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

39 Pages Posted: 20 May 2015

See all articles by Alberto Cavaliere

Alberto Cavaliere

University of Pavia - Department of Economics and Management

Mario Maggi

University of Pavia - Department of Economics and Management; University of Pavia - Department of Economics and Management

Francesca Stroffolini

Università Federico II di Napoli - Dipartimento di Scienze Economiche e Statistiche

Date Written: April 30, 2015

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 benevolent 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.

Keywords: Price-cap regulation, mixed firms, partial privatization, water networks, inelastic demand, natural monopoly

JEL Classification: H42, L32, Q95

Suggested Citation

Cavaliere, Alberto and Maggi, Mario and Stroffolini, Francesca, A Normative Analysis of Local Public Utilities: Investments in Water Networks (April 30, 2015). Available at SSRN: https://ssrn.com/abstract=2608043 or http://dx.doi.org/10.2139/ssrn.2608043

Alberto Cavaliere (Contact Author)

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy
+0382-504358 (Phone)

Mario Maggi

University of Pavia - Department of Economics and Management ( email )

Via San Felice, 5
Pavia, PV 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

University of Pavia - Department of Economics and Management ( email )

Strada Nuova, 65
Pavia, 27100
Italy

HOME PAGE: http://economia.unipv.it/pagp/pagine_personali/maggma/moreinfo.htm

Francesca Stroffolini

Università Federico II di Napoli - Dipartimento di Scienze Economiche e Statistiche ( email )

Corso Umberto I, 40
Napoli, 80138
Italy

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