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2012 | OriginalPaper | Chapter

8. Observed Versus Unobserved Heterogeneity in Electricity Distribution

Authors : Maria Kopsakangas-Savolainen, Rauli Svento

Published in: Modern Energy Markets

Publisher: Springer London

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Abstract

In this chapter we present the new ways to include both observed and unobserved heterogeneity into the efficiency frontier models that have been developed. Observed heterogeneity can be included in the frontier and as explaining cofactors for the moments of the distributions of either the frontier or of the inefficiency. Unobserved heterogeneity can be included by randomizing the frontier parameters. We show how these models can be specified and estimated. We show that random parameter estimation of stochastic cost frontiers produces clearly smaller inefficiency estimates than the basic random effects (RE) model or its extended version. We show how the best fit can be reached by modeling observed heterogeneity into the inefficiency distribution and unobserved heterogeneity into the firm-specific random constant term of the frontier.

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previous chapter Efficiency of Electricity Distribution
next chapter Regulating Electricity Distribution Utilities
Footnotes
1
See Kumbhakar and Lovell [15] for an extensive survey of stochastic frontier models.
 
2
See Greene [8] for incorporating measured heterogeneity in the production function.
 
3
The data we use here is the same as that described in Chap.​ 7.
 
4
Except LF in the RE model.
 
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Metadata
Title
Observed Versus Unobserved Heterogeneity in Electricity Distribution
Authors
Maria Kopsakangas-Savolainen
Rauli Svento
Copyright Year
2012
Publisher
Springer London
Book
Modern Energy Markets

Print ISBN: 978-1-4471-2971-4

Electronic ISBN: 978-1-4471-2972-1

Copyright Year: 2012

DOI
https://doi.org/10.1007/978-1-4471-2972-1_8