Abstract
Regulators often use Data Envelopment Analysis (DEA) to create a pseudo-competitive environment for sectors with natural monopolies. In this paper, we look at the characteristics of the method used by the Danish water regulator to account for differences in the companies’ environmental conditions and propose adjustments to this method. Second stage analysis reveals significant correlations between the efficiency scores and these external factors, indicating that the currently used method is insufficient. To explain this, we develop a new second stage analysis, using permutation-based approaches, where we account for the distribution of the DEA assigned multipliers.
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