (IDF) formulation of the production processes. We propose to tackle endogenous input ratios appearing in the normalized IDF by considering a flexible (simultaneous) system of the IDF and the first-order conditions from the firms cost minimization problem. Our model can accommodate both technical and (input) allocative inefficiencies amongst firms. We also present the algorithm for quantifying the cost of allocative inefficiency. We showcase our cost-system-based model by applying it to study the production of Norwegian dairy farms during the 1991--2008 period. Among other things, we find both an economically and statistically significant improvement in the levels of technical efficiency among dairy farms associated with the 1997 quota scheme change, which a more conventional single-equation stochastic frontier model appears to be unable to detect.

Are All U.S. Credit Unions Alike? A Generalized Model of Heterogeneous Technologies with Endogenous Switching and Correlated Effects

Credit unions differ in the types of financial services they offer to their members. This paper explicitly models this observed heterogeneity using a generalized model of endogenous ordered switching. Our approach captures the endogenous choice that credit unions make when adding new products to their financial services mix. Failure to do so is likely to yield biased and inconsistent estimates. The model that we develop also allows for the dependence between unobserved effects and regressors in both the selection and outcome equations and can accommodate the presence of predetermined covariates in the model. We use this model to estimate returns to scale for U.S. retail credit unions from 1996 to 2011. We document strong evidence of persistent technological heterogeneity among credit unions offering different financial service mixes, which, if ignored, can produce quite misleading results. Employing our generalized model, we find that credit unions of all types exhibit substantial economies of scale.

Are the Job Flow Responses to Oil Price Shocks Asymmetric

This paper investigates the dynamic responses of employment flows to oil price shocks for the U.S. Manufacturing sector in the post-1973 period. Using the latest available data and state-of-the-art econometric methods of estimation and inference, I formally test for asymmetries in responses of job flows to positive and negative oil price innovations --- an issue that has recently been brought into the spotlight of academic debate. In addition to the recently developed impulse response function (IRF) based Wald test, this paper suggests performing a nonparametric IRF-density-based test of asymmetry, which is unconditional of the magnitude of oil price shocks as well as able to account for their relative likelihood. This permits inference about a general tendency of asymmetries in impulse responses. I find strong evidence in favor of asymmetric responses of manufacturing job flows to oil price shocks both on the aggregate and industry group levels.

An internally consistent approach to the estimation of market power and cost efficiency with an application to U.S. banking

We develop a novel unified econometric methodology for the formal examination of the market power -- cost efficiency nexus. Our approach can meaningfully accommodate a mutually dependent relationship between the firms cost efficiency and marker power (as measured by the Lerner index) by explicitly modeling the simultaneous determination of the two in a system of nonlinear equations consisting of the firms cost frontier and the revenue-to-cost ratio equation derived from its stochastic revenue function. Our framework places no a priori restrictions on the sign of the dependence between the firms market power and efficiency as well as allows for different hierarchical orderings between the two, enabling us to discriminate between competing quiet life and efficient structure hypotheses. Among other benefits, our approach completely obviates the need for second-stage regressions of the cost efficiency estimates on the constructed market power measures which, while widely prevalent in the literature, suffer from multiple econometric problems as well as lack internal consistency/validity. We showcase our methodology by applying it to a panel of U.S. commercial banks in 1984-2007 using Bayesian MCMC methods.

Heterogeneous credit union production technologies with endogenous switching and correlated effects

ABSTRACT Credit unions differ in the types of financial services they offer to their members. This article explicitly models this observed heterogeneity using a generalized model of endogenous ordered switching. Our approach captures the endogenous choice that credit unions make when adding new products to their financial services mix. The model that we consider also allows for the dependence between unobserved effects and regressors in both the selection and outcome equations and can accommodate the presence of predetermined covariates in the model. We use this model to estimate returns to scale for U.S. retail credit unions from 1996 to 2011. We document strong evidence of persistent technological heterogeneity among credit unions offering different financial service mixes, which, if ignored, can produce quite misleading results. Employing our model, we find that credit unions of all types exhibit substantial economies of scale.

A Proportional Scale-Invariant Measurement of Heterogeneous Directional Distances to the Technological Frontier

We consider a stochastic multiplicative-directional-distance-function-based formulation of the production technology in the presence of bad outputs. In contrast to the popular additive directional distance function, our approach preserves the highly desired scale invariance property of the proportional radial distance function and can easily assume popular translog specification. Our model can also meaningfully accommodate technological heterogeneity across individual firms by letting the direction in which the distance to frontier is measured be an unknown function of the firm’s idiosyncratic characteristics reflective of the heterogeneous economic environment in which it operates. To mitigate the uncertainty associated with an arbitrary choice of the direction, we rely on a data-driven selection method to determine these varying heterogeneous directional vectors for individual firms. We showcase practical advantages of the proposed model by estimating the production technology of U.S. commercial banks in the presence of undesirable non-performing loans during the 2001–2010 period.

Estimation and Inference in Functional-Coefficient Spatial Autoregressive Panel Data Models with Fixed Effects

This paper develops an innovative way of estimating a functional-coefficient spatial autoregressive panel data model with unobserved individual effects which can accommodate (multiple) time-invariant regressors in the model with a large number of cross-sectional units and a fixed number of time periods. The methodology we propose removes unobserved fixed effects from the model by transforming the latter into a semiparametric additive model, the estimation of which however does not require the use of backfitting or marginal integration techniques. We derive the consistency and asymptotic normality results for the proposed kernel and sieve estimators. We also construct a consistent nonparametric test to test for spatial endogeneity in the data. A small Monte Carlo study shows that our proposed estimators and the test statistic exhibit good finite-sample performance.

The Value-Undermining Effects of Rock Mining on Nearby Residential Property: A Semiparametric Spatial Quantile Autoregression

Rock mining operations, including limestone and gravel production, have considerable adverse effects on residential quality of life due to elevated noise and dust levels resulting from dynamite blasting and increased truck traffic. This paper provides the first estimates of the effects of rock mining — an environmental disamenity — on local residential property values. We focus on the relationship between a house’s price and its distance from nearby rock mine. Our analysis studies Delaware County, Ohio which, given its unique features, provides a natural environment for the valuation of property-value-suppressing effects of rock mines on nearby houses. We improve upon the conventional approach to valuating adverse effects of environmental disamenities based on hedonic house price functions. Specifically, in a pursuit of robust estimates, we develop a novel (semiparametric) partially linear spatial quantile autoregressive model which accommodates unspecified nonlinearities, distributional heterogeneity as well as spatial dependence in the data. We derive the consistency and normality limit results for our estimator as well as propose a consistent model specification test. We find statistically and economically significant propertyvalue-suppressing effects of being located near an operational rock mine which gradually decline to insignificant near-zero values at a roughly ten-mile distance. Our estimates suggest that, all else equal, a house located a mile closer to a rock mine is priced, on average, at about 2.3–5.1% discount, with more expensive properties being subject to larger markdowns.

Structural Estimation of Multi-Product Production Functions and Productivity

Most empirical studies seeking to estimate firm-level production technologies via structural control-function-based estimators focus on single-output production functions despite that, in practice, the majority of firms produce multiple outputs. Arguably, the primary reason for vast popularity of a single-product model is the systematic lack of data on input usage by products. While one can always employ such a model by defining the firm’s “output�? as an aggregate of its multiple outputs in the form of deflated total revenue as customarily done in the literature, such a formulation rarely provides an adequate representation of the multiproduct firm’s technology: (i) it does not allow identification of technological trade-offs between outputs along the firm’s production possibilities frontier, and (ii) it unrealistically assumes perfect substitutability of outputs effectively embedded in a linearly additive revenue-based output aggregator which, if misspecified, would produce biased estimates of the firm’s production technology and productivity. This paper offers a new (nonparametric) methodology for the structural identification of multi-product production technology which not only does not require the access to information beyond that available in most datasets but also successfully identifies the cross-output technological relationship within the firm by not a priori aggregating outputs. The two-stage model is showcased using a panel of Norwegian dairy farms in 1998–2008.

Firm Productivity, Technological Heterogeneity and Endogenous Exports

Exporters tend to be more productive than non-exporting firms, and uncovering the extent of these productivity differentials as well as causes thereof has long been one of the core topics in the literature. This paper focuses on the issues pertaining to robust empirical modeling of the intricate endogenous relationship between the firm’s export behavior and its productivity. I provide a new synthesized (nonparametric) methodology for the structural control-function-based identification of unobserved firm productivity in the presence of (i) endogenous self-selection into export markets, (ii) dependence of productivity evolution on the firm’s past export experiences and (iii) potential technological heterogeneity in the production of for-export and for-domestic-sale outputs. The model offers a useful addition to the toolkit of practitioners interested in studying the nexus between firm productivity and export behavior. I showcase the proposed methodology by applying it to the firm-level data on China’s apparel industry, one of the country’s most export-oriented manufacturing sectors, during the 1999–2006 period.