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Combining Uncertainty with Uncertainty to Get Certainty? Efficiency Analysis for Regulation Purposes

Author

Listed:
  • Mark Andor

    (RWI – Leibniz Institute for Economic Research)

  • Christopher F. Parmeter

    (University of Miami)

  • Stephan Sommer

    (RWI – Leibniz Institute for Economic Research)

Abstract

Data envelopment analysis (DEA) and stochastic frontier analysis (SFA), as well as combinations thereof, are widely applied in incentive regulation practice, where the assessment of efficiency plays a major role in regulation design and benchmarking. Using a Monte Carlo simulation experiment, this paper compares the performance of six alternative methods commonly applied by regulators. Our results demonstrate that combination approaches, such as taking the maximum or the mean over DEA and SFA efficiency scores, have certain practical merits and might offer an useful alternative to strict reliance on a singular method. In particular, the results highlight that taking the maximum not only minimizes the risk of underestimation, but can also improve the precision of efficiency estimation. Based on our results, we give recommendations for the estimation of individual efficiencies for regulation purposes and beyond.

Suggested Citation

  • Mark Andor & Christopher F. Parmeter & Stephan Sommer, 2018. "Combining Uncertainty with Uncertainty to Get Certainty? Efficiency Analysis for Regulation Purposes," Working Papers 2018-02, University of Miami, Department of Economics.
  • Handle: RePEc:mia:wpaper:2018-02
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    Keywords

    Data Envelopment Analysis; Stochastic Frontier Analysis; Efficiency Analysis; Regulation; Network Operators Publication Status: Forthcoming;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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