Giovanni FRAQUELLI
University of Piemonte Orientale, Faculty of Economics,Ceris-CNR and HERMES

Abstract -The question of correctly benchmarking regulated firms operating in different environmental conditions has been extensively debated in the literature. One major problem is the treatment of unobserved heterogeneity and its possible interconnection with structural (persistent) inefficiency. The peculiarity of the reformed Italian water industry, which is based on local authorities defining accurate budget plans over a long period of time, provides a suitable field to test the performance of several frontier models incorporating different specifications for observed and unobserved heterogeneity and efficiency estimates. The results can also shed some light on the consequence of decentralizing efficiency improvements to local authorities and on the potential need to centralize benchmarking activity.