The hidden cost of investment: the impact of adjustment costs on firm performance measurement and regulation

摘要

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. Specifically, we focus on the impact of adjustment costs of investments on estimates of firms' technical and cost inefficiency. We make use of a nonparametric dynamic data envelopment analysis to investigate the dynamic inefficiency of electricity distribution and transmission companies in the US during the years 2004-2011. These results are compared to their static counterparts. Our empirical findings reveal that ignoring long-term investments and their corresponding adjustment costs significantly distorts both firm-specific and industrial inefficiency estimates and may thus create misleading incentives for the regulated firms to cut investments.