The hidden cost of investment: The impact of adjustment cost on firm performance measurement and regulation

Arbeitspapier

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 significantly distorts both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EWI Working Paper ; No. 14/03

Classification and Topics

• Classification: Wirtschaft ; Firm Behavior: Empirical Analysis ; Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity ; Allocative Efficiency; Cost-Benefit Analysis ; Economics of Regulation
• Subject: dynamic inefficiency ; dynamic directional distance function ; dynamic data envelopment analysis ; electricity transmission and distribution

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Nick, Sebastian ; Wetzel, Heike
• Event: Veröffentlichung
• (who): Institute of Energy Economics at the University of Cologne (EWI)
• (where): Köln
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/103411
• Last update: 10.03.2025, 11:43 AM CET