Measurement of technical and allocative efficiencies using a CES cost frontier: a benchmarking study of Japanese transmission-distribution electricity |
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Authors: | Jiro Nemoto Mika Goto |
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Institution: | (1) Graduate School of Economics, Nagoya University, Nagoya 464-8601, Japan;(2) Socio-economic Research Center, Central Research Institute of Electric Power Industry, Otemachi 1-6-1, Tokyo 100-8126, Japan |
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Abstract: | This paper estimates the technical and allocative inefficiencies of the transmission-distribution sector of Japanese electric
utilities using a panel data during the 1981–1998 period. A stochastic production frontier of the CES form is jointly estimated
with input demand equations. Taking advantage of the self-duality, we retrieve the cost frontier by which the impacts of technical
and allocative inefficiencies on costs and input demands are measured. The estimated elasticity of substitution is significantly
different from unity in favor of the CES specification over the Cobb–Douglas. The results show that observed costs are 9 to
48% higher than the efficient level; technical inefficiency raises costs by 1 to 28%, while allocative inefficiency does so
by 8 to 30%. Although their impacts on costs are similar, technical inefficiency more fluctuates so the differences in the
performance of utilities are mainly due to technical inefficiency. We also find a substantial over-utilization of capital
for all utilities.
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Keywords: | CES production frontier Technical efficiency Allocative efficiency Benchmarking Transmission-distribution electricity |
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