Understanding Production in the Performing Arts: A Production Function for German Public Theatres

The production structure for the performing arts is complicated by a number of factors making it difficult to estimate production technologies using a theoretical framework built for standard applications. However, understanding the nature of production and the way in which decisions are made by performing arts firms is particularly important given that many performing arts organisations are funded by government. Public funding of performing arts organisations is justified where socially desirable objectives are fulfilled. The public good component of output makes an important dimension of firms’ production decisions unobservable while the principal-agent problem reduces the incentive for firms to behave as cost minimisers. Both may result in an observed production structure which is uneconomic. In this paper we re-visit these issues using a new and extensive dataset for German public theatre. We aim to explore the extent to which the standard laws of production that apply in other sectors of the economy hold for performing arts institutions.