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TOTEX Malmquist index for CPI-X regulation: Does it correctly estimate the true frontier shift?

Author

Listed:
  • Roland Meyer

    (Jacobs University Bremen)

  • Gert Brunekreeft

    (Jacobs University Bremen)

  • George Elias

    (Polynomics)

Abstract

The X in CPI-X regulation aims to adjust price or revenue allowances to changes in total factor productivity and input prices. If calculated correctly, both terms together correspond to the change in efficient costs which can be determined by applying a cost Malmquist index. However, regulators typically lack the required data on input quantities and prices. As an alternative, regulation authorities may apply a TOTEX Malmquist index to measure the total cost change. We study under which conditions this total cost change correctly estimates the true efficient cost change. Overall, we conclude that the TOTEX Malmquist approach can be used for CPI-X regulation. However, regulators should be aware of the limitations and make adjustments in the implementation where necessary.

Suggested Citation

  • Roland Meyer & Gert Brunekreeft & George Elias, 2020. "TOTEX Malmquist index for CPI-X regulation: Does it correctly estimate the true frontier shift?," Journal of Regulatory Economics, Springer, vol. 58(1), pages 78-97, August.
    • Handle: RePEc:kap:regeco:v:58:y:2020:i:1:d:10.1007_s11149-020-09411-2
    DOI: 10.1007/s11149-020-09411-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Price regulation; Malmquist index; Total factor productivity; Data envelopment analysis;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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