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Curvature-Constrained Estimates of Technical Efficiency and Returns to Scale for U.S. Electric Utilities

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Author Info
Supawat Rungsuriyawiboon
Chris O’Donnell () (CEPA - School of Economics, The University of Queensland)

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Abstract

We estimate an input distance function for U.S. electric utilities under the assumption that non-negative variables associated with technical inefficiency are timeinvariant. We use Bayesian methodology to impose curvature restrictions implied by microeconomic theory and obtain exact finite-sample results for nonlinear functions of the parameters (eg. technical efficiency scores). We find that Bayesian point estimates of elasticities are more plausible than maximum likelihood estimates, technical efficiency scores from a random effects specification are higher than those obtained from a fixed effects model, and there is evidence of increasing returns to scale in the industry.

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Paper provided by School of Economics, University of Queensland, Australia in its series CEPA Working Papers Series with number WP072004.

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Date of creation: Sep 2004
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Handle: RePEc:qld:uqcepa:12

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  1. Timothy J. Considine, 2000. "Cost Structures for Fossil Fuel-Fired Electric Power Generation," The Energy Journal, International Association for Energy Economics, vol. 21(2), pages 83-104.
  2. O'Donnell, Christopher J. & Coelli, Timothy J., 2005. "A Bayesian approach to imposing curvature on distance functions," Journal of Econometrics, Elsevier, vol. 126(2), pages 493-523, June. [Downloadable!] (restricted)
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  3. Kumbhakar, Subal C., 1990. "Production frontiers, panel data, and time-varying technical inefficiency," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 201-211. [Downloadable!] (restricted)
  4. Stevenson, Rodney E., 1980. "Likelihood functions for generalized stochastic frontier estimation," Journal of Econometrics, Elsevier, vol. 13(1), pages 57-66, May. [Downloadable!] (restricted)
  5. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July. [Downloadable!] (restricted)
  6. Atkinson, Scott E. & Primont, Daniel, 2002. "Stochastic estimation of firm technology, inefficiency, and productivity growth using shadow cost and distance functions," Journal of Econometrics, Elsevier, vol. 108(2), pages 203-225, June. [Downloadable!] (restricted)
  7. Supawat Rungsuriyawiboon & Spiro E. Stefanou, 2003. "Dynamic Efficiency Estimation: An Application to US Electric Utilities," CEPA Working Papers Series WP052003, School of Economics, University of Queensland, Australia. [Downloadable!]
  8. 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. [Downloadable!] (restricted)
  9. Greene, William H., 1990. "A Gamma-distributed stochastic frontier model," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 141-163. [Downloadable!] (restricted)
  10. 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.
  11. Gary Koop & M. F. J. Steel, 2004. "Bayesian Analysis of Stochastic Frontier Models," ESE Discussion Papers 19, Edinburgh School of Economics, University of Edinburgh.
  12. Grosskopf, S. & Margaritis, D. & Valdmanis, V., 1995. "Estimating output substitutability of hospital services: A distance function approach," European Journal of Operational Research, Elsevier, vol. 80(3), pages 575-587, February. [Downloadable!] (restricted)
  13. Coelli, Tim & Perelman, Sergio, 1999. "A comparison of parametric and non-parametric distance functions: With application to European railways," European Journal of Operational Research, Elsevier, vol. 117(2), pages 326-339, September. [Downloadable!] (restricted)
  14. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June. [Downloadable!] (restricted)
  15. Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1997. "Bayesian efficiency analysis through individual effects: Hospital cost frontiers," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 77-105. [Downloadable!] (restricted)
  16. Fare, Rolf, et al, 1993. "Derivation of Shadow Prices for Undesirable Outputs: A Distance Function Approach," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 374-80, May. [Downloadable!] (restricted)
  17. Osiewalski, J. & Steel, M., 1996. "Numerical tools for the Bayesian analysis of stochastic frontier models," Discussion Paper 3, Tilburg University, Center for Economic Research. [Downloadable!]
  18. Fernandez, C. & Osiewalski, J. & Steel, M., 1996. "On the use of panel data in bayesian stochastic frontier models," Discussion Paper 17, Tilburg University, Center for Economic Research. [Downloadable!]
  19. 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. [Downloadable!] (restricted)
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