How Harmless is Convexification for Nonparametric Cost Function Estimates?

Kristiaan Kerstens and Ignace Van de Woestyne
Additional contact information
Ignace Van de Woestyne: KU Leuven, Belgium

No 2017-EQM-03, Working Papers from IESEG School of Management

Abstract: This contribution focuses on testing the empirical impact of the convexity assumption in estimating costs using nonparametric specifications of technology and cost functions. Apart from reviewing the scant available evidence, the empirical results based on two publicly available data sets reveal the effect of the convexity axiom on cost function estimates: cost estimates based on convex technologies turn out to be on average between 21% and 38% lower than those computed on nonconvex technologies. These differences are statistically significant when comparing kernel densities and can be illustrated using sections of the cost function estimates along some output dimension. Finally, also the characterization of returns to scale and economies of scale using production and cost functions for individual units yields conflicting results for between 19% and 31% of individual observations. The theoretical known potential impact as well as these empirical results should make us reconsider convexity in empirical production analysis: clearly, convexity is not harmless

Keywords: Economics; Technology; Cost analysis (search for similar items in EconPapers)
JEL-codes: D24 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2017-05
New Economics Papers: this item is included in nep-eff
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.ieseg.fr/wp-content/uploads/2012/03/2017-EQM-03_Kerstens.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ies:wpaper:e201703

Access Statistics for this paper

More papers in Working Papers from IESEG School of Management Contact information at EDIRC.
Bibliographic data for series maintained by Lies BOUTEN ().