Using the latent class approach to cluster firms in benchmarking: An application to the US electricity transmission industry

Manuel Llorca · Luis Orea · Michael Gerald Pollitt

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Efficiency Analysis Using DEA Merger and Competition Analysis Bayesian Methods and Mixture Models

Abstract

In this paper we advocate using the latent class model (LCM) approach to control for technological differences in traditional efficiency analysis of regulated electricity networks. Our proposal relies on the fact that latent class models are designed to cluster firms by uncovering differences in technology parameters. Moreover, it can be viewed as a supervised method for clustering data that takes into account the same (production or cost) relationship that is analysed later, often using nonparametric frontier techniques. The simulation exercises show that the proposed approach outperforms other sample selection procedures. The proposed methodology is illustrated with an application to a sample of US electricity transmission firms for the period 2001–2009.

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References

1957The Measurement of Productive Efficiency 2020Best practices in exploratory factor analysis: four recommendations for getting the most from your analysis 1977Formulation and estimation of stochastic frontier production function models 2005An Introduction to Efficiency and Productivity Analysis 1998An Introduction to Efficiency and Productivity Analysis 2005Estimation and inference in two-stage, semi-parametric models of production processes 2009Best Practices in Exploratory Factor Analysis: Four Recommendations for Getting the Most from Your Analysis 2000A Guide to Modern Econometrics

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