Municipalizing American Waterworks, 1897-1915
Posted: 14 Jul 2003
We consider three explanations for public ownership: public interest, regulation, and a transaction cost interpretation. We employ a large dataset containing information on the municipal acquisition of U.S. private water companies between 1897 and 1915. Those data allow us to isolate the effects of high water rates, water quality, financial difficulties, extensiveness of distribution system, and the like in determining the probability of subsequent municipal takeover of companies that were private in 1897. After controlling for such factors, we find evidence consistent with a transaction cost interpretation of municipal acquisition. We find relatively little support for regulation-based or public interest interpretations. Our evidence indicates that municipalities were unable to credibly precommit to not expropriating value from private water companies once investments were made, resulting in a rational reduction in investment in water provision by private companies. Local governments, in turn, used this rational underinvestment as a pretext for municipalizing private water companies.
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