The Output Side of the Firm: Indirect Functions and Indices

Abstract

In this chapter we assume that the firm maximizes its revenue subject to a constraint on its input cost. The input and output prices are considered as given. The theory of the cost-constrained firm was developed by Färe and Grosskopf (1994). We use the indirect output distance function and the indirect revenue function as representations of the technology. These representations, as well as the efficiency measures based on them, will be discussed in the first section. In section 6.2 the indirect output price index and quantity index are defined. We discuss their properties and derive some nonparametric approximations. In section 6.3 we turn to the indirect output based productivity indices. Using additional assumptions it appears possible to derive nonparametric approximations to specific instances of these indices.