Municipal utilities and local public finance: A simultaneous model

Our results confirm the existence of a positive direct effect of cross subsidies from municipally owned water utilities on city spending. While the results are consistent with the hypothesis that internal subsidization creates a fiscal illusion, they are also consistent with vote-maximizing behavior. That is, the demand for cross subsidies is found to depend on factors that reflect the city's fiscal position, including its spending level in the absence of a contribution. The results of the logit estimation suggest that annual contributions are discretionary, and explained primarily by a city's fiscal health. Our results also confirm the existence of a simultaneous relationship between municipal spending and utility contributions, and the need for a simultaneous estimation technique. This bias affects all prior studies of the interaction between utility revenue contributions and local public finance variables, and future studies must be aware of the simultaneous nature of the underlying relationship. Copyright Kluwer Academic Publishers 1988