Estimation of Firm-Level Productivity Changes in the Indian Power Sector: Disentangling Unobserved Heterogeneity by a Transformed Fixed-Effect Stochastic Frontier Model

35 Pages Posted: 3 Feb 2013

See all articles by Anish Sugathan

Anish Sugathan

Indian Institute of Management Ahmedabad

Deepak Malgan

Indian Institute of Management (IIMB), Bangalore

S. Chandrashekar

Indian Institute of Management Bangalore

Deepak K. Sinha

Indian Institute of Management (IIMB), Bangalore

Date Written: January 31, 2013

Abstract

We measure firm-level productivity changes in the Indian electricity sector during a period that witnessed several pro-market regulatory changes. Using information collected from multiple sources we construct a unique panel of generating firms and transmission and distribution utilities spanning the years 2000 to 2009. We employ a recently developed improvement in the Stochastic Frontier panel method that allows controlling for time-invariant unobserved heterogeneity. Using the method we jointly estimate inefficiency and exogenous determinants of inefficiency. We estimate a flexible translog production model and compute decomposition of productivity into components of changes in technology, efficiency, scale and price effect. During this period, especially post Electricity Act 2003, we observed a general decline in firm-level productivity at the mean rate of -1.6% per year. A positive and large technical change is observed in the sector at the rate of 8% per year, attributable possibly to newer capacity addition. Except for smaller gas based generators, inefficiency is observed to be increasing at the mean rate of 3.1% per year in the sector. Consistent with extant findings we also document no significant impact of un-bundling on firm-level efficiency.

Keywords: India’s Electricity Sector Reform, Stochastic Frontier Analysis, Total Factor Productivity, Firm-Level Panel Data

JEL Classification: L43, L94, L98, C13, C23

Suggested Citation

Sugathan, Anish and Malgan, Deepak and Chandrashekar, S. and Sinha, Deepak K., Estimation of Firm-Level Productivity Changes in the Indian Power Sector: Disentangling Unobserved Heterogeneity by a Transformed Fixed-Effect Stochastic Frontier Model (January 31, 2013). IIM Bangalore Research Paper No. 390, Available at SSRN: https://ssrn.com/abstract=2210741 or http://dx.doi.org/10.2139/ssrn.2210741

Anish Sugathan (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

HOME PAGE: http://https://www.iima.ac.in/web/iima

Deepak Malgan

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

S. Chandrashekar

Indian Institute of Management Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Deepak K. Sinha

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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