Incorporating quality in economic regulatory benchmarking

Emil Heesche and Mette Asmild

Omega, 2022, vol. 110, issue C

Abstract: The Danish water regulator uses, amongst other things, Data Envelopment Analysis to create a pseudo-competitive environment for the water companies. The benchmarking results are used to set an individual revenue cap for each company. The benchmarking model is currently criticised for not including the companies’ supply quality and thereby having an omitted variable bias problem. One problem the regulator has encountered when trying to incorporate supply quality in the benchmarking model is that it tends to increase the revenue caps more than desired. The regulator does, however, not have any prior information about the marginal rates of substitution between the quality variables and costs, which makes it challenging to reduce the supply quality's impact on the revenue caps.

Keywords: Data envelopment analysis; Regulation; Facet structure; Weight restrictions; Marginal rates of substitution (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.omega.2022.102630

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