Does specialization improve firm efficiency? Evidence from the vertical unbundling reform in the Chinese electricity industry

Many electricity markets in the world have experienced the vertical unbundling where the generation and transmission sectors were separated from a vertically-integrated monopolistic power company. This restructuring could positively impact the productivity of the firms because of intensified competition and enhanced autonomy but could also negatively aect the productivity because of the loss of synergy and scaled economy. By exploiting the vertical unbundling that took place in China in 2003, this study finds that vertical unbundling increased the labour use of the generation firms and the material use of the transmission firms. Additional investigation reveals that generation firms suffer from an efficiency loss in labour use due to the loss of coordination after vertical unbundling and the transmission firms face an increased transaction cost in acquiring material and bear the additional cost transferred from the efficiency loss of the upstream generation firms. Our findings suggest that benefits of vertical unbundling relative to integration critically hinge on the market structure of the industry.