Journal of Regulatory Economics

, Volume 52, Issue 3, pp 313–332 | Cite as

Price mimicking under cost-of-service regulation: the Swedish water sector

  • Erik LundinEmail author
Original Article


This study provides an empirical test of price mimicking among publicly owned water utilities. Using a fixed effects spatial Durbin model with data from Swedish municipalities during 2002–2012, I estimate the elasticity of the own relative to neighbors’ average price to 0.14. This behavior can be explained in terms of an informal yardstick competition: when consumers use neighboring municipalities’ prices as benchmarks for costs or as behaviorally based reference prices, policy makers will face the risk of consumer complaints and reduced voter support if deviating too much from neighboring municipalities’ prices. Further, I find some evidence that price mimicking is more pronounced in municipalities where voter support for the ruling coalition is weak.


Yardstick competition Spatial econometrics Public economics Water utilities Price mimicking 

JEL Classification

D42 L32 L43 L51 L95 



I would like to thank Richard Friberg, Pär Holmberg, two anonymous referees, and participants at the 2014 ENTER-Jamboree for valuable comments. Financial support from the Jan Wallander and Tom Hedelius Foundation (Grant nr H13-0467) and the Swedish Competition Authority is greatly appreciated.


  1. Allers, M. A., Maarten, A., & Paul Elhorst, J. (2005). Tax mimicking and yardstick competition among local governments in the Netherlands. International Tax and Public Finance, 12(4), 493–513.CrossRefGoogle Scholar
  2. Anselin, L. (1980). Estimation methods for spatial autoregressive structures. Ph.D. Dissertation, Regional Science Dissertation and Monograph Series nr 8. Ithaca: Cornell University.Google Scholar
  3. Azomahou, T., & Lahatte, A. (2000). On the inconsistency of the ordinary least squares estimator for spatial autoregressive processes. Working papers of BETA 2000-12.Google Scholar
  4. Belotti, F., Hughes, G., & Mortari, A. P. (2013). XSMLE-A command to estimate spatial panel models in Stata. In German Stata user group meetings 2013 09, Stata Users Group.Google Scholar
  5. Besley, T., & Case, A. (1995). Incumbent behavior: Vote-seeking, tax-setting, and yardstick competition. American Economic Review, 85(1), 25–45.Google Scholar
  6. Brueckner, J. K. (2003). Strategic interaction among governments: An overview of empirical studies. International Regional Science Review, 26(2), 175–188.CrossRefGoogle Scholar
  7. Drukker, D. M., Prucha, I., & Raciborski, R. (2013). Maximum likelihood and generalized spatial two-stage least-squares estimators for a spatial-autoregressive model with spatial-autoregressive disturbances. Stata Journal, 13(2), 221–241.Google Scholar
  8. Francese, M., Piacenza, M., Romanelli, M., & Turati, G. (2014). Understanding inappropriateness in health spending: The role of regional policies and institutions in caesarean deliveries. Regional Science and Urban Economics, 49, 262–277.CrossRefGoogle Scholar
  9. Geys, B. (2006). Looking across borders: A test of spatial policy interdependence using local government efficiency ratings. Journal of Urban Economics, 60(3), 443–462.CrossRefGoogle Scholar
  10. Haraldsson, M. (2013). Särredovisning inom VA-branschen (Vol. 2013-21). Svenskt Vatten Utveckling.Google Scholar
  11. Holmström, B. (1982). Moral hazard in teams. Bell Journal of Economics, 13(2), 324–340.CrossRefGoogle Scholar
  12. Kelejian, H. H., & Ingmar, R. P. (1998). A generalized spatial two-stage least squares procedure for estimating a spatial autoregressive model with autoregressive disturbances. The Journal of Real Estate Finance and Economics, 17(1), 99–121.CrossRefGoogle Scholar
  13. Klien, M. (2015). The political side of public utilities: How opportunistic behaviour and yardstick competition shape water prices in Austria. Papers in Regional Science, 94(4), 869–890.CrossRefGoogle Scholar
  14. Konkurrensverket. (2013). Inför prisregleringen av fjärrvärme - vilka lärdomar kan dras från ekonomisk teori och empiri? Report 2013:1Google Scholar
  15. Laffont, J.-J., & Tirole, J. (1993). A theory of incentives in procurement and regulation (1st ed., Vol. 1). Cambridge: The MIT Press.Google Scholar
  16. LeSage, J. P., & Pace, R. K. (2009). Introduction to spatial econometrics statistics: A series of textbooks and monographs. Boca Raton: CRC Press LLC.CrossRefGoogle Scholar
  17. Mizutani, F., & Urakami, T. (2001). Identifying network density and scale economies for Japanese water supply organizations. Papers in Regional Science, 80(2), 211–230.CrossRefGoogle Scholar
  18. Moran, P. A. P. (1950). Notes on continuous stochastic phenomena. Biometrika, 37(1/2), 17–23.CrossRefGoogle Scholar
  19. Nauges, C., & Berg, C. (2008). Economies of density, scale and scope in the water supply and sewerage sector: A study of four developing and transition economies. Journal of Regulatory Economics, 34(2), 144–163.CrossRefGoogle Scholar
  20. Ozimek, A., & Miles, D. (2012). GEOCODE: Stata module to geocode data. Statistical Software Components, Boston College Department of Economics.Google Scholar
  21. Revelli, F. (2005). On spatial public finance empirics. International Tax and Public Finance, 12(4), 475–492.CrossRefGoogle Scholar
  22. Revelli, F. (2006). Performance rating and yardstick competition in social service provision. Journal of Public Economics, 90(3), 459–475.CrossRefGoogle Scholar
  23. Revelli, F., & Tovmo, P. (2007). Revealed yardstick competition: Local government efficiency patterns in Norway. Journal of Urban Economics, 62(1), 121–134.CrossRefGoogle Scholar
  24. SCS. (2013). Water and Sewage Act, Swedish Code of Statutes 2006:412.Google Scholar
  25. Shleifer, A. (1985). A theory of yardstick competition. RAND Journal of Economics, 16(3), 319–327.CrossRefGoogle Scholar
  26. Söderberg, M., & Tanaka, M. (2012). Spatial price homogeneity as a mechanism to reduce the threat of regulatory intervention in locally monopolistic sectors. Working Papers hal-00659458, HAL.Google Scholar
  27. Solé-Ollé, A. (2003). Electoral accountability and tax mimicking: The effects of electoral margins, coalition government, and ideology. European Journal of Political Economy, 19(4), 685–713.CrossRefGoogle Scholar
  28. Statistics-Sweden. (2013). Official records of Swedish statistics, Statistics Sweden.
  29. Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199–214.CrossRefGoogle Scholar
  30. Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64, 416.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.Research Institute of Industrial EconomicsStockholmSweden

Personalised recommendations