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

Author

Listed:
  • Alberto Cavaliere

    (Department of Economics and Management, University of Pavia)

  • Mario Maggi

    (Department of Economics and Management, University of Pavia)

  • Francesca Stroffolini

    (Universit`a di Napoli, Federico II)

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. How- ever, 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 be- tween 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. "Investments in Water Networks: A Normative Analysis of Local Public Utilities," DEM Working Papers Series 098, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0098
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    File URL: http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0098.pdf
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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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