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

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.