Journal of Productivity Analysis, 10, 289304 (1998)

c 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.

Productivity Measurement from a Reference Technology: A Distance Function Approach

DAVID K. LAMBERT* Department of Applied Economics and Statistics, University of Nevada, Reno davel@equinox.unr.edu

Abstract An approach to productivity measurement based on distance function measurement is developed in this paper. A series of reference technologies are constructed by augmenting observed inputs and outputs such that the resulting effective netputs are consistent with the weak axiom of prot maximization. Geometric means of year-ahead and year-back distance function values serve as measures of multifactor productivity changes. Both primal measures from the inner bound and dual measures from the outer bound of the reference technologies are calculated. Resulting productivity measures are similar to those derived using index number approaches, but potentially provide greater information regarding the reference technologies.
Keywords: Technical change, Index numbers, Multifactor productivity, Agricultural production JEL classication: D24

1.

Introduction

In this paper we develop a measure of productivity growth based on distance function measurements of observed production bundles from constructed reference technologies. The procedure is based on both quantity based indexes discussed by Malmquist (1953) and Farrell (1957) and on distance functions calculated from a dual prot frontier (F re a and Primont, 1995). However, the approach differs from the techniques developed by F re a et al. (1989, 1994) due to its suitability for measuring productivity changes for time series, rather than panel, data. The approach is similar to the primal-dual approach developed in Chavas and Cox (1994). However, our approach is quite different in the development of a reference technology from which distance function values are derived. Whereas Chavas and Cox (1994) derive distance function measures from unadjusted prices and quantities, we rst develop reference technologies by calculating effective netputs that are consistent with Varians weak axiom of prot maximization (WAPM). The technique is nonparametric, thus eliminating the need to assume a particular functional form for the production relationships. The procedure is ideally suited to estimating multi-output productivity.
* The author is an associate professor in the Department of Applied Economics and Statistics at the University of Nevada, Reno, NV, 89557-0105, USA, phone number (702) 784-1675. Financial assistance from the Nevada Experiment Station, project number NEV05145 is gratefully acknowledged.

290
2. Background

LAMBERT

Productivity analysis assumes that production possibility sets change over time (Diewert, 1980; Solow, 1957). Since true production relationships cannot be induced from a few observations, several approximation techniques must be used to estimate intertemporal shifts. One approach is based on an econometric approximation of production technology. Consequently, primal or dual approaches may be employed to represent the underlying production technology, and econometric estimates of deterministic or stochastic trend may serve as measures of technical change. However, problems may arise using the econometric approach. Estimation generally requires that inputs and outputs be highly aggregated, thus imposing assumptions of separability on the technology (Antle and Capalbo, 1988). Efcient production is also generally assumed, or at least that inefciencies are constant proportionally over time.1 Finally, although the use of exible functional forms increases the approximation properties of the estimating equations to the underlying technology, productivity measurements are still seen to be dependent upon model specication (Guilkey, Lovell, and Sickles, 1983; Capalbo, 1988). Another problem with the econometric approach arises from the time series nature of the data. Common approaches to representing technical change, such as including a deterministic trend, may be invalid. The time series properties of the data must be considered for proper identication of the state of technology. Lambert and Shonkwiler (1995) have shown how standard translog representations of the dual cost function, with time included as a deterministic proxy for the state of technology, can greatly exaggerate estimates of factor biases in technical change. Another approach to estimating technical change is growth accounting, using index numbers as discrete approximations to measuring continuous changes in technology (Diewert, 1976, 1980; Chambers, F re, and Grosskopf, 1994). The economic justication for the use a of index numbers establishes a consistency between an underlying production technology and a given index, such as that between the translog technology and the T rnquist index.2 o The two most common measures used in applied analyses are the T rnquist and the o Fisher productivity indexes. The T rnquist index, exact for the translog (Diewert, 1976), is o commonly used to measure changes in output not accounted for by changes in inputs. As commonly employed, the T rnquist multifactor productivity index (MFP) index measures o technical change under the assumptions of competitive behavior, Hicks-neutral technical change, input-output separability, and constant returns to scale (Antle and Capalbo, 1988). The latter assumption can be dropped, but seldom is in applied work. The Fisher index has been shown to better satisfy various axiomatic, or test, criteria than alternative index number measures, as well as satisfying more general economic qualities desirable in index number construction (Diewert, 1992). In addition, nonparametric procedures have recently been developed to decompose changes in the Fisher productivity index into technical and allocative efciency changes, scale changes, and shifts in the cost function over time (Ray and Mukherjee, 1996). This recent work has addressed a problem raised by F re et al. (1994) about the inability of index numbers to differentiate the inuence of a technical change from shocks or other sources of production inefciency between periods.

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

291

Ray and Mukherjees work relies on linear programming techniques not dissimilar to those developed here. Index number approaches provide no information on the nature of the production technologies generating the sample of netput vectors. The productivity measures may uncover rates of growth in outputs that are unexplained by corresponding changes in inputs. However, without recourse to a presumed functional form underlying the aggregation functions, additional information cannot be derived concerning factor-factor, factor-product, or product-product relationships. The nonparametric approach has been shown to provide information on both input and output biases in MFP changes (Cox and Chavas, 1990), as well as substitution possibilities among inputs and outputs (Chavas and Cox, 1995). This paper demonstrates how the nonparametric approach can provide estimates of MFP changes over time that are very similar to those resulting from index number approaches. In addition, the constructed reference technologies are available for analysis of input and output relationships should such information be desired. The next section discusses two of the problems associated with measuring shifts in production possibility sets over time. A distance function approach to measuring productivity change is developed for measuring distance from a reference production technology in which all netput vectors are technically and allocatively efcient by construction. Finally, the distance function productivity measures are compared with both T rnquist and Fisher o productivity estimates. 3. A Distance Function Measure of Productivity Change

Identifying Changes in Technology Consider the production possibilities set S available at time t:
t S = {(x, y): x can produce y at time t}

(1)

where x n is a vector of inputs and y m is a corresponding vector of outputs. St is conditional upon the technology available at time t. Consider a similarly dened production possibilities set available at period s, Ss . Changes in multifactor productivity (MFP) have occurred between periods t and s if St Ss , but Ss St . Progressive MFP change has occurred when s > t. MFP change is regressive when t > s. Both measures will be local, where exogenous factors such as weather, business cycles, or political changes might affect year-to-year comparisons. Trends over time, however, can indicate the presence of technical change affecting the nature of production. Procedures to identify changes in MFP are not straight-forward. One problem relates to identifying and, if possible, quantifying a change in MFP between two periods. Output distance functions have recently been exploited to measure changes in production possibilities sets between periods (Caves et al., 1982; F re et al., 1989, 1994). If production set St a conforms to a standard set of economic properties including weak disposability of inputs and outputs, the output set is bounded, closed, and convex, and positive levels of inputs

292

LAMBERT

must be used to produce positive levels of output (F re and Primont, 1995, p. 27), then the a technology can be completely described by the output distance function: Dto (x, y) = inf{: (x, y/ ) St } = (sup{: (x, y) St })1 . (2)

The output distance function is the reciprocal of the maximum proportional expansion in output y given x and St . Values of Dt0 () less than 1 will lie within the boundary of St , implying that a proportional increase in outputs could occur for the observed level of inputs. A distance function value equal to 1 indicates the observed level of netput, (x, y) is on the frontier of St . No increase in the observed levels of outputs y is possible given x and the technology available at t. Values of Dt0 () greater than 1 indicate that y cannot be produced given x and St . would indicate the minimal shrinkage of y to be on the boundary of St . Caves et al. (1982) developed productivity indexes based on distance function calculations from a reference technology. Their Malmquist based index for an observed netput bundle in period s relative to technology associated with period t is: mt (xs , xt , ys , yt ) = Dto (xs , ys )/ Dto (xt , yt ) (3)

The numerator Dto (xs , ys ) measures the proportional deation in ys to conform with technology set St . Caves et al. (1982) assume that (xt , yt ) can always be found on the boundary of St , so that Dto (xt , yt ) = 1. Therefore, mt (xs , xt , ys , yt ) = Dto (xs , ys ) = (sup( : (xs , ys ) St ))1 (4) Following Caves et al. (1982, p. 1402), mt (xs , xt , ys , yt ) is the minimal output deation factor required so that the deated measure of output in period s, ys /mt , lies on the production surface of St . In order to avoid the choice of an arbitrary technology set (e.g., either t or s) as a benchmark for measuring productivity changes between periods, the Malmquist measure can also be derived relative to technology existing at period s. Caves et al. (1982) dene this measure ms (xs , xt , ys , yt ) = Ds (xs , ys )/ Ds (xt , yt ) o o Since Ds (xs , ys ) is assumed to equal 1, o ms (xs , xt , ys , yt ) = 1/ Ds (xt , yt ) o = 1/(sup(: (xt , yt ) Ss ))1 (6) (5)

Caves et al. (1982) show how the geometric mean of m t and m s is a generalization of the T rnquist productivity measure when the underlying production technology is translog. o F re et al. (1994) similarly dene their Malmquist measure of productivity change based on a the geometric means of the Malmquist measures from two adjacent time periods, although their approach obviates the need for presuming a structure on the underlying technology. We adopt F re et al.s approach and dene our productivity index as the geometric mean of a Malmquist measures calculated at two adjacent time periods, m(xt+1 , xt , yt+1 , yt ) = [mt (xt+1 , xt , yt+1 , yt )ms (xt+1 , xt , yt+1 , yt )]1/2 = [Dto (xt+1 , yt+1 )/ Dt+1 (xt , yt )]1/2 o (7)

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

293

The Malmquist productivity index will naturally be conditional upon the location of the frontier of set S. This raises the second problem in identifying shifts in the production possibilities set. How should the production possibilities set S be represented in the calculation of the distance functions underlying the Malmquist productivity measures? F re et al. a characterize technology as the convex hull of a set of production observations available at a given time period. However, this characterization denes a lower bound on the frontier of set S. Varian has developed procedures to identify an outer bound on set S if one assumes observed netput bundles result from optimizing behavior such as prot maximization. A production possibilities set is known to exist if observed production relationships are consistent with the weak axiom of prot maximization (WAPM) (Varian, 1984). If we have a set of K observations (xi , yi ) and corresponding prices (ri , pi ), i = 1, . . . , K, consistency with WAPM requires pi yi ri xi pi y j ri x j , for all i, j = 1, . . . , K. In other words, decision makers made the prot maximizing choices of (x, y) for each set of prices they faced. If the data does satisfy WAPM, Varian (1984) has shown that there exists a closed, convex, negative monotonic production set that rationalizes the data.3 Consequently, establishing the existence of a production set that rationalizes the K observations involves checking the following K(K 1) inequalities: pi yi ri xi pi y j ri x j , for all i, j = 1, . . . , K, i = j. Conrming the existence of a production set does not provide information on the curvature of the production frontier. However, lower and upper bounds can be placed on production set S. Employing Varians terminology, the tightest inner bound of production set S can be dened: SI = com {(xi , yi ) for all i = 1, . . . , K}, (8)

where com {} is the negative monotonic hull of S. Varian proves that SI forms the tightest lower boundary of all other production sets S that rationalize the data (i.e., SI S for all sets S that rationalize the data). Varian (1984) also characterized the outer bound on the true production possibilities set: SO = {(x, y): pi y ri x pi yi ri xi for all i = 1, . . . , K}, (9)

and proves that SO rationalizes the data (xi , yi ) and envelopes all production sets S that rationalize the data (i.e., for all S that rationalize the data, S SO). Most studies employing a distance function approach to productivity measurement dene changes in MFP relative to the inner bound representation of technology. F re et al. (1994) a measured gross domestic output for 17 OECD countries resulting from two factors, capital stock and employment. Bureau, F re and Grosskopf (1995) used a similar Malmquist index a in measuring differences in MFP for the agricultural sectors of nine EU countries and the United States. Price and Weyman-Jones (1996) examined efciency and total productivity gains in the UK gas industry before and after the 1986 privatization of the industry. All of these studies employed panel data on physical quantities. Availability of panel data circumvents the problems mentioned in Caves et al.s (1982) original discussion of the Malmquist productivity index. Caves et al. referred to their Malmquist measure as a theoretical index since the reference technologies could not be represented without reliance upon, for example, an assumption of a translog technology.

294

LAMBERT

F re et al. (1989, 1994) operationalized the Caves et al. measure by using panel data and the a inner bound characterization of technology to represent each years production possibilities frontier. Distance function values were then calculated from these annual characterizations of technology, forming the basis for F re et al.s productivity index. a We turn next to a procedure to estimate productivity changes based upon a distance function approach when panel data are not available. Creation of a Reference Technology Creation of a reference technology using time series data is more problematic since only one observation per period is available. However, we can ascertain whether technical change has affected the production set by imposing minimal behavioral assumptions. Testing for WAPM provides information on the existence of a closed, convex, negative monotonic production set that rationalizes the observations. Consider two production sets, St and St+1 , where (xt+1 , yt+1 ) St . In this case, technology has changed between the two periods since St = St+1 . Under an assumption of prot maximization, failure of (xt+1 , yt+1 ) and (xt , yt ) to satisfy WAPM is sufcient, though not necessary, for the observed production bundles to represent different technologies (see appendix 1). It is often found in empirical work that WAPM is violated when comparing earlier and later time periods. Technical change has occurred that render what would be prot maximizing choices using year t + 1 technology unachievable in year t. Technical change is generally attributed to differential improvements in the ability of factors to produce output (Lambert and Shonkwiler, 1995; Binswanger, 1974), neutral technical change affecting aggregate output levels (Harvey and Marshall, 1991), or technological progress that has disproportionate benets in the production of different outputs (Chavas and Cox, 1992). The augmentation hypothesis central to all of these studies has proven to be useful for modeling technical change. Under this hypothesis, technical change may affect the quality of both inputs and outputs. Augmentation factors are presumed to exist that explain qualitative differences between inputs and outputs in different periods. The resulting augmented inputs and outputs are termed effective netputs (Chavas and Cox, 1990). Consider a series of T observed production bundles (xi , yi ), i = 1, . . . , T . Call the i i vectors of effective quantities, (x , y ), where: y = y(y, a), and x = x(x, b). (10)

The vector valued functions y and x are one-to-one correspondences between each input and i i j j output. Augmentation factors are sought that would result in pi y ri x pi y ri x , i, j = 1, . . . , T . Values of a and b that satisfy WAPM indicate the existence of a closed, convex, negative monotonic production technology that rationalizes the effective inputs and outputs, S = {(x , y ): x can produce y for all i = 1, . . . , T }
i i i i

(11)

The proof of (11) follows directly from Varians theorem 3 (1984, page 584).

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

295

By normalizing the augments for a particular year, say t, the observed netputs for year t and effective netputs for other years will form the vertices of the hull of S , where the t subscript t indicates the year of normalization for constructing the reference production set. The distance function value for observed bundles (xi , yi ) for i = 1, . . . T can be calculated relative to both the inner and outer bounds on the frontier of S . t The distance of a particular observation (xt+1 , yt+1 ) from the inner bound SI under an t assumption of nonincreasing returns to scale can be found by solution of the following linear programming problem (F re et al., 1994): a Do t (xt+1 , yt+1 )) = Max subject to yt+1
T i=1 T
i

SI

(12)

T i=1

i y

i x xt+1 i 1
i=1

i , 0 We can similarly derive the distance function of (xt , yt ) from the inner bound SI by t+1 reversing the order of t and t + 1 in problem (12). From (7), the inner bound measure of productivity change between t and t + 1 is then: mSI = [Do t (xt+1 , yt+1 )/ Do t+1 (xt , yt )]1/2 t
SI SI

(13)

The output distance function with respect to the outer bound will measure the minimum proportional change in output necessary for situating a candidate observation, (xt , yt ) on the surface of SO . This deation factor can be found in a similar fashion to the distance t function calculations under SI: (Do t (xt+1 , yt+1 ))1 = Max subject to pi (yt+1 ) ri xt+1 pi yi ri xi t t
SO

for all i = 1, . . . , T

(14)

where (xi , yi ) is the i th effective netput relative to reference technology set S and (ri , pi ) t t t are corresponding input and output prices. The outer bound measure of productivity changes can then be derived: mSO = [Do t (xt+1 , yt+1 )/ Do t
SO SO t+1

(xt , yt )1/2

(15)

Calculation of Netput Augmentation Parameters Construction of a WAPM consistent set of effective inputs and outputs requires nding solution values of a and b to pt [y(yt , at ) y(ys , as )] rt [x(xt , bt ) x(xs , bs )] 0 for all t, s = 1, . . . , T , t = s. Values of the input and output augments result from nding feasible

296

LAMBERT

solutions to T (T 1) linear inequalities. Addition of a nonnegative slack variable, ts , to each of the T (T 1) rows results in a system of linear equalities. If a feasible solution exists for the system, then an innite number of feasible solutions exist.4 The problem is to append an objective function to choose the set of netput augments that satisfy a criterion imposed by the researcher. We use the scaling hypothesis in augmenting observed netputs (Pollak and Wales, 1981), t t so that y = y(yt , at ) = yt at and x = xt bt , where at = 1 a+,t + a,t and bt = 1 b+,t + b,t .5 This formulation calculates linear deviations in the observed netput quantities. The objective function of the linear programming model is to nd augmentation factors that minimize the absolute deviation of proportional changes between observed m n + + and effective netputs: min T ( i=1 yit (ait + ait ) + i=1 xit (bit + bit )), subject to the t=1 effective netputs satisfying WAPM. Reference technology sets are constructed for each of the T1 years in the dataset.6 The vector of augmentation factors (a+,to , a,to , b+,to , b,to , ) is xed to be a 2(m + n) 1 vector of 1s where the subscript to refers to the reference year for the constructed technology. 4. An Analysis of MFP in U.S. Agriculture

The quantity and price indexes compiled by Capalbo and Vo (1988) have been used extensively in analyzing U.S. agricultural productivity (Capalbo, 1988; Chavas and Cox, 1990; Lambert and Shonkwiler, 1995). Their use is adopted here to permit comparisons with other productivity estimates derived from the same data set. Ten inputs were identied: hired labor, self-employed labor, land, structures, other capital equipment, energy, fertilizer, pesticides, feeds, and a miscellaneous category. Six major output categories were considered: small grains, coarse grains, eld crops, vegetables, fruits, and animal products. Further output aggregation is inappropriate for this data set given the inconsistency with Varians nonparametric weak separability test (Chavas and Cox, 1988). Multioutput productivity measures are thus ideally suited to avoid aggregation bias. Results from the calculation of the inner and outer bound representations of technology are compared with the T rnquist and Fisher productivity indexes in gure 1 and tables 1 and 2. There is a o striking similarity between the two index number estimates of MFP growth and the outer bound measure. This similarity is much closer than the dual model productivity estimates reported in Chavas and Cox (1994). However, their approach did not involve rst deriving effective netputs to represent a common reference technology across all observations. It appears that rst deriving a reference technology for year t for t = 2, . . . , T 1, may yield productivity estimates closer to index number estimates than the Chavas and Cox approach. The close correspondence between the Fisher and T rnquist indexes arises from the o aggregation procedures used to develop the quantity and price indices in Capalbo and Vo (1988). Even though the data used in the estimation were disaggregated into 6 outputs and 10 inputs, some aggregation was still necessary to derive the original 16 general netput categories. The T rnquist approximation of the Divisia indexing procedure was used for o aggregation (Capalbo and Vo (1988, p. 125)). Thus, a translog form of both the input and output aggregator functions was presumed. The T rnquist index is exact for the translog o

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

297

Figure 1. Comparison of inner and outer bound nonparametric productivity measures with the Fisher and T rnquist o index number estimates.

technology. The Fisher index is superlative for a general class of arbitrary second order approximations to a exible functional approximation, including the translog. Diewert (1978) observed that superlative indexes (such as the Fisher and the T rnquist) will be o similar numerically if the underlying technology is translog. Numerical similarities between distance function based productivity indexes, such as the Malmquist, and Divisia approximations, such as the T rnquist and the Fisher, have also o been noted. F re and Grosskopf (1992) showed how, under constant returns to scale and a prot maximization, the input based Malmquist productivity measure is equal to the Fisher productivity measure. A parallel argument can be derived for the output based Malmquist

298
Table 1. Comparison of the output based inner and outer bound productivity indexes Fisher and T rnquist index o number estimates, US agricultural production, 19491983. Inner Bound Outer Bound 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1 0.9933 1.0159 1.0558 1.1085 1.0675 1.0579 1.1288 1.0919 1.1481 1.0900 1.1293 1.1024 1.1198 1.1383 1.1672 1.1529 1.1615 1.2060 1.1961 1.2101 1.1677 1.2459 1.2431 1.2579 1.3585 1.4220 1.4296 1.4867 1.4600 1.5618 1.5021 1.6304 1.6433 1.4047 1 0.9835 1.0159 1.0590 1.0918 1.0862 1.0826 1.1584 1.1235 1.1510 1.1216 1.1540 1.1610 1.1796 1.2012 1.2246 1.2180 1.2261 1.2555 1.2590 1.2720 1.2413 1.3058 1.3195 1.3428 1.4005 1.4304 1.4226 1.4734 1.4468 1.5250 1.5114 1.6286 1.6407 1.4871 Fisher 1 0.9769 1.0042 1.0487 1.0849 1.0830 1.0724 1.1544 1.1265 1.1472 1.1072 1.1383 1.1481 1.1699 1.1902 1.2178 1.2047 1.2157 1.2452 1.2480 1.2613 1.2293 1.2925 1.3072 1.3280 1.3752 1.4040 1.4035 1.4570 1.4205 1.4948 1.4883 1.5971 1.6122 1.4604 T rnquist o 1 0.9769 1.0042 1.0487 1.0848 1.0830 1.0724 1.1544 1.1264 1.1471 1.1070 1.1382 1.1481 1.1698 1.1902 1.2177 1.2046 1.2156 1.2451 1.2479 1.2612 1.2292 1.2923 1.3070 1.3278 1.3775 1.4063 1.4059 1.4595 1.4230 1.4974 1.4911 1.5998 1.6149 1.4631

LAMBERT

measure estimated here. However, the input and output based Malmquist measures are identical under constant returns to scale (Caves et al., 1982). Consequently, the F re and a Grosskopf results will hold for an output based Malmquist measure as well under constant returns to scale and prot maximization. Small discrepancies between the outer bound productivity measure and the Fisher index arise from the estimation procedure for the outer bound, in which no scale assumptions are imposed.

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

299

Table 2. Average annual growth rates in multifactor productivity (MFP) for selected years. Inner Bound Outer Bound Fisher Index T rnquist Index o 1950-1983 1950-1963 1964-1973 1974-1983 1.11% 0.99% 1.04% 1.34% 1.22% 1.35% 1.14% 1.13% 1.17% 1.29% 1.12% 1.06% 1.12% 1.24% 1.09% 0.97%

The inner bound measure of MFP closely follows the other three estimates. The inner bound generally lies below the outer bound, consistent with the concepts of SI and SO bounding some true, unknown production possibility set. However, the inner bound does exceed the outer bound MFP cumulative growth values in several years. This apparent discrepancy arises from two sources. First, standardization of all three measures to equal 1 in the rst year of analysis can mask differences between the inner and outer bounds. For example, if the inner bound is instead normalized to 0.975 in 1949, a 2.5 percent reduction, the inner bound falls below the outer bound in all years. Second, composite netput sets constructed on the frontier of each years reference technology set may not be the same for the inner and outer bound distance functions. Examination of the two linear programming models (12) and (14) show that the outer bound model results in a proportional change in all outputs and no change in the level of inputs for each netput vector (xt , yt ) under examination. The composite netput and output vectors in the inner bound problem may, however, differ from (xt , yt ) depending upon the vector of weights resulting from solution of the problem. Thus, the direction of movement from the actual years netput vector (xt , yt ) to the frontier may be different for the two measures. If the direction were the same, the distance to the inner bound should be shorter than the distance to the outer bound for production sets (xt , yt ) interior to the reference technology. The reverse will hold for production sets outside of the reference technology. It is well known that the Malmquist productivity index will differ between input and output based distance functions. Caves et al. (1982) show how, under decreasing returns to scale, the input based productivity measure will be greater than the output based measure. This appears to be the case in gure 2, in which the outer bound measures are illustrated under the two approaches. The productivity measure resulting from the input-based distance functions exceeds the output-based measures in all years. The overall average annual rate of growth in MFP was 1.67 percent using the input-based outer bound estimate as compared to the 1.22 percent rate of growth from the output-based measure. This discrepancy indicates departures from constant returns to scale in U.S. agricultural production. The constant returns to scale assumption of the T rnquist index7 are thus somewhat questionable. o The inner bound estimates of MFP derived from the input and output-based approaches are nearly identical in all years. However, infeasibilities in solving the input-based linear programming model required solving this problem under an assumption of constant returns to scale (i.e., the constraint t t 1 was dropped). Consequently, differences between the input and output-based inner bound productivity measures were affected by the scale assumptions imposed in solution of the problems.

300

LAMBERT

Figure 2. Comparison of output and input based distance function nonparametric estimates of MFP, US agriculture, 19491983.

5.

Conclusions

The Malmquist based productivity measure developed in this paper is appropriate to calculate multifactor productivity for time series data. The procedure requires data on netput quantities and prices. Under a behavioral assumption of prot maximization, the productivity measure derives from distance function measurements from a reference technology constructed from effective netputs. Both the inner and outer bound measures closely track Divisia approximations of productivity changes. The question remains concerning the rationale for determining the inner and outer bound productivity measures developed in this paper. The Fisher measure has especially been shown to satisfy both axiomatic as well as

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

301

economic justications for its adoption (Diewert, 1992). Both the index number and the linear programming productivity measures require the same data for their estimation. Why then should the slightly greater mathematical complexity of the nonparametric methods be employed? First, no functional specications need to be asserted for the nonparametric approach. The T rnquist is superlative for a translog technology. The Fisher is more general and is o superlative for any arbitrary second order technology. The nonparametric approach makes no requirement of the underlying technology other than convexity, closedness, and negative monotonicity. These are much more general characteristics of the technology than those required for the index number measures. The nonparametric frontier model requires no functional specication for input and output aggregator functions. Although the data used in this application were aggregated using a T rnquist aggregator function, directly observed input and output quantities and prices o could be used in the nonparametric approach. Any bias introduced by aggregation could thus be eliminated. This advantage of the nonparametric approach could be exploited in both the current time series approach as well as in the panel data models developed in F re a et al. (1994). The inner and outer bound estimates do impose consistency with Varians weak axiom of prot maximization. Such an assertion may be inappropriate in certain settings. A less restrictive model could be developed in which distance functions are calculated from cost or revenue function frontiers. For example, reference technologies could be constructed subject to Varians (1984) weak axiom of cost minimization, and distance functions of observed netput bundles calculated relative to the inner and outer bounds on the cost function. Finally, the nonparametric approach provides more information about the technology than the index number approaches. Recall that the procedure establishes a reference technology set formed of effective netputs for each year, S . The reference technology is further t bounded by SI and SO . This technology can be completely characterized by projections t t represented by the distance functions upon the surfaces of SI and SO . Chavas and Cox t t (1995) have exploited this feature in deriving rudimentary information regarding netput quantity responses to price changes. The derivation of T 1 reference production sets could thus, for example, be used to approximate changes over time in supply and demand responses to price. Similarly, projections onto the reference technology frontiers could measure changes in marginal products over time (see, for example, Charnes et al., 1985). The distance function approach is thus seen to provide productivity measures unencumbered from functional form or scale specications. Further, changes in production characteristics over time can be derived from the construction of the reference technologies to provide further insight into the factors underlying estimated changes in MFP over time.

Appendix 1 Under an assumption of prot maximization and efcient production, failure of (xs , ys ) and (xt , yt ) to satisfy WAPM is sufcient for the observed production bundles to represent different technologies.

302

LAMBERT

Proof of sufciency. The proof follows directly from Varians denition (1984, page 584) of a production set S that rationalizes a set of observed data. Specically, if pi yi ri xi pi y ri x for all (x, y) S, then S rationalizes the data. Consider an alternative bundle (x j , y j ) such that pi y j ri x j > pi yi ri xi , or WAPM is not satised. By Varians denition, the set S j that includes (x j , y j ) cannot rationalize the data, so that (x j , y j ) S. Consequently, S = S j .

Notes
1. However, recent contributions have permitted varying levels of technical and allocative inefciencies over time (Kumbhakar, 1996). 2. However, as one reviewer has noted, the test approach to index numbers does not posit an underlying technology, but instead proposes certain properties for price and quantity indexes that should be satised (Diewert, 1992). 3. Varian refers to a production set consistent with WAPM as p-rationalizing the data, where the p stands for prot. This is to differentiate the production set from those that c-rationalize the data with respect to cost minimization. Since we are only concerned with prot maximizing behavior in this paper, we do not emphasize the distinction. We are, however, always referring to production sets that p-rationalize the data. 4. Consider the system of linear equalities, Ax = b. If a solution exists to the system, then the rank of the augmented matrix [A : b] is equal to the rank of A. The number of unknowns under the scaling hypothesis is 2(n + m)(T 1) + T (T 1), where the rst term equals the number of positive and negative augmentation factors for all netputs and the second term equals the number of slacks for the T (T 1) inequality constraints. The number of variables is thus greater than the rank of A, which can be no greater than T (T 1). Therefore, if there is one feasible solution, there will be an innite number of solutions to the equations (Noble and Daniel, 1977, page 92). 5. Although other augmentation procedures have been proposed, such as the translating hypothesis where y = t yt + at and x = xt + bt , and solution of the augments result from assigning arbitrary weights to a linear combination of the input and output augments. We prefer the scaling hypothesis in which the proportional differences between observed and effective netputs are minimized, rather than the arbitrarily weighted linear deviations from observed netputs resulting from the translating hypothesis. 6. The rst year is lost in the procedure due to taking the geometric mean of year-ahead and year-back distance function measures. 7. This also raises questions about the CRTS assumptions underlying the original aggregation functions used by Capalbo and Vo (1988) in compiling the dataset.
t

References
Antle, J. M., and S. M. Capalbo. (1988). An Introduction to Recent Developments in Production Theory and Productivity Measurement. In J. M. Antle and S. M. Capalbo (eds.), Agricultural Productivity: Measurment and Explanation. Washington, D.C.: Resources for the Future. Binswanger, H. P. (1974). The Measurement of Technical Change Biases with Many Factors of Production. American Economic Review 64, 96476. Bureau, J. C., R. F re, and S. Grosskopf. (1995). A Comparison of Three Nonparametric Measures of Productivity a Growth in European and United States Agriculture. Journal of Agricultural Economics 46, 309326. Capalbo, S. M. (1988). A Comparison of Econometric Models of U.S. Agricultural Productivity and Aggregate Technology. In J. M. Antle and S. M. Capalbo (eds.), Agricultural Productivity: Measurment and Explanation. Washington, D.C.: Resources for the Future.

PRODUCTIVITY MEASUREMENT FROM A REFERENCE TECHNOLOGY

303

Capalbo, S. M., and T. T Vo. (1988). A Review of the Evidence on Agricultural Productivity and Aggregate Technology. In J. M. Antle and S. M. Capalbo (eds.), Agricultural Productivity: Measurment and Explanation. Washington, D.C.: Resources for the Future. Caves, D. W., L. R. Christensen, and W. E. Diewert. (1982). The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity. Econometrica 50, 13931414. Chambers, R., R. F re, and S. Grosskopf. (1994). Efciency, Quantity Indexes, and Productivity Indexes: A a Synthesis. Bulletin of Economic Research 46, 1-21. Charnes, A., W. W. Cooper, B. Golany, and L. Seiford. (1985). Foundations of Data Envelopment Analysis for Pareto-Koopmans Efcient Empirical Production Functions. Journal of Econometrics 30, 91107. Chavas, J.-P., and T. L. Cox. (1988). A Nonparametric Analysis of Agricultural Technology. American Journal of Agricultural Economics 70, 303310. Chavas, J.-P., and T. L. Cox. (1990). A Non-Parametric Analysis of Productivity: The Case of U.S. and Japanese Manufacturing. American Economic Review 80, 450464. Chavas, J.-P., and T. L. Cox. (1992) A Nonparametric Analysis of the Inuence of Research on Agricultural Productivity. American Journal of Agricultural Economics 74, 583591. Chavas, J.-P., and T. L. Cox. (1994) A Primal-Dual Approach to Nonparametric Productivity Analysis: The Case of U.S. Agriculture. Journal of Productivity Analysis 5, 359373. Chavas, J.-P., and T. L. Cox. (1995) On Nonparametric Supply Response Analysis. American Journal of Agricultural Economics 77, 8092. Cox, T. L., and J.-P. Chavas. (1990). A Nonparametric Analysis of Productivity: The Case of US Agriculture. European Review of Agricultural Economics 17, 449464. Diewert, W. Erwin. (1976). Exact and Superlative Index Numbers. Journal of Econometrics 4, 1545. Diewert, W. Erwin. (1978). Superlative Index Numbers and Consistency in Aggregation. Econometrica 46, 883900. Diewert, W. Erwin. (1980). Capital and the Theory of Productivity Measurement. American Economic Review 70, 260267. Diewert, W. Erwin. (1992). Fisher Ideal Output, Input, and Productivity Indexes Revisited. Journal of Productivity Analysis 3, 211248. F re, Rolf, S. Grosskopf, M. Norris, and Z. Zhang. (1994). Productivity Growth, Technical Progress, and a Efciency Change in Industrialized Countries. American Economic Review 84, 6683. F re, Rolf, and S. Grosskopf. (1992). Malmquist Productivity Indexes and Fisher Ideal Indexes. The Economic a Journal 102, 158160. F re, Rolf, and D. Primont. (1995). Multi-Output Production and Duality: Theory and Applications. Boston: a Kluwer Academic Publishers. F re, Rolf, S. Grosskopf, B. Lindgren and P. Roos, (1989). Productivity Developments in Swedish Hospitals: A a Malmquist Output Index Approach. In A. Charnes, W. W. Cooper, A. Y. Lewin and I. M. Seiford (eds.), Data Envelopment Analysis: Theory, Methodology and Applications. Boston: Kluwere Academic Publishers, 1996 Farrell, M. J. (1957). The Measurement of Productive Efciency. Journal of the Royal Statisitical Society Series A, General, 120, 25382. Guilkey, D., C. A. K. Lovell, and R. C. Sickles. (1983). A Comparison of the Performance of Three Flexible Functional Forms. International Economic Review 24, 591616. Harvey, A. C., and P. Marshall. (1991). Inter-Fuel Substitution, Technical Change and the Demand for Energy in the UK Economy. Applied Economics 23, 107786. Kumbhakar, Subal C. (1996). A Parametric Approach to Efciency Measurement Using a Flexible Prot Function. Southern Economic Journal 63, 473487. Lambert, David K., and J. S. Shonkwiler. (1995). Factor Bias under Stochastic Technical Change. American Journal of Agricultural Economics 77, 57890. Malmquist, Sten. (1953). Index Numbers and Indifference Curves. Trabajos de Estatistica 4, 20942. Noble, B., and J. W. Daniel. (1977). Applied Linear Algebra, 2nd ed. Englewood Cliffs, NJ: Prentice-Hall, Inc. Pollak, R. A., and T. J. Wales. (1981). Demographic Variables in Demand Analysis. Econometrica 49, 153351. Price, C. W., and T. Weyman-Jones. (1996). Malmquist Indices of Productivity Change in the UK Gas Industry before and after Privatization. Applied Economics 28, 2939. Ray, Subhash C., and Kankana Mukherjee. (1996). Decomposition of the Fisher Ideal Index of Productivity: A Non-Parametric Dual Analysis of US Airlines Data. The Economic Journal 106, 16591678.

304

LAMBERT

Solow, R. W. (1957). Technical Change and the Aggregate Production Function. Review of Economics and Statistics 39, 312320. Varian, Hal R. (1984). The Nonparametric Approach to Production Analysis. Econometrica 52, 57997.