Inefficiencies in Local Infrastructure: Evidence from Drinking Water in California

Local elected officials oversee critical infrastructure, often with limited electoral accountability. This paper studies how this distorts investment across California drinking-water systems. We document that pollution responds to shifts in the political environment, motivating a dynamic model of public investment. We measure welfare returns to investment directly, combining event-study estimates of investment effectiveness and costs with those of residents’ clean-water valuations, recovered from housing choices. Investment choices identify policymakers’ responsiveness to those returns. Weak accountability diverts investment from high-return systems and conventional policies imperfectly offset these distortions: subsidy takeup is misaligned with returns, while uniform mandates induce welfare losses.