Essays on Efficiency, Productivity, and Impact of Policy

Abstract: This thesis consists of five self-contained empirical essays centering on total factor productivity (TFP), efficiency, and impacts of policy.Essay I: “TFP Change and Its Components for Swedish Manufacturing Firms During the 2008-2009 Financial Crisis” (co-authored with Jonas Månsson and William H. Greene). A driving force of economic development is growth in total factor productivity (TFP). Manufactured goods are, to a large extent, exports, and represent an important part of the economy for many developed countries. Additionally, a slowdown in labour productivity has been observed in many OECD countries after the financial crisis 2008-2009. This study investigates TFP change and its components for the Swedish manufacturing industry, compared with the private service sector, during the years 1997-2013, centering on the financial crisis. Stochastic frontier analysis (SFA) is used to disentangle persistent and transient efficiency from firm heterogeneity and random noise, respectively. In addition, technical change (TC), returns to scale (RTS) and a scale change (SC) component are also identified. Along with the empirical analysis, an elaborative discussion regarding TC in SFA is provided. The persistent part for manufacturing (service) is 0.796 (0.754) and the transient part is 0.787 (0.762), indicating improvement potentials. Furthermore, TFP change is substantially lower between the years 2007-2013, compared to 1997-2007, driven by lower technological progress. Policy should, therefore, target interventions that enhance technology. However, care needs to be taken so that policies do not sustain low-productive firms that otherwise would exit the market. Essay II: “A bootstrapped Malmquist index applied to Swedish district courts” (co-authored with Jonas Månsson, Christian Andersson and Fredrik Bonander). This study measures the total factor productivity (TFP) of the Swedish district courts by applying data envelopment analysis (DEA) to calculate the Malmquist productivity index (MPI) of 48 Swedish district courts from 2012 to 2015. In contrast to the limited international literature on court productivity, this study uses a fully decomposed MPI. A bootstrapping approach is further applied to compute confidence intervals for each decomposed factor of TFP. The findings show a 1.7% average decline of TFP, annually. However, a substantial variation between years can be observed in the number of statistically significant courts below and above unity. The averages of the components show that the negative impact is mainly driven by negative technical change (TC). Large variations are also observed over time where the small courts have the largest volatility. Two recommendations are: (1) that district courts with negative TFP growth could learn from those with positive TFP growth; and (2) that the back-up labour force could be developed to enhance flexibility. Essay III: “Potential efficiency effects of merging the Swedish district courts” (co-authored with Claes Tidanå). The Swedish district courts have undergone a substantial restructuring process in which the main reform has been to merge. As a result, the number of district courts has declined from 95 in 2000 to only 48 in 2009. All main arguments that support merging concern enhancements of efficiency. However, it has not yet been explicitly examined whether the mergers have the potential to increase efficiency ex ante. Thus, the expectation concerning higher efficiency was built on a subjective view. This paper investigates whether the mergers can be rationalized from a production economic point of view. Data envelopment analysis (DEA) is used to compute a production frontier where the conducted mergers are incorporated to identify the potential ex ante gains. Furthermore, the overall potential is decomposed into learning, scale, and harmony to investigate the source of the potential gain, e.g., an effect of adjusting to best practice or a pure merging effect such as scale. The results show diverse potentials, i.e., a number of mergers did not have the potential to gain in efficiency while others could gain substantially. A conclusion based on the analysis is that the potential production economic effects should be investigated before merger decisions are made in the future. This is also likely to be true beyond the Swedish district courts.Essay IV: “Impacts on efficiency of merging the Swedish district courts” (co-authored with Per J. Agrell and Jonas Månsson). Judicial courts form a stringent example of public services using partially sticky inputs and outputs with heterogeneous quality. Notwithstanding, governments internationally are striving to improve the efficiency of and diminish the budget spent on court systems. Frontier methods such as data envelopment analysis (DEA) are sometimes used in investigations of structural changes in the form of mergers. We review the methods used to evaluate the ex post efficiency of horizontal mergers. Identification of impacts is difficult. Therefore, we apply three analytical frameworks: 1) a technical efficiency comparison over time, 2) a metafrontier approach among mergers and non-mergers and 3) a conditional difference-in-differences (cDiD) approach where non-merged twins of the actual mergers are identified by matching. In addition, both time heterogeneity and sources of efficiency change are examined ex post. We apply our method to evaluate the impact on efficiency of merging the Swedish district courts from 95 to 48 between 2000 and 2009. Whereas the stated ambition for the mergers was to improve efficiency, no structured ex post analysis has been done. Swedish courts are shown to improve efficiency from merging. In addition to the particular application, our work may inform a more general discussion on public service efficiency measurement under structural changes, and their limits and potential.Essay V: “The impact of labour subsidies on total factor productivity and profits per employee.” Subsidizing targeted labour groups is a common intervention to prevent long-term unemployment. Lower expected productivity is the motivation for subsidizing labour, but all research, with one exception, focuses on other effects while some investigates the TFP effects of capital subsidies. This study combines methods that, to the best of my knowledge, have not previously been used together to determine the impacts of labour subsidies on total factor productivity (TFP). Further, the profit per employee is included as a second outcome. Coarsened exact matching (CEM) is performed on the key variables; difference-in-differences (DiD) is then applied to the matched data. It is found that firms employing workers with wage subsidies experience negative and significant effects on both TFP and profit per employee. Heterogeneity is, however, observed; the only sector to show a deficit in both TFP and profit per employee is wholesale. During the second year with a subsidy, a negative impact can be observed on the profit per employee but not on TFP. The policy conclusion from the analysis is that subsidizing individuals from particular groups is necessary to induce firms to hire workers from these groups. However, the time period for which a single firm is subsidized should be considered.