Production with Storable and Durable Inputs: Nonparametric Analysis of Intertemporal Efficiency

KU Leuven Department of Economics, Discussion Paper Series, DPS16.19, September, 2016

34 Pages Posted: 21 Sep 2016

See all articles by L. Cherchye

L. Cherchye

KU Leuven; Erasmus Research Institute of Management (ERIM)

Bram de Rock

Katholieke Universiteit Leuven - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics

Pieter Jan Kerstens

KU Leuven - Subfaculty of Economics and Applied Economics

Date Written: September 2016

Abstract

We propose a nonparametric methodology for intertemporal production analysis that accounts for durable as well as storable inputs. Durable inputs contribute to the production outputs in multiple consecutive periods. Storable inputs are non-durable and can be stored in inventories for use in future periods. We explicitly model the possibility that firms use several vintages of the durable inputs, i.e. they invest in new durables and scrap older durables over time. Furthermore, we allow for production delays of durable inputs. We characterize production behavior that is dynamically cost efficient, which allows us to evaluate the efficiency of observed production decisions. For cost inefficient behavior, we propose a measure to quantify the degree of inefficiency. An attractive feature of this measure is that it can be decomposed in period-specific cost inefficiencies. We demonstrate the usefulness of our methodology through an application to Swiss railway companies.

Keywords: cost minimization, storable inputs, durable inputs, production delay, dynamic efficiency

JEL Classification: D21, D24, D92

Suggested Citation

Cherchye, Laurens and de Rock, Bram and Kerstens, Pieter Jan, Production with Storable and Durable Inputs: Nonparametric Analysis of Intertemporal Efficiency (September 2016). KU Leuven Department of Economics, Discussion Paper Series, DPS16.19, September, 2016, Available at SSRN: https://ssrn.com/abstract=2841170 or http://dx.doi.org/10.2139/ssrn.2841170

Laurens Cherchye (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant
Belgium

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Bram De Rock

Katholieke Universiteit Leuven - Campus Kortrijk (KULAK) - Subfaculty of Economics and Applied Economics ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

Pieter Jan Kerstens

KU Leuven - Subfaculty of Economics and Applied Economics ( email )

Etienne Sabbelaan 53
Kortrijk, B-8500
Belgium

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