The Role of Management in Efficient Production: Theoretical and Statistical Implications

Mike G. Tsionas

A chapter in Essays in Honor of Subal Kumbhakar, 2024, vol. 46, pp 185-210 from Emerald Group Publishing Limited

Abstract: In this chapter, we consider the possibility that a firm may use costly resources to improve its technical efficiency. Results from static analyses imply that technical efficiency is determined by the configuration of factor prices. A dynamic model of the firm is developed under the assumption that managerial skill contributes to technical efficiency. Dynamic analysis shows that the firm can never be technically efficient if it maximizes profits, the steady state is always inefficient, and it is locally stable. In terms of empirical analysis, we show how likelihood-based methods can be used to uncover, in a semi-non-parametric manner, important features of the inefficiency-management relationship using a flexible functional form accounting for the endogeneity of inputs in a production function. Managerial compensation can also be identified and estimated using the new techniques. The new empirical methodology is applied in a data set previously analyzed byBloom and van Reenen (2007)on managerial practices of manufacturing firms in the UK, US, France and Germany.

Keywords: Organization theory; firm behavior; technical inefficiency; inefficiency-management relationship; panel data econometrics (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320240000046008

DOI: 10.1108/S0731-905320240000046008

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