Efficiency analysis with unobserved inputs: An application to endogenous automation in railway traffic management

47 Pages Posted: 7 Apr 2021

See all articles by Laurens Cherchye

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Dieter Saelens

KU Leuven

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus

Bart Roets

Ghent University

Date Written: April 6, 2021

Abstract

Performance analytics are commonly used in managerial decision making, but are vulnerable to an omitted variable bias issue when there is incomplete information on the used production factors. In this paper, we relax the standard assumption in efficiency analysis that all input quantities are observed and develop a nonparametric methodology that is robust to endogeneity issues. Our methodology extends Cherchye et al. (2021) by introducing cost inefficiency in the nonparametric framework to recover unobserved heterogeneity of cost minimizing firms. Our main contribution is that we bridge the OR/MS literature and the economic literature by addressing the general critique of Stigler (1976) on the concept of inefficiency (Leibenstein, 1966), which argued that found inefficiencies reflect unobserved inputs rather than waste. As such, we are the first to differentiate between cost inefficiency (i.e. waste; deviations from optimizing behavior) and unobserved input usage (i.e. optimally chosen input factors that are unobserved to the empirical analyst). We show the applicability of the approach by studying both cost efficiency and endogenous automation in a real-world and purpose-built dataset on Belgian railway traffic management control rooms. Our findings cast doubt on Stigler's argument showing instead the existence of meaningful inefficiencies that cannot be attributed to use of unobserved inputs or environmental factors. In addition, we document how the omitted variable bias impacts cost efficiencies of individual observations in a dissimilar way in case the use of unobserved inputs is not controlled for.

Keywords: efficiency measurement, unobserved heterogeneity, omitted variable bias, cost minimization, railways

JEL Classification: D24, L23, L25

Suggested Citation

Cherchye, Laurens and De Rock, Bram and Saelens, Dieter and Verschelde, Marijn and Roets, Bart, Efficiency analysis with unobserved inputs: An application to endogenous automation in railway traffic management (April 6, 2021). Available at SSRN: https://ssrn.com/abstract=3820457 or http://dx.doi.org/10.2139/ssrn.3820457

Laurens Cherchye

KU Leuven

Bram De Rock

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Av. F. D. Roosevelt, 50
CP 114
Brussels, B-1050
Belgium

Dieter Saelens (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Marijn Verschelde

Catholic University of Lille - IÉSEG School of Management, Lille Campus ( email )

3 rue de la Digue
Lille, 59000
France

Bart Roets

Ghent University ( email )

Coupure Links 653
Gent, 9000
Belgium

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