Abstract: As an alternative to privatization, corporatization implies shifting control rights from politicians to managers—through the creation of a separate legal entity—while ownership remains with the government.
Even though corporatized firms are fairly common, little empirical work has tried to quantify 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. The theoretical prediction that corporatization decreases political interference in price setting is tested using a dataset of Austrian water providers. The empirical evidence largely corroborates this hypothesis. Specifically, the results show that the impact of electoral cycles and intense political competition on price setting is significantly restrained in corporatized firms.
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