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Application Of Panel Data Models In Benchmarking Analysis Of The Electricity Distribution Sector

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  • Mehdi Farsi
  • Massimo Filippini
  • William Greene

Abstract

This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost-efficiency of 59 distribution utilities operating over a nine-year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm-specific heterogeneity. This paper shows that alternative panel models such as the 'true' random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm-specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On the other hand, refined specification of unobserved heterogeneity might lead to an underestimation of inefficiencies by mistaking potential persistent inefficiencies as external factors. Given that specification of inefficiency and heterogeneity relies on non-testable assumptions, there is no conclusive evidence in favour of one or the other specification. However, this paper argues that alternative panel data models along with conventional estimators can be used to obtain approximate lower and upper bounds for companies' efficiency scores. Copyright 2006 The Authors Journal compilation � CIRIEC 2006.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Annals of Public and Cooperative Economics.

Volume (Year): 77 (2006)
Issue (Month): 3 (09)
Pages: 271-290

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Handle: RePEc:bla:annpce:v:77:y:2006:i:3:p:271-290

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Cited by:
  1. Farsi, Mehdi & Filippini, Massimo, 2009. "An analysis of cost efficiency in Swiss multi-utilities," Energy Economics, Elsevier, vol. 31(2), pages 306-315, March.
  2. Anne-Kathrin Last & Heike Wetzel, 2011. "Baumol’s cost disease, efficiency, and productivity in the performing arts: an analysis of german public theaters," Journal of Cultural Economics, Springer, vol. 35(3), pages 185-201, August.
  3. Astrid Cullmann & Jürgen Apfelbeck & Christian von Hirschhausen, 2006. "Efficiency Analysis of East European Electricity Distribution in Transition: Legacy of the Past?," Discussion Papers of DIW Berlin 553, DIW Berlin, German Institute for Economic Research.
  4. Emili Grifell-Tatjé & Kristiaan Kerstens, 2007. "Incentive Regulation and the Role of Convexity in Benchmarking Electricity Distribution: Economists versus Engineers," Working Papers 2007-ECO-01, IESEG School of Management.
  5. Philippe K. Widmer & Peter Zweifel & Mehdi Farsi, 2011. "Accounting for heterogeneity in the measurement of hospital performance," ECON - Working Papers 052, Department of Economics - University of Zurich.
  6. Philippe K. Widmer, 2011. "Does prospective payment increase hospital (in)efficiency? Evidence from the Swiss hospital sector," ECON - Working Papers 053, Department of Economics - University of Zurich.
  7. Jamasb, T. & Söderberg, M., 2009. "Yardstick and Ex-post Regulation by Norm Model: Empirical Equivalence, Pricing Effect, and Performance in Sweeden," Cambridge Working Papers in Economics 0908, Faculty of Economics, University of Cambridge.
  8. Luisa Affuso & Alvaro Angeriz & Michael Pollitt, 2009. "The Impact of Privatisation on the Efficiency of Train Operation in Britain," Working Papers 28, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.

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