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Big and beautiful? On non-parametrically measuring scale economies in non-convex technologies

  • Kristof Witte

    ()

  • Rui Marques

    ()

Knowledge on the scale economies drives the incentives of regulators, governments and individual utilities to scale-up or scale-down the scale of operations. This paper considers the returns to scale (RTS) in non-convex frontier models. In particular, we evaluate RTS assumptions in a Free Disposal Hull model, which accounts for uncertainty and heterogeneity in the sample. Additionally, we provide a three-step framework to empirically analyze the existence and extent of RTS in real world applications. In a first step, the presence of scale (and scope) economies is verified. Secondly, RTS for individual observations are examined while in a third step we derive the optimal scale for a sector as a whole. The framework is applied to the Portuguese drinking water sector where we find the optimal scale to be situated around 7 to 10 million m3.

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File URL: http://hdl.handle.net/10.1007/s11123-010-0191-1
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Article provided by Springer in its journal Journal of Productivity Analysis.

Volume (Year): 35 (2011)
Issue (Month): 3 (June)
Pages: 213-226

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Handle: RePEc:kap:jproda:v:35:y:2011:i:3:p:213-226
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100296

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