The Impact of Governance Choice on Performance : an Application to the German Water Sector

Abstract: This paper investigates the impact of governance structure on firm performance. We use a database of 765 German water suppliers to analyze the relationship between organizational form (i.e. private sector participation in water supply versus public service provision) and retail prices controlling for scale economies as well as technical and structural characteristics of the suppliers. Assuming that managers make strategic decisions (e.g. governance form) not randomly but rather decide based on expectations of how their choices affect future performance we correct this “self-selection” applying a two stage Heckman model. Amongst others, we show that private sector participation results in higher prices whereas structural parameters such as a high share of underground water or the delivery to a large city may decrease consumer prices. Eastern states on average feature higher prices mirroring significant investments during the last two decades as well as in some cases network over-dimension.