Cost efficiency of Tunisian water Utility: Heteroskedastic Stochastic Frontier Approach

Abstract We examine the operating cost inefficiencies and economies of scale of Tunisian drinking water utilities. Different stochastic models that incorporate heterogeneity have been investigated. We have examined the stochastic frontier model and the fixed effects model. The results show that these models produce different results. Therefore we estimate a specific fixed-effects model where the inefficiency term remains in the model and the fixed effect is intended only to capture the firm-specific heterogeneity. This model performs better results and it allows differentiating between non-heterogeneity and inefficiency. The results indicate that significant cost inefficiencies are present in the utilities and the economies of scale are found in small-sized utilities, while large utilities exhibit diseconomies of scale. Jel Classification : C16; C23; D24; L95, L51.