Maintenance incentives in highway concession contracts

Ricardo Gonçalves and Antonio Gomes

No 4, Working Papers de Economia (Economics Working Papers) from Católica Porto Business School, Universidade Católica Portuguesa

Abstract: In most European countries, the private sector has a direct or indirect participation in the construction, overhaul, maintenance or operation of highways, normally through concession contracts with a pre-specified duration. The concession company is frequently remunerated through direct payments by road users (road tolls). In this context, it is important to understand the incentives it has to maintain a highway in proper conditions whilst at the same time it seeks to maximise its profits. We model this profit-maximisation problem in a dynamic setting where demand is partly a function of road quality in each period. We find that concession companies have incentives to "shirk" on their maintenance duties and let road quality degrade early in their concession contract; later on, the concession company invests more heavily in maintenance so as to return the highway to the public authority in good working conditions. We also analyse how these results are affected by changes in the road toll, costs and the duration of the concession contract.

Keywords: Incentives; Concession contracts; Highways (search for similar items in EconPapers)
JEL-codes: L2 L5 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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