Infrastructure investment and incentives with supranational funding

Ginés de Rus and M. Pilar Socorro

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: Public infrastructure investment is usually co-financed by supranational organizations. The selection of projects is supposed to be decided using the information provided by conventional cost-benefit analysis. Nevertheless, we show that the type of institutional design regarding the financing mechanism affects the incentives of national governments to reduce costs and increase revenues, affecting project selection, the infrastructure capacity, the choice of technology, and the type of contract used for the construction and operation of projects. With a total cost-plus financing mechanism there is no incentive in being efficient and the price charged for the use of the new infrastructure is zero, the market quantity excessive, and the level of supranational financing disproportionate. In contrast, with a sunk cost-plus financing mechanism social optimal pricing is always implemented, though there is no incentive in being efficient. Finally, with a fixed-price financing mechanism the maximal efficiency may be achieved, and the socially optimal pricing is always implemented.

Keywords: Infrastructure project; incentives; fixed-price; cost-plus. (search for similar items in EconPapers)
JEL-codes: D82 H50 L90 (search for similar items in EconPapers)
Date: 2009-09-21
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Infrastructure investment and incentives with supranational funding (2011)
Journal Article: Infrastructure Investment and Incentives with Supranational Funding (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mil:wpdepa:2009-18

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