Specification and estimation of the effect of ownership on the economic efficiency of the water utilities

A stochastic frontier cost function is used to specify the cost of inefficiency of publicly and privately owned urban water utilities in terms of their different ownership structures and firm-specific characteristics. A translog cost function is used to approximate the production technology. Both mean and variance of inefficiency are specified in the model as functions of firm-specific factors. Estimation is done in two steps, which does not require a set of stringent distributional assumptions as needed for the estimation of a standard frontier model. Results show that when the operation is small, privately owned water utilities are comparatively more efficient. Public water utilities are comparatively more efficient when the scale of operation is large. A generalized likelihood ratio test of the null hypothesis that the inefficiency effects are not firm-specific is rejected in favor of a firm-specific specification.