Paul W. Bauer

Recent developments in the econometric estimation of frontiers

Abstract A number of techniques have been developed that expand the range of options available to researchers for estimating frontiers. This paper discusses recent developments in the econometric approach to the estimation of stochastic frontiers such as production, costs, and profit functions. Areas requiring further work are also noted.

Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed results.

Original ArticlesConsistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed results.

Decomposing TFP Growth in the Presence of Cost Inefficiency, Nonconstant Returns to Scale, and Technological Progress

A thorough understanding of changes in productivity measures is important to economists and policymakers, because productivity growth is a major source of economic growth. This article explores the relationship between changes in total factor productivity (TFP) growth, defined using an index number approach, and changes in returns to scale, cost efficiency, and technology. Several decompositions are developed, using alternatively production and cost frontiers. The last decomposition developed also allows for multiple outputs.

The efficiency of the Federal Reserve in providing check processing services

Abstract We examine the efficiency and productivity of check processing offices of the Federal Reserve System using a variety of frontier estimation techniques. Although there is broad agreement among the techniques about the relative efficiency rankings of offices, the average level of efficiency varies considerably depending on the technique chosen. Similar to other studies of financial services, we find that measured cost inefficiency (deviations from the frontier) dominates scale inefficiency. We find no evidence of significant technological progress over the main sample period.

U.S. AIR PASSENGER SERVICE: A TAXONOMY OF ROUTE NETWORKS, HUB LOCATIONS, AND COMPETITION

In this paper, we analyze the service provided by the 13 largest U.S. passenger airlines to the 100 most populous U.S. metropolitan areas in 1989. We classify the route systems by their nature and geographical extent using a variety of measures based on route-level data. We then identify individual airline hub locations and derive and calculate several measures of the extent of competition both on individual routes and at the airports in our sample. The results show the wide diversity of route networks that existed in the airline industry in 1989--a phenomenon that may help to explain the failure of several major carriers since then.

State Growth Empirics: The Long-Run Determinants of State Income Growth

Real average U.S. per capita personal income growth over the last 65 years exceeded a remarkable 400 percent. Also notable over this period is that the stark income differences across states have narrowed considerably: In 1939 the highest income states per capita personal income was 4.5 times the lowest, but by 1976 this ratio had fallen to less than 2 times. Since 1976, the standard deviation of per capita incomes at the state level has actually risen, as some higher-income states have seen their income levels rise relative to the median of the states. A better understanding of the sources of these relative growth performances should help to characterize more effective economic development strategies, if income growth differences are predictable. In this paper, we look for statistically and economically significant growth factors by estimating an augmented growth model using a panel of the 48 contiguous states from 1939 to 2004. Specifically, we control for factors that previous researchers have argued were important: tax burdens, public infrastructure, size of private financial markets, rates of business failure, industry structure, climate, and knowledge stocks. Our results, which are robust to a wide variety of perturbations to the model, are easily summarized: A states knowledge stocks (as measured by its stock of patents and its high school and college attainment rates) are the main factors explaining a states relative per capita personal income.

Scale Economies, Scope Economies, and Technical Change in Federal Reserve Payment Processing

In the past decade, the U.S. economy has witnessed a tremendous surge in the usage of electronic payment processing services and an increased importance of the firms that provide these services. In this paper, we estimate scale economies, scope economies, and technical change in the Federal Reserves provision of payments processing from 1990 to 2000. We find considerable scale economies and evidence of some scope economies for the provision of automated clearinghouse, Fedwire, and Book-Entry services no matter whether we specify a separable quadratic or a translog cost function. In addition, we find that disembodied technical change also contributed to the overall reduction in costs throughout the 1990s.

Estimating GSP and Labor Productivity By State

In gauging the health of state economies, arguably the two most important series to track are employment and output. While employment by state is available about three weeks after the end of a month, data on output, as measured by Gross State Product (GSP), are only available annually and with a significant lag. This Policy Discussion Paper details how more current estimates of GSP can be generated using U.S. Gross Domestic Product and personal income along with individual states’ personal income. A straightforward share approach yields reasonable GSP estimates, but a more sophisticated econometric approach, at a cost of imposing more structure, yields even better ones. Both techniques are also applied to estimate nonfarm-business GSP in order to calculate a measure of labor productivity at the state level that follows as closely as possible the method used by the Bureau of Labor Statistics to calculate the national measure of labor productivity. We then briefly examine how labor productivity varies across states.

The Effect of Pricing on Demand and Revenue in Federal Reserve ACH Payment Processing

Because the automated clearinghouse (ACH) has been found to have lower social costs than paper checks, the Federal Reserve has been promoting more widespread use of ACH by lowering ACH processing fees. In this paper we have obtained the first numerical estimates of ACH demand elasticities, a measure of the responsiveness of ACH demand to price changes. In order to determine how robust the estimates are, various methods were employed to estimate the demand elasticities. Our results show that the volume of ACH items processed by the Federal Reserve does respond to changes in per-item fees. We find that demand for ACH credit is elastic, while demand for ACH debit is inelastic. The difference most likely arises from high customer resistance to automatic payment deduction and from low market penetration of that service among companies. Demand for origination was found to be somewhat more elastic than demand for receipt. We then examined how volume growth initiated by a price cut affected unit costs. Given the relatively large scale economies found for ACH, volume growth leads to lower unit costs. However, to outweigh revenue lost as a result of a price decline, ACH volume would have to increase by an amount greater than our estimates indicate is likely. Consequently, a decline in per-item ACH fees would likely lead to lower net revenues.