Big and Beautiful? On Non-Parametrically Measuring Scale Economies in Non-Convex Technologies

21 Pages Posted: 9 Nov 2008 Last revised: 11 Nov 2008

See all articles by K. De Witte

K. De Witte

University of Leuven (KUL); Maastricht University

Rui Cunha Marques

Technical University of Lisbon (UTL) - Centre for Management Studies (CEG-IST)

Date Written: August 1, 2008

Abstract

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.

Keywords: Free Disposal Hull, economies of scale, optimal size, water sector

Suggested Citation

De Witte, Kristof and Marques, Rui Cunha, Big and Beautiful? On Non-Parametrically Measuring Scale Economies in Non-Convex Technologies (August 1, 2008). Available at SSRN: https://ssrn.com/abstract=1296623 or http://dx.doi.org/10.2139/ssrn.1296623

Kristof De Witte (Contact Author)

University of Leuven (KUL) ( email )

Naamsestraat 69
Leuven, Vlaams Brabant B-3000
Belgium

HOME PAGE: http://www.feb.kuleuven.be

Maastricht University ( email )

Boschstraat 24
Maastricht, Vlaams-Brabant 6211 AX
Netherlands
003216326656 (Phone)

HOME PAGE: http://www.feb.kuleuven.be

Rui Cunha Marques

Technical University of Lisbon (UTL) - Centre for Management Studies (CEG-IST) ( email )

Technical University of Lisbon
Avenida Rovisco Pais
Lisbon, 1049-001
Portugal
+351218418305 (Phone)

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