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

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