Resource Management and the Mayor's Guarantee in French Water Allocation

Abstract

This paper uses standard methods in stochastic calculus tomeasure the cost of the agency conflict that pits electedofficials of French municipalities against the communities theyrepresent in the management of the water supply. Under the Frenchlegal code, the municipalities are responsible for the watersupply and the elected officials are personally liable for anydamage due to negligence on their part. Uncertainty regardingexactly how negligence will be defined by the courts puts theelected officials in a precarious position. By delegatingauthority to an oligopoly of private firms, however, electedofficials can eliminate their personal liability, which istransferred to the delegated firm. Many studies argue thatdelegation locks communities into long-term contracts that areagainst their better interests. Thus, the agency conflict mayaffect the delegation decision to the detriment of the community.To determine whether or not this is true it is necessary to knowthe economic cost of the mayor's personal liability.