Tutorial: Cost functions of the Dutch Railways

In this assignment, our main aim is to estimate a cost function for the Dutch Railways (Nederlandse Spoorwegen, NS) for the period 1951-1993, and to interpret the results by answering specific questions. The dataset contains operating costs and characteristics for the NS for the period 1951-1993. Even though the data set is old, updating it with more recent years causes many problems. For instance, during the period of observation NS operated the infrastructure (the tracks), while nowadays infrastructure is operated by Prorail. In effect, the old NS was split up in Prorail and a new NS (which is responsible for transport services). Below you find a description of the variables in the dataset: t time trend year the year of the observation me1 cost share labour me2 cost share energy me3 cost share maintenance pe1 price of labour (expenditure on labour / number of employees) pe2 price of energy (expenditure on energy / energy consumption (kW/h ) pe3 price of maintenance (maintenance and materials expenditures number of train-kilometres goods and train-kilometres passengers) ye1 output in seat-km ye2 output in train-km cost total operational cost wcap value of capital corrected for usage (value of capital * load factor) stations number of stations in network loadfactor passenger-kilometres / capacity seat-kilometres passengers total number of passengers carried avgdistance average distance travelled Assignments: (Hand in answers every week. You will receive feedback on your answers, but you do not have to hand in a revised version; just use the feedback to correct your analyses for the final paper). Week 2. 1. The definition of a cost function A. In one sentence, and in your own words, explain what a cost function is. B. In theory (see lecture 2), what variables are essential in a cost function? C. What about in the dataset, which variables would you use?

2. Describe the (important) variables using descriptive statistics. 1 SPSS: Analyze/Descriptive statistics Stata: summarize variable names here 2 Week 3 3. Uses of the analysis. A. What information can the NS get from the estimation of a cost function (for the NS)? Explain your answer. B. What information can the government get from the estimation of a cost function (for the NS)? Explain your answer. 4. Explain the difference between a Cobb-Douglas cost function and a translog cost function. Give a reason in favour of estimating a translog function. And give a reason in favour of estimating a Cobb-Douglas function. 5. Draw scatterplots of year (x-axis) against financial data and output data (y-axis). What can we conclude from the scatterplots? SPSS: Analyze/Correlate/Bivariate Stata: correlate x-variable y-variable Week 4 6. Estimate a variable cost function (Cobb-Douglas) using OLS. Are the coefficients significant? Does the estimated cost function meet all theoretical requirements? Report and describe all relevant output, and interpret the coefficients. (Here the interpretation and discussion of theoretical requirements is at least as important as the estimation itself). SPSS: Analyze/Regression/Linear Stata: regress dependent variable independent variables Week 5. 7. Following the feedback of week 4; please update your answers to Q6. 8. The age of the dataset. A. Can we draw any useful conclusions for present day policy makers based on the results obtained from cost function estimation using the available dataset? Motivate your answer. B. We can also collect more recent data. What would be a benefit of this? And is there any drawback? Motivate your answer. C. How would estimation results be influenced if we ignore the fact that NS was split up in the 1990s? Motivate your answer.
Commenting on the descriptives not only involves describing them, but also looking for wrong entries, outliers, and other things that would affect any further analyses. You could also compare some values of the descriptives with data/ information in books, internet, etc. 2 Obviously, you have to replace the text in italics with the appropriate variable names.
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Week 6. It is advisable to start writing the paper in this week (or earlier). 9. Compute the economies of density parameter. Are there density effects in the variable cost function? Based on your findings concerning density economies, do you agree with the policy of allowing competition on tracks (i.e. between transport operators)? 11. Write out the reference list of the references you plan to include in the paper. Always explain/motivate your answers, using insights from the lectures and relevant articles from refereed academic journals (the paper should include at least five of these). You can also use other sources besides these articles. Paper Now write a short research paper, using the results you have obtained while answering the questions above. You may also try more regressions or other analyses, if you want. Your paper should discuss the cost function of the NS, but the exact research question and focus is up to you (this is part of the assignment). All questions should be included in the paper in some way; but the paper should be a paper, not a point by point answer to the questions.

NB: If you are struggling with the econometrics (how to interpret regression results, logarithms, dummy variables, etc.) I recommend you have a look at the first few chapters of: Wooldridge, J.M., Introductory Econometrics: A Modern Approach (any edition). or, alternatively, chapters 9 and 1315 of: Berenson, M. L., Levine, D. M., Krehbiel, T. C., 2009. Basic Business Statistics: Concepts and Applications, 11th edition. Upper Saddle River: Pearson Prentice-Hall. if youre really lost, and/or dont know how to use statistical software, I highly recommend: Field, A., 2009. Discovering Statistics Using SPSS (and sex and drugs and rock 'n' roll), 3rd edition. London: Sage.; especially chapter 7 about regression analysis. If you have the 2nd edition, it is chapter 5. This is the only statistics book I know of that really starts from the basics and is actually funny (at times).