Abstract
One of the persistent problems plaguing the measurement of productivity and output is accounting for changes in product quality. A similar problem arises in attempting to explain shifts in a production function using information on changes in the characteristics of the production process itself. We consider these problems under a behavioral model in which the firm chooses a profit-maximizing bundle of input/output/process characteristics as well as the profit maximizing levels of input and output. This view of quality change is similar to the endogenous design index advocated by Triplett [1983] for industrial prices and the endogenous quality indexes analyzed by Pollak [1983] for consumer prices. We show how a price-characteristics locus can be used to adjust the Tornqvist output- and input-oriented multifactor productivity indexes of Caves, Christensen and Diewert [1982] for changes in input, output and process characteristics. To show the applicability of the methodology to services, we apply the results in the framework of the commercial banking measurement of Fixler [1988] to measure the impact of bank branching on multifactor productivity.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Archibald, R.B. (1977). “On the Theory of Industrial Price Measurement: Output Price Indexes.” Annals of Economic and Social Measurement, 6, 57–72.
Barnett, W. (1978). “The User Cost of Money.” Economics Letters, 1, 145–149.
Benston, G.J., Hanweck, G.A., and Humphrey, D.B. (1982). “Scale Economies in Banking.” Journal of Money, Credit, and Banking, 14, 435–456.
Caves, D.W., Christensen, L.R., and Diewert, W.E. (1982). “The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity.” Econometrica, 50, 1393–1414.
Diewert, W.E. (1989). “Fisher Ideal Output, Input, and Productivity Indexes Revisited.” University of British Columbia Discussion Paper 89-07.
Donovan, D.J. (1978). “Modeling the Demand for Liquid Assets: An Application to Canada.” International Monetary Fund Staff Papers, 25(4), 676–704.
Färe, R., Grosskopf, S., Lovell, C.A.K., and Yaisawarng, S. (1989). “Derivation of Virtual Prices for Undesirable Outputs: A Distance Function Approach.” Working Paper 90-3, Department of Economics, University of North Carolina at Chapel Hill.
Färe, R., and Lyon, V. (1981). “The Determinateness Test and Economic Price Indices.” Econometrica, 49 (1), 209–214.
Fisher, I. (1922). The Making of Index Numbers, Boston: Houghton Mifflin.
Fixler, D.J. (1988). “A Commercial Bank Output Price Index.” BLS Working Paper 179. Washington, D.C.
Fixler, D.J., and Zieschang, K.D. (1990). “User Costs, Shadow Prices, and the Real Output of Banks.” In Output Measurement in the Service Industries, Chicago: National Bureau of Economic Research, forthcoming.
Fixler, D.J., and Zieschang, K.D. (1991). “Measuring the Nominal Value of Financial Services in the National Income Accounts.” Economic Inquiry 24 (1), January 1991.
Frisch, R. (1936). “Annual Survey of General Economic Theory: The Problem of Index Numbers.” Econometrica 4(1), 1–38.
Hancock, D. (1985). “The Financial Firm: Production with Monetary and Non-monetary Goods.” Journal of Political Economy 93, 859–880.
Kim, M., and Ben-Zion, U. (1989). “The Structure of Technology in a Multioutput Branch Banking Firm.” Journal of Business and Economic Statistics 7(4), 489–496.
Kim, M., and Ben-Zion, U. (1989). “Total Factor Productivity Growth in Banking.” Journal of Productivity Analysis 1(2), 139–153.
Malmquist, S. (1953). “Index Numbers and Indifference Surfaces.” Trabajos de Estadistica 4, 209–242.
McFadden, D. (1978). “Cost, Revenue, and Profit Functions.” In M. Fuss, and D. McFadden, (eds.), Production Economics: A Dual Approach to Theory and Applications, Volume 1, Amsterdam: North Holland.
Moorsteen, R.H. (1961). “On Measuring Productive Potential and Relative Efficiency.” Quarterly Journal of Economics, 75, 451–467.
Nelson, R.W. (1985). “Branching, Scale Economies, and Banking Costs.” Journal of Banking and Finance 9, 177–191.
Pollak, R. (1983). “The Treatment of ‘Quality’ in the Cost of Living Index.” Journal of Public Economics 20 (1) 23–53.
Reece, W.S., and Zieschang, K.D. (1987). “Output Price Indices for Regulated Monopoly.” Economics Letters, 85–89.
Triplett, J.E. (1983). “Concepts of Quality in Input and Output Price Measures: A Resolution of the User-Value Resource-Cost Debate.” In M. Foss, (ed.), The U.S. National Income and Product Accounts: Selected Topics, Chicago: University of Chicago Press.
Zieschang, K.D. (1985). “Output Price Measurement When Output Characteristics Are Endogenous.” BLS Working Paper 150.
Zieschang, K.D. (1988). “The Characteristics Approach to the Problem of New and Disappearing Goods in Price Indexes.” BLS Working Paper 183.
Author information
Authors and Affiliations
Additional information
The refereeing process of this paper was handled through R. Färe.
Rights and permissions
About this article
Cite this article
Fixler, D., Zieschang, K.D. Incorporating ancillary measures of process and quality change into a superlative productivity index. J Prod Anal 2, 245–267 (1992). https://doi.org/10.1007/BF00156469
Issue Date:
DOI: https://doi.org/10.1007/BF00156469