Cost Efficiency in Regional Bus Companies: An Application of Alternative Stochastic Frontier Models

This paper evaluates cost and scale efficiencies of Switzerland's regulated rural bus companies operating in regional networks. The adopted methodology can be used in benchmarking analyses applied to incentive regulation systems. Moreover, the estimations can be used to evaluate the bidding offers for the tendering processes predicted by the ongoing reform policies. Since these companies operate in different regions with various characteristics that are only partially observed, it is crucial for the regulator to distinguish between inefficiency and exogenous heterogeneity that influences the costs. The main focus lies in the ability of models to distinguish inefficiency from the unobserved firm-specific heterogeneity in a network industry. The estimation results are compared and analysed. © 2006 LSE and the University of Bath