Productivity growth in Illinois electric utilities

Abstract

The purpose of this paper is to study productivity growth in Illinois electric utilities. We develop an input based Malmquist productivity index which makes use of Shephard's input distance functions. Our Malmquist productivity index does not require that firms be revenue maximizers or cost minimizers or that information be available on input prices. Moreover, our productivity index accounts for changes in technical efficiency as well as changes in the frontier technology. Linear programming techniques are used to calculate the Malmquist productivity index for a sample of 19 coal-fired steam electric generating plants in Illinois during 1975–1981. On average, rates of productivity growth are relatively stable but statistically significant productivity slowdown is found for the period of 1976–1977. The major contribution to this productivity slowdown is due to technological regress in that period. At the plant-specific level, we found that there are considerable variations in changes in both efficiency and technology and that efficiency change plays a major role in productivity growth. Our results suggest that neglecting technical efficiency in the analysis of productivity growth may lead to inappropriate conclusions.