Extending Metafrontier Technique to Input-Oriented Distance Functional Form: An Application to China's Urban Water Utilities

Abstract

This paper extends two different metafrontier models proposed by O’Donnell et al. (2008) and Huang et al. (2014) to the input-oriented distance functional form which has been mentioned by O’Donnell et al. (2008, p250) but has not been done so far partly due to endogenous problem. As noted by Kumbhakar (2013, p465), there are a few industries such as public utilizes and banks where the hypothesis of exogenous outputs is satisfied. Thus, the metafrontier framework can be used in those industries without the problem of endogeneity. The extended model is then applied to a panel of Chinese urban water utilities. The estimated results show that the average technical efficiency for Chinese urban water utilities as a whole is below 60%, indicating the presence of much technical inefficiency. Our findings also show that the ownership reform happened in China cannot guarantee the efficiency growth in public utilities. Thus, Chinese regulatory agents should deepen the reform and change the current rate of return regulation to a more incentive-based one and require utilities to improve their efficiency before applying for raising water price.