IDEAS home Printed from https://ideas.repec.org/p/ris/ewikln/2014_003.html
   My bibliography  Save this paper

The Hidden Cost of Investment: The Impact of Adjustment Cost on Firm Performance Measurement and Regulation

Author

Listed:
  • Nick, Sebastian

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln)

  • Wetzel, Heike

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln)

Abstract

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

Suggested Citation

  • Nick, Sebastian & Wetzel, Heike, 2014. "The Hidden Cost of Investment: The Impact of Adjustment Cost on Firm Performance Measurement and Regulation," EWI Working Papers 2014-3, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2014_003
    as

    Download full text from publisher

    File URL: https://www.ewi.uni-koeln.de/cms/wp-content/uploads/2015/12/EWI_WP_14_03-Hidden_Cost_of_Investment.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. S.N. Silvestrov & N.V. Kuznetsov & V.V. Ponkratov & D.A. Smirnov & N.E. Kotova, 2018. "Investment Development of Russian Regions Backed up by Natural Monopolies," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 89-99.
    2. Dakpo, K Hervé & Lansink, Alfons Oude, 2019. "Dynamic pollution-adjusted inefficiency under the by-production of bad outputs," European Journal of Operational Research, Elsevier, vol. 276(1), pages 202-211.
    3. Magdalena Kapelko, 2017. "Dynamic versus static inefficiency assessment of the Polish meat‐processing industry in the aftermath of the European Union integration and financial crisis," Agribusiness, John Wiley & Sons, Ltd., vol. 33(4), pages 505-521, September.
    4. Cherchye, Laurens & De Rock, Bram & Kerstens, Pieter Jan, 2018. "Production with storable and durable inputs: Nonparametric analysis of intertemporal efficiency," European Journal of Operational Research, Elsevier, vol. 270(2), pages 498-513.
    5. Engida, Tadesse Getacher & Rao, Xudong & Oude Lansink, Alfons G.J.M., 2020. "A dynamic by-production framework for analyzing inefficiency associated with corporate social responsibility," European Journal of Operational Research, Elsevier, vol. 287(3), pages 1170-1179.
    6. Yang, Xinhe & Wang, Xiuli & Lu, Zhilin & Liang, Ziyang & Gu, Chenghong & Li, Furong, 2024. "Distribution network tariff design: Facilitate flexible resource under uncertain future energy scenarios," Energy Policy, Elsevier, vol. 188(C).

    More about this item

    Keywords

    Dynamic Inefficiency; Dynamic Directional Distance Function; Dynamic Data Envelopment Analysis; Electricity Transmission and Distribution;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ewikln:2014_003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sabine Williams (email available below). General contact details of provider: https://edirc.repec.org/data/ewikode.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.