Institutions and performance of regulated firms: Evidence from electricity distribution in India

• Published in: Economic analysis and policy 2021-06, Vol.70, p.68-82
• Main Authors: Jamasb, Tooraj, Llorca, Manuel, Khetrapal, Pavan, Thakur, Tripta
• Format: Article
• Language: English
• Subjects: Electricity distribution in India; Heteroscedastic stochastic frontier models; Inefficiency determinants; Quality of state institutions
• ISSN: 0313-5926
• DOI: 10.1016/j.eap.2021.02.002

It is commonly accepted in the economic literature that institutions influence economic development. But can we detect the effect of quality of institutions on the performance of specific economic sectors in the regions of a country? There is a significant gap in knowledge and evidence of this in the literature. Since the 1990s, India has adopted a set of reform steps to improve the efficiency of its electricity sector. However, there remain significant performance differences among the regulated network utilities. We apply a stochastic frontier analysis to examine the performance of electricity distribution utilities in 24 Indian states. Our estimated heteroscedastic cost frontier model allows us to identify determinants of performance related to state-level institutional and economic factors. The findings confirm that economic development and institutional quality positively affect the performance of electricity distribution utilities. Additionally, we simulate the potential cost savings from institutional enhancements. The results support the need to strengthen the institutions, for example, through reform and bolstering of independent regulatory agencies.