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Efficiency Measurement in Network Industries: Application to the Swiss Railway Companies

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  • Mehdi Farsi

    ()
    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • Massimo Filippini

    ()
    (Center for Energy Policy and Economics CEPE, Department of Management, Technology and Economics, ETH Zurich, Switzerland)

  • William Greene

    (Department of Economics, Stern School of Business, New York University, 44 West 4th St., New York, NY 10012, USA)

Abstract

This paper examines the performance of several panel data models to measure cost and scale efficiency in network industries. Network industries are characterized by a high degree of heterogeneity, much of which is network-specific and unobserved. The unaccounted-for heterogeneity can create bias in the inefficiency estimates. The stochastic frontier models that include additional firm-specific effects, such as the random-constant frontier model proposed by Greene (2004), can control for unobserved network effects that are random but time-invariant. In cases like railway networks the unobserved heterogeneity is potentially correlated with other exogenous, but observed, factors such as network size and density. In such cases the correlation with explanatory variables may bias the coefficients of the cost function in a random-effects specification. However, these correlations can be integrated into the model using Mundlak’s (1978) formulation. The unobserved network effects and the resulting biases are studied through a comparative study of a series of stochastic frontier models. These models are applied to a panel of 50 railway companies operating over a 13-year period in Switzerland. Different specifications are compared regarding the estimation of both cost frontier coefficients and inefficiency scores.

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Bibliographic Info

Paper provided by CEPE Center for Energy Policy and Economics, ETH Zurich in its series CEPE Working paper series with number 04-32.

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Length: 29 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:cee:wpcepe:04-32

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References

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2004. "Cost Efficiency in Regional Bus Companies: An Application of Alternative Stochastic Frontier Models," CEPE Working paper series 04-33, CEPE Center for Energy Policy and Economics, ETH Zurich.
  2. Jara-Díaz, Sergio R. & Basso, Leonardo J., 2003. "Transport cost functions, network expansion and economies of scope," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 39(4), pages 271-288, July.
  3. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  4. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200.
  5. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  6. Pitt, Mark M. & Lee, Lung-Fei, 1981. "The measurement and sources of technical inefficiency in the Indonesian weaving industry," Journal of Development Economics, Elsevier, vol. 9(1), pages 43-64, August.
  7. Antonio Álvarez & Carlos Arias & William Greene, 2004. "Accounting for unobservables in production models:management and inefficiency," Economic Working Papers at Centro de Estudios Andaluces E2004/72, Centro de Estudios Andaluces.
  8. Mancuso, Paolo & Reverberi, Pierfrancesco, 2003. "Operating costs and market organization in railway services. The case of Italy, 1980-1995," Transportation Research Part B: Methodological, Elsevier, vol. 37(1), pages 43-61, January.
  9. Antonio Estache & Marianela Gonzalez & Lourdes Trujillo, 2002. "What Does Privatization Do for Efficiency? Evidence from Argentina's and Brazil's Railways," ULB Institutional Repository 2013/43980, ULB -- Universite Libre de Bruxelles.
  10. Massimo Filippini & Paola Prioni, 2003. "The influence of ownership on the cost of bus service provision in Switzerland - an empirical illustration," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 683-690.
  11. Banos-Pino, Jose & Fernandez-Blanco, Victor & Rodriguez-Alvarez, Ana, 2002. "The allocative efficiency measure by means of a distance function: The case of Spanish public railways," European Journal of Operational Research, Elsevier, vol. 137(1), pages 191-205, February.
  12. Schmidt, Peter & Sickles, Robin C, 1984. "Production Frontiers and Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 2(4), pages 367-74, October.
  13. Filippini, Massimo & Maggi, Rico, 1993. "Efficiency and Regulation in the Case of the Swiss Private Railways," Journal of Regulatory Economics, Springer, vol. 5(2), pages 199-216, June.
  14. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
  15. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521522717, October.
  16. Kumbhakar,Subal C. & Lovell,C. A. Knox, 2003. "Stochastic Frontier Analysis," Cambridge Books, Cambridge University Press, number 9780521666633, October.
  17. Pedro Cantos & José Pastor & Lorenzo Serrano, 1999. "Productivity, efficiency and technical change in the European railways: A non-parametric approach," Transportation, Springer, vol. 26(4), pages 337-357, November.
  18. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  19. Mehdi Farsi & Massimo Filippini & Michael Kuenzle, 2005. "Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2127-2141.
  20. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
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