Application of Panel Data Models in Benchmarking Analysis of the Electricity Distribution Sector

20 Pages Posted: 31 Aug 2006

See all articles by Mehdi Farsi

Mehdi Farsi

University of Neuchatel - Institute for Research in Economics (IRENE)

Massimo Filippini

ETH Zürich; University of Lugano - Faculty of Economics

William H. Greene

New York University Stern School of Business

Abstract

This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost-efficiency of 59 distribution utilities operating over a nine-year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm-specific heterogeneity. This paper shows that alternative panel models such as the 'true' random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm-specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On the other hand, refined specification of unobserved heterogeneity might lead to an underestimation of inefficiencies by mistaking potential persistent inefficiencies as external factors. Given that specification of inefficiency and heterogeneity relies on non-testable assumptions, there is no conclusive evidence in favour of one or the other specification. However, this paper argues that alternative panel data models along with conventional estimators can be used to obtain approximate lower and upper bounds for companies' efficiency scores.

Suggested Citation

Farsi, Mehdi and Filippini, Massimo and Greene, William H., Application of Panel Data Models in Benchmarking Analysis of the Electricity Distribution Sector. Annals of Public and Cooperative Economics, Vol. 77, No. 3, pp. 271-290, September 2006, Available at SSRN: https://ssrn.com/abstract=927828 or http://dx.doi.org/10.1111/j.1467-8292.2006.00306.x

Mehdi Farsi

University of Neuchatel - Institute for Research in Economics (IRENE) ( email )

Pierre-à-Mazel 7
Neuchatel, 2000
Switzerland
+41 32 718 1450 (Phone)

Massimo Filippini (Contact Author)

ETH Zürich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland

University of Lugano - Faculty of Economics ( email )

Via Giuseppe Buffi 13
CH-6900 Lugano, CH-6904
Switzerland

William H. Greene

New York University Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
212-998-0876 (Phone)

HOME PAGE: http://people.stern.nyu.edu/wgreene

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