Inter-municipal cooperation in drinking water supply: Trade-offs between transaction costs, efficiency and service quality

Inter-municipal cooperation (IMC) is frequently promoted as a solution to improve the management of local utilities such as drinking water. Yet its effectiveness remains ambiguous: while IMC can create economies of scale, it may also induce transaction costs that undermine its benefits. In France, drinking water services are managed at the municipal level, where local governments can decide whether to cooperate—and if so, whether to adopt a purely technical cooperative arrangement or a more politically integrated, supra-municipal governance structure. Using a comprehensive panel of French water utilities from 2008 to 2021, we investigate the factors that lead municipalities to remain independent. Our econometric analysis, based on a correlated random effects probit model with a control function approach, yields several key findings. First, while IMC is associated with higher water prices, these increased tariffs are offset by better network performance, as indicated by lower water loss indices and improved water quality. Second, we find that the more politically integrated form of cooperation is more common among publicly managed utilities and among municipalities seeking to reduce their dependence on imported water. These findings provide new insights into the governance of common-pool resources, suggesting that while cooperation can improve service provision, its institutional design must carefully balance organizational costs against expected efficiency gains.