Application of Panel Data Models in Benchmarking Analysis of the Electricity Distribution Sector

They also wish to thank the editor and two anonymous referees for their helpful suggestions, and Aurelio Fetz for his assistance. 2 This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost-efficiency of 59 distribution utilities operating over a nine-year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm-specific heterogeneity. This paper shows that alternative panel models such as the “true ” random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm-specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On th