Estimation of firm-level productivity changes in the Indian power sector: Disentangling unobserved heterogeneity by a transformed fixed-effect stochastic frontier model
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Abstract
We measure firm-level productivity changes in the Indian electricity sector during
a period that witnessed several pro-market regulatory changes. Using information collected
from multiple sources we construct a unique panel of generating firms and transmission
and distribution utilities spanning the years 2000 to 2009. We employ a recently developed
improvement in the Stochastic Frontier panel method that allows controlling for time-invariant
unobserved heterogeneity. Using the method we jointly estimate inefficiency and exogenous
determinants of inefficiency. We estimate a flexible translog production model and
compute decomposition of productivity into components of changes in technology, efficiency,
scale and price effect. During this period, especially post Electricity Act 2003,
we observed a general decline in firm-level productivity at the mean rate of -1.6%
per year. A positive and large technical change is observed in the sector at the rate
of 8% per year, attributable possibly to newer capacity addition. Except for smaller
gas based generators, inefficiency is observed to be increasing at the mean rate of
3.1% per year in the sector. Consistent with extant findings we also document no significant
impact of un-bundling on firm-level efficiency.