Abstract
Cross-country comparisons avoid the unsteady equilibrium in which regulators have to balance between economies of scale and a sufficient number of remaining comparable utilities. By the use of data envelopment analysis, we compare the efficiency of the drinking water sector in the Netherlands, England and Wales, Australia, Portugal and Belgium. After introducing a procedure to measure the homogeneity of an industry, robust order-m partial frontiers are used to detect outlying observations. By applying bootstrapping algorithms, bias-corrected first and second stage results are estimated. Our results suggest that incentive regulation in the sense of regulatory and benchmark incentive schemes have a significant positive effect on efficiency. By suitably adapting the conditional efficiency measures of Daraio and Simar (Advanced robust and nonparametric methods in efficiency analysis. Springer, New York 2007) to the bias corrected estimates of Simar and Wilson (Manage Sci, 44(1): 49–61, 1998), we incorporate environmental variables directly into the efficiency estimates. We firstly equalize the social, physical and institutional environment, and secondly, deduce the effect of incentive schemes on utilities as they would work under similar conditions. The analysis demonstrates that in absence of clear and structural incentives the average efficiency of the utilities falls in comparison with utilities which are encouraged by incentives.
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Kristof De Witte and Rui C. Marques acknowledge the many helpful comments of seminar participants at the University of Leuven (KUL), Université Catholique de Louvain (UCL), the EGPA in Madrid and the EWEPA in Lille. In particular, we would like to thank Laurens Cherchye, Wim Moesen, David Saal, Elbert Dijkgraaf, Jan van Helden and representatives of the Flemish, Walloon and Portuguese drinking water sector for their very useful comments.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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De Witte, K., Marques, R.C. Designing performance incentives, an international benchmark study in the water sector. Cent Eur J Oper Res 18, 189–220 (2010). https://doi.org/10.1007/s10100-009-0108-0
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DOI: https://doi.org/10.1007/s10100-009-0108-0