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Persistent and transient cost efficiency—an application to the Swiss hydropower sector

Author

Listed:
  • Massimo Filippini

    (ETH Zurich
    University of Lugano)

  • Thomas Geissmann

    () (ETH Zurich
    Massachusetts Institute of Technology)

  • William H. Greene

    (New York University)

Abstract

Abstract Electricity prices on the European market have decreased significantly over the past few years, resulting in a deterioration of Swiss hydropower firms’ competitiveness and profitability. One option to improve the sector’s competitiveness is to increase cost efficiency. The goal of this study is to quantify the level of persistent and transient cost efficiency of individual firms by applying the generalized true random effects (GTRE) model introduced by Colombi et al. (Journal of Productivity Analysis 42(2): 123–136, 2014) and Filippini and Greene (Journal of Productivity Analysis 45(2): 187–196, 2016). Applying this newly developed GTRE model to a total cost function, the level of cost efficiency of 65 Swiss hydropower firms is analyzed for the period between 2000 and 2013. A true random effects specification is estimated as a benchmark for the transient level of cost efficiency. The results show the presence of both transient as well as persistent cost inefficiencies. The GTREM predicts the aggregate level of cost inefficiency to amount to 21.8% (8.0% transient, 13.8% persistent) on average between 2000 and 2013. These two components differ in interpretation and implication. From an individual firm’s perspective, the two types of cost inefficiencies might require a firm’s management to respond with different improvement strategies. The existing level of persistent inefficiency could prevent the hydropower firms from adjusting their production processes to new market environments. From a regulatory point of view, the results of this study could be used in the scope and determination of the amount of financial support given to struggling firms.

Suggested Citation

  • Massimo Filippini & Thomas Geissmann & William H. Greene, 2018. "Persistent and transient cost efficiency—an application to the Swiss hydropower sector," Journal of Productivity Analysis, Springer, vol. 49(1), pages 65-77, February.
  • Handle: RePEc:kap:jproda:v:49:y:2018:i:1:d:10.1007_s11123-017-0522-6
    DOI: 10.1007/s11123-017-0522-6
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    References listed on IDEAS

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    Cited by:

    1. Konstantin Yu. Totyev, 2016. "Business Transaction Invalidity In the Context of the Principle of Legality," HSE Working papers WP BRP 63/LAW/2016, National Research University Higher School of Economics.

    More about this item

    Keywords

    Efficiency measurement; Stochastic frontier analysis; Persistent and transient cost efficiency; Hydropower;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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