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TOTEX Malmquist index for CPI-X regulation: Does it correctly estimate the true frontier shift?

Roland Meyer, Gert Brunekreeft and George Elias
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Roland Meyer: Jacobs University Bremen
Gert Brunekreeft: Jacobs University Bremen
George Elias: Polynomics

Journal of Regulatory Economics, 2020, vol. 58, issue 1, No 4, 78-97

Abstract: Abstract The X in CPI-X regulation aims to adjust price or revenue allowances to changes in total factor productivity and input prices. If calculated correctly, both terms together correspond to the change in efficient costs which can be determined by applying a cost Malmquist index. However, regulators typically lack the required data on input quantities and prices. As an alternative, regulation authorities may apply a TOTEX Malmquist index to measure the total cost change. We study under which conditions this total cost change correctly estimates the true efficient cost change. Overall, we conclude that the TOTEX Malmquist approach can be used for CPI-X regulation. However, regulators should be aware of the limitations and make adjustments in the implementation where necessary.

Keywords: Price regulation; Malmquist index; Total factor productivity; Data envelopment analysis (search for similar items in EconPapers)
JEL-codes: D24 L51 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11149-020-09411-2

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