Incorporating Service Quality into Yardstick Regulation : An Application to the Peru Water Sector

Yardstick regulation requires the utilization of benchmarking, a valuable tool for improving the public service delivery, especially in developing countries where inefficiencies translate into negative health impacts and social unrest. However, research must account for both cost and quality of service. Using data from 38 Peruvian water utilities (1996 to 2001), the paper evaluates quality-incorporated firm performance and identifies changes in efficiency, technology (frontier), and service quality. The study utilizes the nonparametric Data Envelopment Analysis (DEA) model, a preference structure model, and quality-incorporated Malmquist Productivity Index in evaluating firm performance; the study discusses their implications for regulating state-owned enterprises