Controlling for environmental conditions in regulatory benchmarking

Emil Heesche () and Mette Asmild ()
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Emil Heesche: Department of Food and Resource Economics, University of Copenhagen
Mette Asmild: Department of Food and Resource Economics, University of Copenhagen

No 2020/03, IFRO Working Paper from University of Copenhagen, Department of Food and Resource Economics

Abstract: Data Envelopment Analysis (DEA) is often used by regulators to create a pseudo-competitive environment for sectors with natural monopolies. In addition to develop a theoretically well-behaved model, regulators need to take into account several other factors, such as the political agenda and the historical context of the regulation. This sometimes results in some unconventional approaches, which furthermore are not easily changed. In this paper, we discuss the model used for DEA-based benchmark regulation of the Danish water sector. More specifically, we look at the characteristics of the method the regulator uses to take into account differences in the companies’ environmental conditions. We show how the approach currently used to control for differences in environmental conditions seemingly does not sufficiently control for the actual differences as intended since second stage analysis still reveals significant correlations between the efficiency scores and these external factors. To explain this, we reconsider the second stage analysis, using permutation-based approaches and also accounting for the fact that only those companies that in the DEA assign weights to those output measures adjusted for environmental conditions, will benefit from the adjustments.

Keywords: Data envelopment analysis; Second Stage Analysis; Environmental Variables; Regulation; Permutation (search for similar items in EconPapers)
JEL-codes: C02 C14 C51 C52 C61 C67 L51 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2020-03
New Economics Papers: this item is included in nep-eff, nep-env and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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