Economic Strategy for Improving the Efficiency (Cost) of Iranian Water and Sewerage Companies: Application of Stochastic Frontier Methods Based on Panel Data

Document Type : Original Article

Authors

1 شهر زیبا بلوار تعاون خ شربیانی شرقی پلاک 106 واحد 16

2 Department of Management and Economic, Azad University, Branch of Sciences & Researches.

3 Department of Economic, Allame Tabatabaie University, Tehran,Iran.

Abstract

It seems necessary to regulate prices of public utilities such as water due to market failures, regardless of ownership. Based on available theoretical and experimental literature, The latest achievement of researchers in field of public utility regulation such as water, electricity, performance-based regulation in general, and performance-based price regulation in particular. Adjusting price of urban drinking water in provinces of country based on efficiency and performance of water distribution companies, while motivating Iranian water and sewage companies to improve efficiency and productivity, will also reduce water prices for consumers as a result of competition. In the study, several different stochastic frontier methods were considered to estimate a translog cost frontier function for the sample of Iranian water distribution companies over the 2012-2017 period. The inefficiency scores obtained from different methods are not found to be robust in their levels and rankings of companies. A possible explanation for this lack of robustness can be found in different ability of stochastic frontier methods to account for unobservable heterogeneity. From methodological point of view, The empirical results show that conventional random-effects models tend to overestimate cost inefficiency since the inefficiency estimates also contain unobserved heterogeneity. The true fixed effects model proposed by Greene seems to be able to distinguish between unobserved heterogeneity and inefficiency but it may underestimate inefficiency since all time-invariant effects are treated as unobserved heterogeneity. Therefore, this model seems to contribute, at least partially, to the solution of the problem of time-invariant unobserved heterogeneity in the estimation of cost inefficiency.

Keywords

References

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Economic Strategy
Volume 10, Issue 37 - Serial Number 37
September 2021
Pages 289-320

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