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 ine fficiency of publicly and privately owned urban water utilities in ter ms of their different ownership structures and firm-specific character istics. A translog cost function is used to approximate the production technology. Both mean and variance of inefficiency are specified in t he model as functions of firm-specific factors. Estimation is done in two steps, which does not require a set of stringent distributional as sumptions as needed for the estimation of a standard frontier model. R esults show that when the operation is small, privately owned water ut ilities are comparatively more efficient. Public water utilities are c omparatively more efficient when the scale of operation is large. A ge neralized likelihood ratio test of the null hypothesis that the ineffi ciency effects are not firm-specific is rejected in favor of a firm-sp ecific specification.