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Baumol’s cost disease, efficiency, and productivity in the performing arts: an analysis of german public theaters

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Abstract

This paper analyzes the productivity development in the German public theater sector for the seasons 1991/1992 to 2005/2006. Using a stochastic distance frontier approach that allows decomposing total factor productivity change into different sources, we examine (a) whether Baumol’s cost-disease hypothesis is valid in this sector and (b) if so, whether any negative influence of the cost-disease effect on productivity can be compensated by efficiency gains. The findings indicate an increase in real unit labor cost as a result of rising wage rates and thus do support the cost-disease hypothesis. Further, increasing returns to scale are observed for the majority of the theaters, implying that significant efficiency gains can be realized by the exploitation of scale economies. However, because of the increasing unit labor cost and an increasing scale inefficiency, we find an overall decrease in average productivity of about 8% within the sample period.

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Notes

  1. For a more detailed discussion of Baumol’s cost disease, see Krueger (2001) or Besharov (2005).

  2. In particular, the technology producing electronic reproduction has led to a significant increase in productivity in some fields of the cultural sector (Cowen 1996).

  3. Since the input vector is measured in monetary terms, the inefficiency reflects the cost savings possible from the use of a technically efficient input vector (Grafton et al. 2000). Thus, the technical inefficiency could also be denoted as technical cost inefficiency. Here, however, we stick to the term "technical (in)efficiency".

  4. In principle, one could also opt for a threshold of at least three or five observations. Our rationale for choosing the four-observation threshold is that for all theaters which fulfill this criterion, at least two productivity change values are available. Nevertheless, robustness checks show that the results are not significantly different for selection of a three-, four-, or five-observation threshold.

  5. Most theaters run several stages, so the number of tickets supplied is calculated for every stage and then summed.

  6. All monetary measures are adjusted for inflation using the consumer price index for Germany [Statistisches Bundesamt (Federal Statistical Office 2009)]. Values are stated in year-2005 €.

  7. The largest theater in terms of tickets supplied is Niedersächsisches Staatstheater Hannover, which includes the state opera house and the Schauspielhaus, resulting in about 2360 seats overall. The smallest theater is the Schlosstheater Moers, which has about 300 seats.

  8. Using the same data set as is used in the current study, Last and Wetzel (2010) show that the distance function estimates of a conventional fixed effects model with unbiased parameter estimates are very similar to the distance function estimates of the true random effects model with Mundlak formulation. However, since, in contrast to the true random effects model, the conventional fixed effects model identifies at least one observation as 100% efficient and assumes—at least for long panels—a somewhat unrealistic constant efficiency over time, its efficiency estimates are sensitive to outliers and are, in all likelihood, very downward biased. See Last and Wetzel (2010) for more details.

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Authors and Affiliations

  1. Institute of Economics, Leuphana University Lueneburg, P.O. Box 2440, 21314, Lüneburg, Germany

    Anne-Kathrin Last

  2. Institute of Energy Economics, University of Cologne, Vogelsanger Str. 321, 50827, Cologne, Germany

    Heike Wetzel

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  1. Anne-Kathrin Last
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  2. Heike Wetzel
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Correspondence to Anne-Kathrin Last.

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Last, AK., Wetzel, H. Baumol’s cost disease, efficiency, and productivity in the performing arts: an analysis of german public theaters. J Cult Econ 35, 185–201 (2011). https://doi.org/10.1007/s10824-011-9143-5

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