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The Hidden Cost of Investment: The Impact of Adjustment Cost on Firm Performance Measurement and Regulation

Sebastian Nick () and Heike Wetzel ()

No 2014-3, EWI Working Papers from Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI)

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. In specific, we focus on the impact of adjustment costs of investments on estimates of firms' technical and cost inefficiency. We apply nonparametric dynamic data envelopment analysis to investigate the dynamic inefficiency of electricity distribution and transmission companies in the US during the years 2004 to 2011 and compare our results with their static counterparts. Our empirical findings reveal that ignoring long-term investments and their corresponding adjustment costs does significantly distort both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments.

Keywords: Dynamic Inefficiency; Dynamic Directional Distance Function; Dynamic Data Envelopment Analysis; Electricity Transmission and Distribution (search for similar items in EconPapers)
JEL-codes: D22 D24 D61 D92 L51 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014-03-04
New Economics Papers: this item is included in nep-bec, nep-eff, nep-ene and nep-reg
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Journal Article: The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ewikln:2014_003

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