Productivity in the Electricity Retail Market: Does Ownership Matter? A Structural Production Function Approach for Germany

This paper examines firm-level productivity for German electricity retailers using a structural production function approach. The sector was subject to fundamental changes in market structure after retail liberalization in 1998. Competition was supposed to increase productivity and reduce retail prices. Despite increased competition, public firms are still accused of being less productive than private firms, although empirical evidence is missing. Based on a theory-driven robust empirical model we test the hypothesis whether ownership has a significant impact on the retailers' productivity. We derive an innovative production function for the retail sector using labour and external services as main inputs. Our econometric model builds on the recently developed control function approach which allows us to correct for the bias which arises when unobserved factors (such as the firm level productivity) are correlated with input choice. We use a proxy function for productivity which relies on deflated expenditure for external services and control for the effect of ownership in the law of motion for productivity. We use a new and unique dataset on German utilities provided by the German Federal Statistical Office which covers the years 2003 to 2012. Empirical results show that firm-level productivity increased during 2004 and 2008 but fell after 2009. We do not find any evidence for ownership having an impact on productivity.