Management Discretion and Political Interference in Municipal Enterprises. Evidence from Italian Utilities

Abstract

The attention of scholars and policy makers is shifting from full privatization to accompanying policies and alternative measures as a means to improve the efficiency of public services. This paper focuses on three restructuring measures: partial privatization (without transfer of control rights), inter-municipal joint ventures, and the presence of outside directors on the Board. Divergent hypotheses on these measures have emerged according to whether political economy or the agency theory has been used. An empirical analysis investigates the effects of restructuring processes on a sample of Italian municipal utilities. Partial privatization has been shown to play a significant and positive role, while Board independence from management has a less significant influence. Multi-government utilities have been found to suffer from severe coordination costs, which are not outweighed by scale benefits. Our findings reveal that management discretion is a significant source of inefficiency in public enterprise.

Keywords: Partial privatisation, Inter-municipal initiatives, Municipal utilities, Management discretion

JEL Classification: L32,L33,L9