Political Vs Managerial Control and Public Service Prices: Evidence from Austrian Water Utilities

Michael Klien (WU Vienna University of Economics and Business)

Abstract: As an alternative to privatization, corporatization implies a shift of control rights over a firm from a politician to a manager while the public retains ownership. Although organizations with such features are fairly common, both in Europe and the US, there is little empirical work trying to assess the effects of corporatizations. This paper tries to fill this gap by analyzing the effect of corporatization on the price setting behavior of public firms. Based on a simplified version of Shleifer and Vishny (1994), I test the hypothesis that a corporatization decreases political interference in price setting. The empirical evidence from a dataset on Austrian water providers largely corroborates this hypothesis. Specifically, the effect of the political business cycle and partisan politics on price setting is significantly restrained in corporatized firms. This result is confirmed by a series of robustness and sensitivity tests.

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