Application of the

Cobb-Douglas Production Model

to Libraries

Robert M. Hayes
2005
Overview
 Production Functions in Economics
 Applicable to Libraries?
 Testing on Public Library Data
 Optimization
 Application to Academic Library Data
Production Functions - 1
 In economics, a “production function" describes an empirical
relationship between specified output and inputs. A production
function can be used to represent output production for a single
firm, for an industry, or for a nation. Just to illustrate, a
production function of a wheat farm might have the form:

W=F(L,A,M,F,T,R)

 That is, production of wheat in tons (W) depends on the use of

labor measured in days (L), land in acres (A), machinery in
dollars (M), fertilizer in tons (F), mean summer temperature in
degrees (T), and rainfall in inches (R).
Production Functions - 2

 In most applications of production functions, the input

variables are simply labor (L) and capital (C). The output is
usually measured by physical units produced or, perhaps, by
their value.
 Labor is typically measured in man-hours or number of full-
time-equivalent (FTE) employees.
 Capital is the variable that usually is most problematic. While
data on output and labor are readily available, those for
capital are not. It represents aggregations of diverse
components, of different characteristics and vintage.
Furthermore, only capital that is actually utilized should be
treated as input, but it is difficult to determine the extent to
which that is so.
 Properties of Production Functions
 It is generally assumed that a production function, F(L,C),
satisfies the following properties:
 F(L,0) = 0, F(0,C) = 0 (both factor inputs are required for output)
 dF/dL > 0, dF/dC > 0 (an increase in either input increases output)
 At a given set of inputs (L,C), the production function may
show decreasing, constant, or increasing “returns to scale”:
 If F(L, C) < F(L,C), there are decreasing returns to scale
 If F(L, C) = F(L,C), there are constant returns to scale
 If F(L, C) > F(L,C), there are increasing returns to scale
 Constant returns to scale imply that the total income from
output production equals the total costs from inputs:
pF(L,C) = wL + rC
(p the price per unit output, w and r costs of labor and capital).
The Cobb-Douglas Production Function
 The simplest production function is the Cobb-Douglas model. It has
the following form:

Q=aLbCc

where Q stands for output, L for labor, and C for capital. The
parameters a, b, and c (the latter two being the exponents) are
estimated from empirical data.

 If b + c = 1, the Cobb-Douglas model shows constant returns to

scale. If b + c > 1, it shows increasing returns to scale, and if b + c <
1, diminishing returns to scale.
 Alternative forms

 Equivalent is a linear function of the logarithms of the three

variables:

log(Q) = log(a) + b log(L) + c log(C)

 If b + c = 1, another equivalent form exhibits an underlying

heuristic for the Cobb­Douglas model:

log(Q/L) = log(a) + (1 - b) log(C/L).

which says that the "production per employee" (Q/L) is a function

of the capital investment per employee (C/L).
 
Market and Production
 It should be recognized that allocation decisions must be
concerned not only with productivity but with response to
market demand. The manager must decide both how much
should be invested in total, as determined by the market, as well
as how resources should be divided between capital and labor
but. If the relationship is homogeneous, the two decisions may be
treated as independent, but if it is not homogeneous an optimum
allocation from the standpoint of productivity could be
inconsistent with the optimum from the standpoint of market.
 Allocation of Resources in Libraries

 Are production functions applicable to libraries?

 Balance between Capital and Labor in Libraries
 Output as represented by demand for services
 Capital as represented by the Collection
 Labor as represented by Services Staffing
 Other determinants of demand for services
Are production functions applicable? - 1
 The first issue that needs to be considered is whether it
really make sense to discuss the relationship between
"productivity" and the allocation of resources in the
library or, indeed, in any service industry?
 The answer is not obvious. In manufacturing, labor
uses capital resources to produce a tangible product.
The allocation of resources intuitively may be regarded
as causal in its effect on production.
 The market is in that respect separable from
production, and one can determine optimal conditions
for production.
Are production functions applicable? - 2
 For the library, as for most service industries, however,
the relationship between output and the allocation of
resources is not at all clearly causal. In service
industries, "production" is in the delivery of services in
response to demand for them. While increased staff or
capital resources may be needed to serve increased
demand, it is not clear that they will generate increased
demand. As a result, while models like the Cobb-
Douglas may evidently apply to manufacturing
industries, it needs to be demonstrated that they apply
to service industries.
Capital and Labor in Libraries
 But, recognizing that complexity, the question
of how resources are to be allocated between
capital and labor is a crucial management
decision. It may be based on a view of causality
between production and resource components;
it may be based on the need to respond to
demand for services. But, in either event, it
should represent the optimum allocation within
the constraints of the relationships among the
variables involved.
 Capital Investment in the Library
 Capital Investment in Collection
 Capital Investment in Facilities
 Capital Investment in Technical Services
Service Costs in the Library
 Services staff
 Effect of Branch Library Operation
 Effect of Reference Services
 Effect of Departmentalization
 Balance of Capital and Service Staff
 The Cobb-Douglas Model
 The Capital component of the Cobb-Douglas model
will be measured by the size of the Collection of the
library. It is assumed that costs in acquisition of it,
in facilities to house it, and in the technical services
staff for building the collection are proportional to
the size of the collection.
 The Labor component will be measured by the
services staff, which will be calculated as the total
staff minus the technical services staff
 The Production will be measured by the circulation,
as a surrogate for all of the uses of the library and
its services.
Estimation of the Parameters

 The log-linear form of the Cobb-Douglas model

will be used to estimate the parameters:

log(Circ/Srvst) = a + (1 – b) log(Coll/Srvst)

where

“Circ” is the circulation

“Srvst” is the service staff
 “Coll” is the collection size
Application to Public Libraries
 To see whether the Cobb-Douglas production model is
applicable to public libraries, detailed data (1976) for
several states—California, Illinois, Ohio, Missouri,
Wisconsin—were used to determine the relevant
parameters.
 Data for a portion of the California libraries (the 78
serving the largest populations) provided the primary
basis for exploration of the Cobb-Douglas model, while
those for the rest of the California libraries and for the
other states and national libraries served as the means for
testing and evaluating the results.
Testing on Data for California Libraries
 78 largest libraries
 76 largest, not including LAPL or LA County
 All 173 libraries
 35 of 78 largest with budgets less than $1,000,000
 120 of all 173 with budgets less than$1,000,000
The Results for California Libraries
 log (Circ/Srvst) = a + (1-b) log(Coll/Srvst)

log a 1 - b R
78 largest libraries .804 .590 .68
76 (not including LAPL or LA County) .806 .590 .68
 These35
dataof 78 awith
present incomes
qualitatively less
consistent than
picture, $1,000,000
showing a high correlation .670 .770 per .80
between circulation staff member
and size of collection per service staff member.
All 173 libraries .770 .592 .67
120 with incomes less than$1,000,000 .700 .654 .70
 Generalization to other States
 Illinois Public Libraries
 Ohio Public Libraries
 Missouri Public Libraries
 The overall size of libraries in each of these states is relatively
smaller than those in California:

State Number of Average Average

Libraries Collection Budget
California 173 253,000 $1,107,000
Illinois 567 40,000 $143,000
Missouri 129 100,000 $192,000
Ohio 251 151,000 $254,000
 In order to make comparison more meaningful, the estimation of
the parameters was limited to libraries with income of less than
$1,000,000 in California and each of the other states.
Resulting Estimates of Parameters
 The following table summarizes the results:

log a 1 - b R
120 of 173 California .709 .654 .70
454 af 567 Illinois .633 .676 .79
230 of 251 Ohio .617 .691 .78
 122 ofthe121
In summary, Missouri
Cobb-Douglas equation.670 .631 .64
appears consistently to describe
the behavior of libraries of a size determined by budget of less than $1
million, across a set of four states (California, Illinois, Ohio, and Missouri).
In each case, there is a relatively high correlation. There is close agreement
among the values for the parameters for the four regressions.
Discussion of Variance
 Effect of Multi-collinearity
 Effect of Demographic Factors
Effect of Multi-Collinearity - 1
 The use of regression equations is an easy way to deal
with the kind of analyses involved in evaluating the Cobb-
Douglas equation. However, although easy, it is a way
fraught with pitfalls. In particular, the variables involved
are closely interrelated—multi-collinear. Both staff and
collection are highly correlated with each other and with
circulation. It is therefore easy to investigate equations
that will almost automatically result in high correlation,
but will simply reflect the self-evident correlations.
 In particular, different forms of the Cobb-Douglas
equation, though arithmetically equivalent, can exhibit
radically different correlations.
Effect of Multi-Collinearity - 2
 To illustrate, consider the following two equations:
 
log CIRC = log(a) + blog(SRVST) + (1 - b)log(COLL)
log CIRC/SRVST = log(a) + (1 b)log(COLL/SRVST)
 
 The correlations for these two equations, for the largest 78
California libraries and for the same values of a and (1 - b),
(viz., log(a) = .804 and 1 - b = .590) are, respectively, R = .96 and
R = .68. The reason is simple: The first equation is controlled by
the close relationship between circulation, on the one hand, and
service staff and collection size on the other; the second equation
depends upon the less clear-cut relation between the ratios.
Effect of Multi-Collinearity - 3
 If this problem were treated as a multiple regression problem,
in which an effort were made to represent log(CIRC) as a
function of the two independent variables log(SRVST) and
log(COLL), several technical problems would arise: 
 1. The determinant of the matrix of inter-variable correlations would
be near zero, making it difficult to calculate the regression coefficients;
 2. As a result, the computation would provide imprecise, highly
variable estimates of those coefficients; and
 3. There would be large sampling variances.
 The use of the ratios, CIRC/SRVST and COLL/SRVST,
significantly reduces the impact of the multi-collinearity. It
permits one to obtain consistent estimates and to avoid the
technical problems of multi-collinearity.
Effect of Demographic Factors - 1
 The second, and more important, issue involved in evaluating
the correlations found for the Cobb-Douglas equation arises
because the library is not a market-oriented organization.
The management decision with respect to allocation of
resources between capital (i.e., collection) and service staff
therefore is likely to account for only a portion of the
variance among libraries, with at least part of the remaining
variance being determined by demographic factors. 
 The analysis presented of the California data considers only
those issues affected by library management decisions and
accounts for only 50% of the variance among California
libraries. It is, therefore, worthwhile to assess the effect of
some demographic factors.
 Effect of Demographic Factors - 2
 Consider the following log linear form which combines Cobb-Douglas with some
demographic factors:
6

log(y0) = ailog(yi)
i=0

  y0 = circ/popl,
y1 = a(srvst)b(coll)1-b/popl,
y2 = (average income),
y3 = (average years of education)
y4 = (number in school)/popl,
y5 = (area/popl)
y6 = (average distance)
 
 Effect of Demographic Factors - 3
 The first, y0, is the same dependent variable used before; the
second, y1, is the Cobb-Douglas formula for circulation, divided by
population; the remaining are the typical demographic variables.
 The regression for California libraries on this equation, combining
Cobb-Douglas and demographic factors, was as follows:

ai R2 beta
1 Cobb-Douglas .642 .446 .606
2 Income .101 .119 .067
3 Education 1.856 .050 .225
4 Percent in school .126 .030 .236
  These account for 67.5% of the variance (an R > .80).
5 Density of population .076 .025 .473
6 Distance .077 .005 .241
 Optimization
 Central Library
 Branch Libraries
 Division Between Central Library and Branches
Optimization for a Central Library
 For a central library, the management decision is to maximize X0 = aX1bX2(1-b)
, subject to X1C1 + X2C2 = TR
  where TR is the budget available for the central library.
 Using a Lagrangian multiplier, let
P=aX1bX2(1-b) - k(XlC1+X2C2 -TR).
 To maximize P, take partial derivatives:
dP/dX1 = abX1(b-1) X2(1-b) – kC1 = 0
dP/dX2 = a(l - b)Xl b X2(1-b) – kC2 = 0
  dP/dk = X1C1 + X2C2 - TR = 0
Taking the ratio of the first iwo equations,
C1/C2 = (b/(1-b))(X2/X1)
 This gives the following as the design equations 
C1X1 = bTR
C2 = (1 - b)TR
 Optimization for Branch Libraries - 1
 The management decisions where branches are involved, however,
are more complex than is implied in the Cobb-Douglas model taken
alone, since the effect of the inverse-distance law on utilization of a
library makes the number of branches crucial. Assuming that the
inverse distance law is applicable, take X B= (B/B0)X0
 That is, given the actual circulation, X 0, for a given number of
branches, B0, the circulation for another number of branches, B,
would be proportional to B/B0.
 However, a change in the number of branches would also change the
number of service staff needed, resulting in a different distribution
of resources between service staff and collection, and lead to changes
in circulation as represented in the Cobb-Douglas model.
 Optimization for Branch Libraries - 2
  Assume the following form for the Cobb-Douglas model:
XB = (B/B0) a(Bm)b (X2)(1-b)
where m is the minimum staffing required per branch.
 We want to choose B and X2 so as to maximize XB, subject to
the boundary condition that the total resources available for
the branch library system are fixed:
BmC1 + X2C2 = TB  
 Using a Langranian multiplier, let
P = (B/B0)a(Bm)b (X2)(1-b) - y (BmC1 + X2C2 - TB)
= (B(1+b)/B0)a(m)b (X2)(1-b) - y (BmC1 + X2C2 - TB) 
 Optimization for Branch Libraries - 2
 Taking partial derivatives with respect to B, X2, and y:
dP/dB = (1 + b)(Bb/B0) a(m)b (X2)(1-b) - y (mC1)
dP/dX2 = (1 – b)(B(1+b)/B0)a(m)b (X2)-b - y (C2)
dP/dy = BmC1 + X2C2 - TB 
 Taking ratios of the first two equations,
mC1/C2 = ((1 + b)/(1 – b))(X2/B)  
 From the third equation, 
X2C2 = (1 – b)TB/2, BmC1 = (1 + b)TB/2
Optimization for Branch Libraries - 2

 Taking partial derivatives with respect to B, X2, and y:

  dP/dB = (1 + b)(Bb/B0) a(m)b (X2)(1-b) - y (mC1)
dP/dX2 = (1 – b)(B(1+b)/B0)a(m)b (X2)-b - y (C2)
dP/dy = BmC1 + X2C2 - TB
 Taking ratios of the first two equations,  
mC1/C2 = ((1 + b)/(1 – b))(X2/B)
 From the third equation above, 
X2C2 = (1 – b)TB/2, BmC1 = (1 + b)TB/2
Central Library and Branches
 The design equations for a total system are therefore:

(1 – b)TB/2 + (1 – b)TR = CC2

(1 + b)TB/2 + bTR = (S – 0.05C)C1
TB + TR = T
X0 = (B/B0)(aTB/2)((1 + b)b(1 – b)(1–b) + aTRb b (1 – b) (1–b)

where TB and TR are the allocations of the total budget to the

central library and the branch library; S is the total staff; and C is
the collection size. In these equations, the service staff is represented
by (S - 0.05), the total staff reduced by those committed to capital
resource maintenance.
Application to Academic Libraries

 Turning now to the application of the

Cobb-Douglas model to academic
libraries, two contexts will be considered:

Library productivity
 Institutional productivity
 For each, data were acquired from ARL
statistics and, for institutional productivity,
from Social Science Citation Index.
 The following variables were acquired for each ARL library and institution:
 

For x0, (1) Number of interlibrary loans
(2) Number of Ph.D.s graduated
(3) Number of faculty
(4) Number of publications


For x1, (1) Number of Reader Services staff
(2) Number of faculty


For x2, (1) Size of library collection
(2) Index of library rank (from ARL)
(3) Index of library size (from ARL)
 
 Statistics were acquired for the ARL libraries and
institutions for academic year 1973/74 and for the total
number of publications attributable to each institution
for the period 1971/­1981. Data of a similar nature were
obtained for each of the past 17 years; for each of them,
the analyses are quite consistent in the overall patterns.
 
 Ordinary least squares regression analyses are applied
to these data for the several ARL libraries. In addition
to these regression analyses, some effort was made to
identify major differences among the libraries.
Library Productivity
 Measures of Production
 Measures of Labor
 Measures of Capital Investment
 Results
Measures of Production- 1
 The characterizing function of the academic research
library is support to research of faculty and students,
primarily doctoral students. However, this is a very
difficult function to measure. Unfortunately, statistics for
"circulation" were not reported in ARL statistics until
1995, but even so it is a matter of some debate concerning
whether they are an adequate measure of research use.
 On the one hand, the claim has been made that
“circulation is a reasonably reliable index of all use,
including the unrecorded, consultative, or browsing use
within the library". On the other hand, other analyses
that in-house use is significantly different.
Measures of Production- 2
 The Faculty. If we regard the faculty as the primary
research users, might not the number of them be a measure
of the amount of research use made of the collection?
Underlying that view are a number of assumptions (e.g., the
average use of the collection by a faculty member is not a
function of the library as such and will be uniform from
institution to institution, even if not from faculty member to
faculty member).
 Ph.D. Graduates. In the same vein, the Ph.D. students also
are heavy research users of a collection. With the same kinds
of assumptions that apply to faculty, might not the number
of Ph.D. graduates be a measure of the research use?
Measure of Labor - 1
 The costs involved in technical services (basically, in selecting,
acquiring, processing, and cataloging of acquired materials)
are regarded as part of the capital investment.
 Doing this requires that the staff involved in technical services
be estimated, since the published data do not clearly identify
it. The basis for doing so was identical with that used for
public libraries
 In the following tabulation, the FTE estimates are based on
acquisitions (ACQ), using a standard ratio of 1.5 for volumes
per title Serial titles are assumed to account for about one-
fourth of the volumes acquired based on the apparent ratio of
serial volumes to total volumes and one volume per year per
serial).
Measure of Labor - 2

Acquisitions 0.65 FTE/l000 titles = .43 FTE/l000 volumes

Cataloging 0.84 FTE/l000 titles = .56 FTE/l000 volumes
Serials 0.20 FTE/1000 serials = .05 FTE/l000 volumes
Physical handling .08 FTE/l000 volumes
Supervision .14 FTE/l000 volumes
Total 1.26 FTE/1000 volumes
Measure of Labor - 3
 Those figures are all for acquisitions. In addition,
continuing with the same pattern followed in the analysis of
public libraries, the labor required to maintain the physical
facilities in which the collection is housed has been
estimated to be .012 FTE per 1000 volumes of collection.
Thus, the technical services staff has been estimated as:

(1.26 x ACQ) + (.012 x COLL)

 To obtain the estimates for Reader Services Staff, this

estimate of technical processing staff is then subtracted
from the data, that are available, on total staff.
Measures of Capital - 1
 The underlying rationale for applying the Cobb-Douglas
model to libraries is that "information" is at least
analogous to if not identical with "capital investment". It
seems evident that the primary capital resource of the
library in fact is its collection, so the size of collection will
be used as the measure for x2.

 However, there are serious difficulties in measuring even

so basic a variable as the size of the collection. Libraries
differ in whether or not they include microforms,
government documents, special collections, etc. They differ
in the means by which they measure any of those.
Measures of Capital - 2
 Despite that difficulty, the analysis took the number of
volumes in the collection, as reported in ARL Statistics,
as the primary value for this variable.
 An alternative measure of library resources could be
the Library Resources Index, which was derived from
three component variables:

total volumes held
 volumes added

 current serials.
Measures of Capital - 3
 A third alternative is the ARL Library Index. Through
factor analysis, the ARL data variables were reduced
from 22 down to 10. A weight is derived for each of the
variables on the factor to which they relate.
 These weights are then applied to the variables for a
given library to derive the index value for that library.
 The weights for the ten variables in that principal
factor analysis for 1980/81 were as follows (the
comparable values reported for 1979/80 are quite
similar):
Measures of Capital - 4

- 27.01014 + .57460 log (volumes held)

+ .56469 log (volumes added, gross)
+ .42692 log (microforms)
+ .53595 log (current serials)
+ .75211 log (expend., materials)
+ .43553 log (expend., binding)
+ .62256 log (total salaries)
+ .39022 log (expend., other operating)
+ .67798 log (professional staff)
+ .58385 log (nonprofessional staff)
Results
 Using Faculty as the measure of productivity
ARLYEAR A B R
ARL7374 .53 .56 .40208
ARL7475 .75 .36 .20672
ARL7576 .62 .46 .34135
ARL7677 .45 .61 .54628
ARL7778 .63 .42 .28101
ARL7879 .38 .63 .57489

 Using PhD graduates as the measure of productivity

ARL YEAR A B R
ARL7374 -.67 .81 .61283
ARL7475 -.65 .77 .56769
ARL7576 -.76 .85 .67577
ARL7677 -.87 .91 .71759
ARL7778 -.83 .87 .62334
ARL7879 -.81 .84 .73506
 ARL-2000 Data
 Since 1995, ARL statistics have included circulation and
reference use data, so it is now possible to apply the Cobb-
Douglas model with them as output measures.
 The results are the following two regression equations:
log(Circ/Srvst) = -0.095 + 0.887 log(Coll/Srvst), R = 0.52
log((Circ+Ref)/Srvst) = 5.92 + 0.478(Coll/Srvst), R = 0.62
 The following charts show the scattergrams for the ARL
libraries that reported circulation and reference data (eight
did not).
 While the correlation values of R = 0.52 and R = 0.62 are
not large, they are substantial.
 Scattergram for (Circ)/(Srvst)
6.80

6.70

6.60

6.50
log(Coll/Srvst)

6.40

6.30

6.20

6.10

6.00

5.90
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80

log(Circ/Srvst) - 4.5
 Scattergram for (Circ + Ref)/(Srvst)

6.8

6.7

6.6

6.5
log(Coll/Srvst)

6.4

6.3

6.2

6.1

5.9
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

log((Circ + Ref)/Srvst) - 5.0

Institutional Productivity
 Measures of Labor
 Measures of Capital Investment
 Measures of Production
 The Results
Measure of Labor

 The "producing labor" for the university is almost

self-evident. It's the faculty, with all other university
staff simply being supportive to them.
Measures of Capital Investment
 The measurement of "capital investment" for the
university turns out to be quite complex. In fact, there
do not appear to be any generally available or published
data that describe the total capital resources in any given
university. However, the size of the collection of each
university's library is published data. Furthermore, use
of it as a surrogate for the total capital investment will
provide a valuable test of the degree to which it is indeed
analogous, as an information investment, to capital
investments generally. We therefore first use the size of
collection as our measure or surrogate for the
university's capital investment.
Measures of Production

 The university serves many functions: education,

research, and public service. The measure of
"production" for the first two, at least, appears to be
straightforward. Number of students graduated should
measure the function of education reasonably well;
number of doctoral students or number of papers
published should measure the second. Focusing
attention on the research functions, though, it is that
which will be measure and using the two measures
appropriate to it.
Results

YEAR A B R
ARL7778 -0.452 0.882 0.820
ARL7879 -0.700 0.808 0.685
THE END