Big and beautiful? On non-parametrically measuring scale economies in non-convex technologies

De Witte, Kristof; Marques, Rui C.
June 2011
Journal of Productivity Analysis;Jun2011, Vol. 35 Issue 3, p213
Academic Journal
Knowledge on the scale economies drives the incentives of regulators, governments and individual utilities to scale-up or scale-down the scale of operations. This paper considers the returns to scale (RTS) in non-convex frontier models. In particular, we evaluate RTS assumptions in a Free Disposal Hull model, which accounts for uncertainty and heterogeneity in the sample. Additionally, we provide a three-step framework to empirically analyze the existence and extent of RTS in real world applications. In a first step, the presence of scale (and scope) economies is verified. Secondly, RTS for individual observations are examined while in a third step we derive the optimal scale for a sector as a whole. The framework is applied to the Portuguese drinking water sector where we find the optimal scale to be situated around 7-10 million m.


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