Combining uncertainty with uncertainty to get certainty? Efficiency analysis for regulation purposes

Mark Andor, Christopher Parmeter and Stephan Sommer

No 770, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Data envelopment analysis (DEA) and stochastic frontier analysis (SFA), as well as combinations thereof, are widely applied in incentive regulation practice, where the assessment of efficiency plays a major role in regulation design and benchmarking. Using a Monte Carlo simulation experiment, this paper compares the performance of six alternative methods commonly applied by regulators. Our results demonstrate that combination approaches, such as taking the maximum or the mean over DEA and SFA efficiency scores, have certain practical merits and might offer an useful alternative to strict reliance on a singular method. In particular, the results highlight that taking the maximum not only minimizes the risk of underestimation, but can also improve the precision of efficiency estimation. Based on our results, we give recommendations for the estimation of individual efficiencies for regulation purposes and beyond.

Keywords: data envelopment analysis; stochastic frontier analysis; efficiency analysis; regulation; network operators (search for similar items in EconPapers)
JEL-codes: C10 C50 D24 L50 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-eff, nep-ore and nep-rmg
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Journal Article: Combining uncertainty with uncertainty to get certainty? Efficiency analysis for regulation purposes (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:770

DOI: 10.4419/86788898

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