The effects of privatization on return to the dollar: A case study on technical efficiency, and price distortions of Taiwan’s intercity bus services

Abstract

The purpose of this paper is to apply a hyperbolic graph efficiency approach to measure “return to the dollar” at the station-level of the Taiwan Motor Transport Company before and after privatization. The “return to the dollar” measure is decomposed into two components: a technical efficiency and allocative efficiency index. Price distortions are measured by allocative efficiency using data on observed costs and revenues, without requiring explicit information on prices. The decomposition results indicate that both technical and allocative efficiencies contribute to the growth of “return to the dollar”, with the allocative component playing a more important role than the technical component. Perhaps in an attempt to cover the inefficiency-induced losses, both the public and private firms apparently resort to distorting relative output prices with respect to input prices, and the distortion is more pronounced in the private firm than in the public firm. A statistically significant increase in technical efficiency took place following privatization, implying that the private firm converted input resources into output more effectively than its predecessor.