EconPapers    
Economics at your fingertips  
 

The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation

Sebastian Nick () and Heike Wetzel ()

Journal of Regulatory Economics, 2016, vol. 49, issue 1, 33-55

Abstract: In this study, we address a major problem in the measurement of firm performance and the regulation of natural monopolies, namely the intertemporal character of long-term investment decisions. Specifically, we focus on the impact of adjustment costs of investments on estimates of firms’ technical and cost inefficiency. We make use of a nonparametric dynamic data envelopment analysis to investigate the dynamic inefficiency of electricity distribution and transmission companies in the US during the years 2004–2011. These results are compared to their static counterparts. Our empirical findings reveal that ignoring long-term investments and their corresponding adjustment costs significantly distorts both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments. Copyright Springer Science+Business Media New York 2016

Keywords: Dynamic inefficiency; Dynamic directional distance function; Dynamic data envelopment analysis; Electricity transmission and distribution; D22; D24; D61; D92; L51 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1007/s11149-015-9285-z (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Hidden Cost of Investment: The Impact of Adjustment Cost on Firm Performance Measurement and Regulation (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:regeco:v:49:y:2016:i:1:p:33-55

Ordering information: This journal article can be ordered from
http://www.springer. ... on/journal/11149/PS2

DOI: 10.1007/s11149-015-9285-z

Access Statistics for this article

Journal of Regulatory Economics is currently edited by Michael A. Crew

More articles in Journal of Regulatory Economics from Springer
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2020-02-14
Handle: RePEc:kap:regeco:v:49:y:2016:i:1:p:33-55