The political side of public utilities: how opportunistic behavior and yardstick competition shape water prices in Austria

The political side of public utilities: how opportunistic behavior and yardstick competition shape water prices in Austria
Michael Klien (Chaire EPPP)
Abstract: This paper studies the effect of politics on water prices in Austria. When public utilities are under political control, price setting may be affected by political incentives.
Besides classical theories like the political budget cycle, more current research stresses the role of spatial interactions between jurisdictions (yardstick competition). The paper tests for both local political competition and yardstick competition using a spatial lag model. The results suggest that water prices are lower when political competition is strong and before elections. At the same time the magnitude of the political budget cycle appears to depend upon neighboring jurisdictions, thus confirming yardstick competition as an indirect determinant of water prices.