Regularized conditional estimators of unit inefficiency in stochastic frontier analysis, with application to electricity distribution market

PublikationArtikel (med peer review)

Magnus Söderberg

Sammanfattning

In stochastic frontier analysis, the conventional estimation of unit inefficiency is based on the mean/mode of the inefficiency, conditioned on the composite error. It is known that the conditional mean of inefficiency shrinks towards the mean rather than towards the unit inefficiency. In this paper, we analytically prove that the conditional mode cannot accurately estimate unit inefficiency, either. We propose regularized estimators of unit inefficiency that restrict the unit inefficiency estimators to satisfy some a priori assumptions, and derive the closed form regularized conditional mode estimators for the three most commonly used inefficiency densities. Extensive simulations show that, under common empirical situations, e.g., regarding sample size and signal-to-noise ratio, the regularized estimators outperform the conventional (unregularized) estimators when the inefficiency is greater than its mean/mode. Based on real data from the electricity distribution sector in Sweden, we demonstrate that the conventional conditional estimators and our regularized conditional estimators provide substantially different results for highly inefficient companies.

The article can be accessed here.

Zeebari, Z., Månsson, K., Sjölander, P., & Söderberg, M. (2023). Regularized conditional estimators of unit inefficiency in stochastic frontier analysis, with application to electricity distribution market.Journal of Productivity Analysis, 59(1), 79-97.

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2025

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University of Adelaide, School of Economics and Public Policy Working Paper.

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Efficiency analysis is essential for evaluating the performance of entities that deliver essential or standardized services. The estimator proposed by Jondrow et al. (1982) is widely used in this context, but it has been criticized for several shortcomings: it tends to bias inefficiency estimates toward the mean, distorts the distribution, and misrepresents the conditional distribution of inefficiency—especially in cross-sectional data.

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Artikel (med peer review)Publikation

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Publiceringsår

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Publicerat i

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Sammanfattning

This paper examines the Swedish electricity distribution sector to highlight three key findings. First, we identify significant economies of scale among electricity distribution firms, indicating that larger firms operate more efficiently. Second, we explore alternative market structures and demonstrate that these can substantially reduce the aggregated costs of electricity distribution. Third, we use novel survey data to show that firms perceive the economic incentives for mergers to be insufficient. These findings suggest that policymakers should consider creating a regulatory environment that encourages consolidation and enhance efficiency in the sector.

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Publicerat i

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Sammanfattning

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