Umeå Economic Studies, Department of Economics, Umeå University
No 576:
Evaluating market efficiency without price data. The Swedish market for wood fuel
Runar Brännlund ()
, Per-Olov Marklund ()
and Magnus Sjöström ()
Abstract: The objective of this paper is to shed some empirical
light on the price development and price formation for wood fuel used by
the Swedish district heating sector. According to Lönner et.al. (1998),
there is a significant potential for increasing the use of wood fuel in
Sweden, and that at a fairly moderate cost. The basic question raised in
this paper is why this potential is not realized, in spite of the low cost.
Here we identify three possible explanations; (1) the marginal cost for
providing wood fuel is higher than expected, (2) the market for wood fuel
is not functioning efficiently due to market imperfections, (3) investments
in wood fuel burning technology do not take place due to risk and
uncertainties concerning the future energy taxation system. In this paper
we focus the second explanation, and propose a methodology for testing
whether the market imperfections are present. The test we propose is a
two-step procedure. In the first step the shape of the technology in the
Swedish district heating sector is estimated. In the second we combine the
estimated technology and the assumption of cost-minimizing firms to
calculate shadow prices of wood-fuel, i.e., marginal valuation of wood fuel
in this sector. If the average shadow price significantly deviates from the
average observed price we may conclude that this market is inefficient. To
construct confidence intervals for the shadow price we use bootstrap
techniques. The resulting point estimates of the shadow price implies that
this market is inefficient in the sense that the firms values additional
quantities higher than the ruling price, implying that too small quantities
of wood fuel is traded. However, according to the bootstrap confidence
intervals this difference between the shadow price and the ruling price is
not significant, implying that we cannot, on statistical grounds, reject
the efficient market hypothesis.
Keywords: wood fuel; fuelwood; market efficiency; shadow price; bootstrap; (follow links to similar papers)
JEL-Codes: D43; Q42; (follow links to similar papers)
23 pages, December 7, 2001
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