Rural water suppliers and efficiency : empirical evidence from East and West Germany

This discussion paper attempts the investigation of inefficiency with respect to water suppliers in rural areas of East and West Germany. This is done by using a nonradial measure of input-specific allocative inefficiency based on the demand system derived from a flexible cost function for the variable inputs labour, energy and chemicals. Distributional dependency with respect to the composed error term is reduced. The cost structure is modelled by applying a modified symmetric generalized McFadden functional form and the imposition of concavity restrictions as required by economic theory. Data on 47 rural water suppliers was collected by a written survey in 2002/2003. The applied second order flexible functional form performs well in the estimations. Efforts towards increasing suppliers ̕allocative efficiency should focus on the relatively inefficient usage of the inputs energy and chemicals. With exception of the category size ̕the measures of input specific allocative inefficiency are found to be superior to those of overall allocative inefficiency. No significant difference between the efficiency of East and West German suppliers was found. Widely assumed economies of scope for the joint production of water and sewage services as well as vertically integrated utilities are not confirmed by the results. The positive correlation between firm size and overall efficiency finally suggests negative effects on efficiency by the legally set supplying areas.