Summary and concluding remarks

In this study, we have estimated persistent and transient technical inefficiency and input misallocation using a panel of Norwegian electricity distribution firms for the years 2000 to 2016. Our modelling and empirical strategy was to formulate and estimate a primal system consisting of the production function (generalized Cobb–Douglas) and the first-order conditions of cost minimization. We estimated the costs of technical inefficiency and input misallocation by deriving the cost function for a multiple-output separable production technology, extending the model in Kumbhakar (1988).

The results show that there exist non-negligible costs of input misallocation for Norwegian electricity distribution firms and call into question a commonly imposed modelling assumption under the SFA framework, that all firms are fully allocatively efficient. Even if we assumed that all firms are technically efficient, the costs to the industry arising from input misallocation

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would be too high, ranging on the average from 9.0% to 11.3% in our analysis. The robustness of these estimates across the different model specifications emphasize the importance of estimating input misallocation in general, also in studies of electricity distribution firms.

Beyond the modelling aspects, our results may also have important implications for regulators of electricity generation and distribution firms from across the world. The priority so far has been to identify the best method for estimating technical efficiency for benchmarking;

see, e.g., Bogetoft and Otto (2011). The question that this study poses is as follows: given that the goal of regulation is cost minimization, is it not imperative that allocative efficiency also should be included in the benchmarking?

The results from the generalized true random effects model show evidence of persistent inefficiency. Filippini et al. (2018) argued that regulators may fail to set optimal efficiency targets if they are unable to identify systematic shortfalls in managerial capabilities that generate persistent inefficiency and to distinguish these from non-systematic management problems in the short run. For firms, however, investment decisions could be delayed and incentives for innovation weakened. Therefore, in line with Kumbhakar and Lien (2017), our findings further emphasize that future efficiency studies need to disentangle persistent and transient technical inefficiency.

Acknowledgements

The project is funded by Norwegian Water Resources and Energy Directorate, Energy Norway and six electric utilities in Norway (BKK Nett, Eidsiva Nett, Hafslund Nett, Helgeland Kraft, Lyse Elnett and Skagerak Nett).

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Appendix