Campus Presentation at National Taiwan University

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Campus Presentation at National Taiwan University

• Wesley Shu
• Assistant Professor
• San Diego State University

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Short Biography

• BA in Economics, National Taiwan University
• MBA in Finance Decision Sciences, Indiana
  University
• Ph.D. in MIS, University of Arizona

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IT Productivity and Productive Efficiency in
Taiwan
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What is Productivity?

• The amount of output produced given an input
• Output/Input
• What if multiple input?

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A Cobb-Douglas Function
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Other Functional Forms

• CES
• translog

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Productivity and Productive Efficiency

• Productivity is to measure how much business
  value an input factor can contribute to.
• Productive efficiency is to measure the gap
  between observed and optimal values of output and
  input.

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Three Types of Inefficiency

• Technical inefficiency
• Allocative inefficiency
• Scale inefficiency

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Technical Inefficiency

• The gap between the observed output and the
  production frontier under the current technology

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Technical Inefficiency, continued
x2
Production frontier
A
B
x1
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Allocative Inefficiency

• A firm chooses the input ratio when the marginal
  ratio input price ratio to minimize its total
  cost. When they are not equal,

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Scale Inefficiency

• A firm chooses its production level when the
  marginal cost output price. If not, then

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Characteristics of Previous Studies

• Measuring single deterministic production
  function
• Not incorporating some basic business assumptions

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Deterministic Approach

• Deterministic approach assumes all deviations
  except the error terms are under management
  control
• It in fact uses observed data to construct the
  production frontier (optimal output level.)

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Not Imbedding the Basic Business Assumption

• Firms want to either maximize their profits or
  minimize their costs
• So, they will decide the output and input
  quantities based on the price information
• This price information and firms decision
  behavior are not captured in a single production
  function approach, but in the error terms.
• So, there is bias because the explanatory
  variables are correlated with the error terms.

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Not Imbedding the Basic Business
Assumptioncontinued

• Hal Varian, Microeconomic Analysis, 3rd Edition
• If the managers observe these effects (of price
  changes,) then they will certainly take that
  information into account when they determine
  their optimal choice of inputs. Thus, the
  right-hand variables (of a production function)
  will not be statistically independent from the
  error term.

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Our Model - formalize the business assumption
Profit maximization model with inefficiency
measurement
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Our Model, continued
Endogenous variable xi Exogenous variable p, wi
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Our Model, continued

• Intrilligator, Bodkin, and Hsiao
• Estimating the complete system is generally
  superior to estimating only the first equation
  (the production function) from both economic and
  econometric standpoints.
• From an economic standpoint, estimating the
  complete system expresses the assumption that the
  data reflect both the behavior of the decision
  maker (the firm) and the technology, while the
  first equation (the production function) reflects
  only the technology.
• From an econometric standpoint, the estimators of
  only the first equation involves simultaneous
  equations bias, so the estimators will be biased
  and inconsistent.

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Data Requirement

• Assets, output price, Employment Compensation are
  publicly available.
• IT Employment Compensation
• IT Spending, including hardware, software,
  maintenance, and training
• Prices (Price deflators)

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Our Production Function
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Data Source

• Year 2000 - 2002
• Survey of more than 300 companies,
• 187 with valid data (all three years)
• A variety of industries

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Data Requirement IT Capital

• From survey
• The survey is IT Spending. Need to convert
  flow into stock.
• Companies may know spending but not stock or
  asset.
• Since we only have 3-year data, we assume IT life
  cycle is 2 years.

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Data Requirement IT Capital

• Rate of depreciation, ex., in a year, ½
  of IT to be obsolete.

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Data Requirement IT price

• Rental price very complicated formula
• Our research survey

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Finding, Productivity
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Findings - Inefficiency

• Technical -0.1350
• Allocative uNIT -0.7989 decrease non-IT
• uLIT 0.6138
• uNLIT -0.2314
• Scale 0.2423 over produce

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Findings - Overall Percentage Loss
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Future Direction

• After March when 2003 data available complete
  the research
• Add panel data consideration into the model

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Analysis of Panel Data

• Cross section and time series
• With consideration of stochastic form or not

Y
Company C
Company B
Company A
I
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Future Direction continued

• Put into consideration the company size and
  industry difference
• Relax constraints - CES
• Measure input substitution effect translog
  function