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A Normative Analysis of Local Public Utilities: Investments in Water Networks

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  • Alberto Cavaliere
  • Mario Maggi
  • Francesca Stroffolini

Abstract

We analyze rehabilitation investments in a regulated water industry with perfectly inelastic demand. We compare alternative organizational solutions for local provision (municipalization, corporatization and privatization), though subject to a common regulatory mechanism. We can then assess the effects of incentive regulation in public firms and find that even benvolent politicians always stick to the price-cap, in order to save on distortionary taxation. However, incentives to invest result to be excessive only in private firms, as the cost of capital is accounted differently by public and private undertakings. We also provide a theory of mixed firms, based on strategic interaction between politicians and managers, which contributes to endogenously explain partial privatization and minority participation by private stockholders. In this last case incentives to invest appear to be driven just by governance and ownership reasons.

Suggested Citation

  • Alberto Cavaliere & Mario Maggi & Francesca Stroffolini, 2015. "A Normative Analysis of Local Public Utilities: Investments in Water Networks," IEFE Working Papers 80, IEFE, Center for Research on Energy and Environmental Economics and Policy, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:bcu:iefewp:iefewp80
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    More about this item

    Keywords

    price-cap regulation; mixed firms; partial privatization; water networks; inelastic demand; natural monopoly;
    All these keywords.

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

    NEP fields

    This paper has been announced in the following NEP Reports:

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