The Paradox of Concessions in Developing Countries: A game-theoretic investigation of airport concessions in Brazil

Maurício Soares Bugarin and Frederico Ribeiro

No 100/2020, Economics and Politics Working Paper Series from Economics and Politics Research Group (EPRG), University of Brasília

Abstract: After a first wave of privatizations in Latin America in the 1980s, the return of conservative governments in the region points to a renewed cycle of concessions. This paper presents a game-theoretic analysis of airport concessions that explicitly takes into account the two distinct, interacting phases of the concession mechanism: the concession auction and the operation game. The concession contract sets an investment to be made during operation, but the concessionaire may benefit from underinvesting and renegotiating the concession contract with the regulator . The paper shows that the weaker a country's institutions are, the higher is the probability of underinvestment, and the higher are the auction equilibrium concession fees. This is the "Paradox of Concession" : the more successful the auction is, the less likely the operation will be effective. This research proposes a new mechanism based on benefits for investment rather than punishment for underinvestment with the following properties : It is efficient; frees the government from the weak -institutions problem; increases auction bids; eliminates the "paradox of concessions"; and can be fine-tuned to reduce the likelihood of underinvestment.

Keywords: Game theory; applied mechanism design; airport concession; privatization in Latin America (search for similar items in EconPapers)
JEL-codes: C72 D44 D78 L33 (search for similar items in EconPapers)
Date: 2020-01-28
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Persistent link: https://EconPapers.repec.org/RePEc:gvn:eprgwp:1002020

DOI: 10.5281/zenodo.23574344

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