Restructuring Chinese railways from a cost-efficient perspective—A hedonic cost function analysis

The restructuring of railway systems has been widely analyzed around the world, while the empirical evidence from the Chinese railway industry is few, despite its significant market scale and unique organizational structure. This study aims to construct and estimate a hedonic cost function for Chinese railway system using the panel data on 18 Regional Railway Administrations (RRAs) of 2006–2017 period. The returns to density (RTD), the returns to scale (RTS), the cost complementarities and the economies of scope (SC) are estimated. The key findings and policy implications are as follows: (1). RTD and RTS of RRAs are 3.56 and 1.19, respectively, suggesting very significant returns to density and slight returns to scale at RRA level. (2). 1% increase in passenger output would increase the marginal costs of freight operations and network infrastructure by 0.233% and 0.808%, respectively. 1% increase in freight output would increase the marginal costs of passenger operations and network infrastructure by 0.486% and 0.735%, respectively. 1% increase in network infrastructure would increase the marginal costs of passenger operations and freight operations by 0.809% and 0.736%, respectively. (3). The economy of scope (SC) between passenger operation and freight operation is −0.189, implying no existence of economy of scope. (4) Based on these estimated results, 18 RRAs are suggested to be consolidated into several larger scale ones, and a separation between passenger and freight operations could be suitable for Chinese railway sector in terms of short-run cost efficiency improvement.