Using in the latent class approach as a supervised method to cluster firms in DEA: An application to the US electricity transmission industry

Manuel Llorca, Luis Orea and Michael G. Pollit
Authors registered in the RePEc Author Service: Michael Gerald Pollitt

No 2013/03, Efficiency Series Papers from University of Oviedo, Department of Economics, Oviedo Efficiency Group (OEG)

Abstract: In this paper we advocate using the so-called latent class model (LCM) approach to control for technological differences in traditional efficiency analysis of regulated electricity networks. Our proposal relies on the fact that latent class models are designed to cluster firms by uncovering differences in technology parameters. Moreover, our approach can be viewed as a supervised method for clustering data as it takes into account the same (production or cost) relationship that is analyzed later, often using non-parametric frontier techniques. The simulation exercises confirm our expectations and show that the proposed approach outperforms other alternative sample selection procedures. The proposed methodology is illustrated with an application to a sample of US electricity transmission firms for the period 2001-2009.

Keywords: electricity transmission; utilities regulation; latent class approach; non-parametric analysis (search for similar items in EconPapers)
JEL-codes: D22 L51 L94 (search for similar items in EconPapers)
Pages: 23
Date: 2013
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