Does Private Ownership Reduce Political Distortions? Evidence from U.S. Electric Utilities

Abstract

Politics is believed to distort decisions in regulated private firms as well as in government enterprises. In order to compare the magnitude of these distortions, I examine one of the very few large U.S. industries where both for-profit and government enterprises sell goods to the public: electric utilities. I follow the existing literature in measuring political distortions in two ways: differences between government decisions in election years versus in non-election years, and governments' inability to quickly adapt to change. Using comprehensive U.S. data for the years 1964 through 2014, I find that for-profit electricity rates are more likely to be manipulated before elections, but are more responsive to costs, compared to government electricity rates. Thus private ownership need not reduce political distortions, and may actually increase them. I further provide a theoretical framework that explains the findings.