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Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry

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  • Llorca, Manuel
  • Orea, Luis
  • Pollitt, Michael G.

Abstract

In this paper we advocate using the latent class model (LCM) approach to control for technological differences in traditional efficiency analysis of regulated electricity networks. Our proposal relies on the fact that latent class models are designed to cluster firms by uncovering differences in technology parameters. Moreover, it can be viewed as a supervised method for clustering data that takes into account the same (production or cost) relationship that is analysed later, often using nonparametric frontier techniques. The simulation exercises show that the proposed approach outperforms other sample selection procedures. The proposed methodology is illustrated with an application to a sample of US electricity transmission firms for the period 2001–2009.

Suggested Citation

  • Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2014. "Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry," Operations Research Perspectives, Elsevier, vol. 1(1), pages 6-17.
  • Handle: RePEc:eee:oprepe:v:1:y:2014:i:1:p:6-17
    DOI: 10.1016/j.orp.2014.03.002
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:energy:v:155:y:2018:i:c:p:35-45 is not listed on IDEAS
    2. Orea, Luis & Álvarez, Inmaculada C. & Jamasb, Tooraj, 2016. "A spatial approach to control for unobserved environmental conditions when measuring firms’ technology: an application to Norwegian electricity distribution networks," Efficiency Series Papers 2016/06, University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG).
    3. repec:eee:appene:v:242:y:2019:i:c:p:364-377 is not listed on IDEAS
    4. Llorca, Manuel & Orea, Luis & Pollitt, Michael G., 2016. "Efficiency and environmental factors in the US electricity transmission industry," Energy Economics, Elsevier, vol. 55(C), pages 234-246.
    5. Luis Orea & Inmaculada C. Álvarez & Tooraj Jamasb, 2016. "Using a spatial econometric approach to mitigate omitted variables in stochastic frontier models: An application to Norwegian electricity distribution networks," Working Papers EPRG 1630, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    6. repec:aen:journl:ej38-4-orea is not listed on IDEAS
    7. Manuel Llorca & Ana Rodríguez-Álvarez & Tooraj Jamasb, 2018. "Objective vs. Subjective Fuel Poverty and Self-Assessed Health," Working Papers EPRG 1823, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    8. Maria Nieswand & Stefan Seifert, 2016. "Operational Conditions in Regulatory Benchmarking Models: A Monte Carlo Analysis," Discussion Papers of DIW Berlin 1585, DIW Berlin, German Institute for Economic Research.
    9. Agrell, Per J. & Brea-Solís, Humberto, 2017. "Capturing heterogeneity in electricity distribution operations: A critical review of latent class modelling," Energy Policy, Elsevier, vol. 104(C), pages 361-372.
    10. repec:eee:ejores:v:265:y:2018:i:1:p:133-148 is not listed on IDEAS
    11. repec:eee:tefoso:v:126:y:2018:i:c:p:186-193 is not listed on IDEAS
    12. Massimo Filippini & Luis Orea, 2014. "Applications of the stochastic frontier approach in Energy Economics," Economics and Business Letters, Oviedo University Press, vol. 3(1), pages 35-42.
    13. repec:eee:ejores:v:275:y:2019:i:2:p:780-792 is not listed on IDEAS
    14. repec:eee:ejores:v:263:y:2017:i:3:p:1078-1094 is not listed on IDEAS
    15. repec:eee:soceps:v:65:y:2019:i:c:p:111-126 is not listed on IDEAS
    16. Agrell, P & Brea-Solís, H., 2015. "Stationarity of Heterogeneity in Production Technology using Latent Class Modelling," CORE Discussion Papers 2015047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    17. Kerstens, Kristiaan & O’Donnell, Christopher & Van de Woestyne, Ignace, 2019. "Metatechnology frontier and convexity: A restatement," European Journal of Operational Research, Elsevier, vol. 275(2), pages 780-792.
    18. repec:kap:hcarem:v:22:y:2019:i:3:d:10.1007_s10729-018-9455-5 is not listed on IDEAS

    More about this item

    Keywords

    Electricity transmission; Utilities regulation; Latent class model approach; Nonparametric analysis;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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