Institutional variables and power firms’ productivity: Micro panel estimation with time-invariant variables

Abstract

Enhancing the productivity of power firms is essential for reducing energy resource consumption while improving sectoral performance. This objective aligns with circular economy (CE) principles, which emphasize not only reducing raw material use and minimizing waste, but also promoting systemic efficiency through infrastructure sharing, resource recovery, and cross-sectoral integration, particularly crucial in network-based sectors like electricity. Nonetheless, the productivity of electricity firms is influenced by multiple factors, some of which fall beyond their direct control. Among these, institutional frameworks play a significant role. Indeed, internal and external institutions define the environment in which companies operate, conditioning firms’ decision-making processes and productivity. This study investigates the role of institutional determinants in driving productivity changes in electricity companies across 15 European countries between 2010 and 2016, with a particular focus on environmental and market regulatory policies. In sectors like electricity, where long asset lifecycles, infrastructure interdependencies, and resource intensity prevail, CE goals cannot be achieved without institutional conditions that enable long-term investment, coordination, and adaptive capacity. Using the firm-level ORBIS dataset, we estimate productivity changes over time using the bootstrap Malmquist index, then a dynamic panel linear model is applied to investigate how internal and external institutional variables affect the dynamics of the Malmquist index. The internal institutional variables are time-invariant; therefore, we employ the procedure proposed by Kripfganz and Schwarz (2019) to consistently identify the effects of time-invariant variables. This novel approach provides valuable robustness to false assumptions about the exogeneity of instruments. Interaction variables capture the interplay between external and internal institutional variables. The results highlight the importance of matching environmental regulations with firm-specific internal characteristics in order to avoid detrimental effects on firm performance in the power generation sector.