You Get What You Pay For: Electricity Quality and Firm Dynamics

Electricity sectors in many developing countries are characterized by a persistent cycle of low prices, weak finances, and poor service quality. India’s state-owned distribution utilities exemplify this pattern, absorbing large fiscal transfers while delivering unreliable electricity. This paper studies a major institutional reform in India’s power sector that unbundled vertically integrated utilities and established independent state regulators. On average, the reforms did not generate detectable changes in firm-level outcomes, highlighting the limits of aggregate evaluations. This average masks substantial heterogeneity driven by how states implemented the reform. In response to the unbundling mandate, states endogenously adopted either a single statewide distribution utility or multiple distribution utilities. Exploiting state-level variation in the timing of unbundling, I show that manufacturing firms in single-utility states increased grid electricity consumption and production. These expansions occurred alongside improved service performance, even as electricity prices rose modestly. Complementary descriptive evidence indicates that single utility states also exhibit stronger revenue realization, higher collection efficiency, and lower reliance on bailout financing. Together, these results emphasize the role of institutional design in shaping reform outcomes and suggest that price adjustments, paired with improvements in utility performance, can help escape low-price, low-investment equilibria.