Accounting for externalities in the measurement of productivity growth: the Malmquist cost productivity measure

This paper starts with the basic premise: that conventional measures of productivity growth-often used as a measure of corporate performance-which ignore external or social output, are biased. We then construct an alternative productivity growth measure using activity analysis which integrates the externality/social output into a generalized productivity measure reflecting social responsibility. This method is very general and could be applied to gauge corporate social responsibility. We provide an application to US agriculture to demonstrate the approach: we show that conventional measures of productivity are biased upward when production of negative externalities (or bad) outputs is increasing. Conversely, this same measure of productivity is biased downward when externalities in production are decreasing.