THE ESTIMATION OF AN AVERAGE COST FRONTIER TO CALCULATE BENCHMARK TARIFFS FOR ELECTRICITY

EFFICIENCY MEASUREMENT IN NETWORK INDUSTRIES: APPLICATION TO THE SWISS RAILWAY COMPANIES † † ‡Mehdi Farsi Massimo Filippini William Greene † Center for Energy Policy and Economics Federal Institute of Technology ETH Zentrum, WEC, 8092 Zurich, Switzerland and Department of Economics, University of Lugano Via Ospedale 13, 6900 Lugano, Switzerland ‡ Department of Economics, Stern School of Business New York University th44 West 4 St., New York, NY 10012, USA May 2004 ABSTRACT This paper examines the performance of several panel data models to measure cost and scale efficiency in network industries. Network industries are characterized by a high degree of heterogeneity, much of which is network-specific and unobserved. The unaccounted-for heterogeneity can create bias in the inefficiency estimates. The stochastic frontier models that include additional firm-specific effects, such as the random-constant frontier model proposed by Greene (2004), can control for unobserved network effects that are random but time-invariant. In cases like railway networks the unobserved heterogeneity is potentially correlated with other exogenous, but observed, factors such as network size and density. In such cases the correlation with explanatory variables may bias the coefficients of the cost function in a random-effects specification. However, these correlations can be integrated into the model using Mundlak’s (1978) formulation. ...