Designing performance incentives, an international benchmark study in the water sector |
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Authors: | Kristof De Witte Rui C Marques |
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Institution: | (1) PhD Programme in Analysis and Governance of Sustainable Development, School for Advanced Studies in Venice Foundations (SSAV), University Ca’ Foscari, Island of San Servolo, Venice, 30100, Italy |
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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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