The Economics of Performance Measurement

This syllabus is only as an informative orientation for new students.
Every academic year, professors will give to the students the updated syllabus with the exact contents and evaluation system.

 

Emili Grifell-Tatjé (UAB)
emili.grifell@uab.cat

 

Course Description

This course provides a theoretical and empirical overview of the economics of the performance measurement topic, with special focus on the most recent advances and the main areas of research in the field. Based on the fundamentals of the economic theory of production, the lectures introduce and apply alternative approaches to performance and financial performance measurement. The practical potential of these methods is illustrated with a number of empirical applications drawn from a variety of firms and sectors. Performance measurement is applied to a macro and a micro level. At a micro level, it applies to a variety of organizations, such as private firms or units within the firm or non-profit organisations, e.g. schools or hospitals. The course also links performance measurement with profitability, profit, cost and returns on assets. No assumption is made about the unit under evaluation which makes the methodology suitable for the analysis of the behaviour of organizations with a revenue side independently of their ownership structure. The course also introduces the student to the use of software packages specifically designed to compute efficiency and productivity analysis.

 

Course Objectives

  1. Provide the students a general understanding of performance measurement concepts grounding on the economic theory of production.
  2. Provide the students with useful research tools based on different approaches to measure performance: mathematical programming models (Data Envelopment Analysis) and index numbers.
  3. Develop students' abilities to link theory with applied work. Given a problem of performance analysis, students will be able to identify an appropriate theoretical framework, a suitable analytical method, and undertake an informed empirical analysis.

 

Methods of teaching and course activities

The course combines theoretical lectures and practical sessions that require the dynamic participation of students. Learning activities include: following lectures on main topics, making of problems and computer exercises, reading and critical reviewing of papers.

This is an interactive course. Case preparations and in-class discussions form the important benchmarks of progress. In-class discussions give students an opportunity to apply material from the class to real-world managerial problems. Other class sessions
wilI be primarily dedicated to lecture material and shorter discussions.

 

Course outline

  1. An example to think about. The Pin Factory.
  2. Review of Production Economics:
    • Technical aspects of production. Technology: set and functional representations. Production functions. Returns to scale. Productivity concepts. Distance functions. Input based efficiency measurement. Output based efficiency measurement. Graph efficiency measurement. Economic Aspects of Production: cost minimization revenue maximization and profit maximization. Duality. Cost functions. Technical, allocative and economic efficiency
  3. Index Numbers and Indicators:
    • Empirical index numbers, Laspeyres, Paasche, Fisher, Törnqvist, Edgeworth Marshall, Lowe. Theoretical index numbers, Konüs and Malmquist. Product test and implicit index numbers. Decomposition of Malmquist productivity indexes. Empirical applications.
  4. Efficiency Measurement
    • Overview of empirical methods. Data Envelopment Analysis DEA: The basic model. Input vs output orientation. Constant vs variable returns scale. Price information and allocative efficiency. Non-discretionary variables. Incentives and efficiency. Bad or undesirable outputs. Data and measurement issues. Empirical applications.
  5. Productivity and Profitability
    • Profitability as a performance indicator. Theoretical decomposition of profitability change. Empirical decomposition of theoretical indexes. Distribution financial impacts of productivity change. Exchange rate movements. Decomposing the productivity change and price recovery change components. Paring empirical productivity and price recovery indexes. Paring theoretical productivity and price recovery indexes.
  6. Productivity and Profit
    • Early recognition of profit as a performance indicator. Empirical decomposition of profit change. Distribution of the financial impacts of quantity change. Decomposing the quantity change and price change components. Decomposing productivity change with investor input incorporated. Decomposing productivity change without investor input: A margin effect approach. Decomposing productivity change without investor input: An activity effect approach. Relating the margin effect approach and the activity effect approach.
  7. Productivity and Cost
    • Motivation for using a cost approach. Cost frontier: a Konüs approach. A cost frontier: A Bennet approach. A unit cost frontier. Unit cost change, total factor productivity and partial factor productivities. A unit labor cost frontier.
  8. Productivity, Capacity Utilization, and Returns on Assets
    • Decomposition of returns on assets. The duPont triangle. Incorporating capacity utilization into a DuPont triangle. Output-oriented capacity utilization measures. Input-oriented capacity utilization measures. Incorporating capacity utilization measures into a duPont triangle. Incorporating productivity into a duPont triangle

Assesment

i) The grade of the final exam must be equal or higher than 4.

ii) If the grade of the final exam is equal or higher than 4, the final grade of the subject is a weighted one based on

  • Problem sets and participation 50%
  • Midterm test 20%
  • Final exam 30%

 

Guideness

Problems sets

A series of problems that will help you learn the course material will be available on-line. The course includes various assignments that you are to turn in for credit. Students are encouraged to work in study groups of 3 while preparing problem sets.

 

Class Participation

Active student participation is expected at each class meeting. Every student’s participation is evaluated by her/his effort in making constructive contributions to class discussion, rather than for the frequency of speech. Likewise, attendance is a necessary but not sufficient condition for earning a positive class participation score: those not attending are, by definition, not participating.

 

Books

Grifell-Tatjé, E. and C. A. Knox Lovell (2015), Productivity Accounting: The Economics of Business Performance, Cambridge University Press: New York
Website: htt ://www.bib.uab.cat/socials/exposicions/ productivityaccounting

An introductory book about productivity analysis:
Coelli, T.J., D.S. Prasada Rao, C.J., O’Donnell and G.E. Battese (2005), An Introduction to Efficiency and Productivity Analysis, Springer: New York.

List of papers Campus Virtual.