Least-Present-Value-of-Revenue Auctions and Highway Franchising

Eduardo Engel, Ronald Fischer and Alexander Galetovic

No 6689, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In recent years several countries have started massive highway franchising programs auctioned to private firms. In these auctions, the regulator typically sets the franchise term and firms bid on tolls, or, alternatively, the regulator sets tolls and the winner is the firm that asks for the shortest franchise term. In this paper we argue that many of the problems that highway franchises have encountered are due to the fact that the franchise term cannot adjust to demand realizations. We propose a new auction mechanism where the firm that bids the least present value of revenue from tolls (LPVR) wins the franchise. With this scheme, the franchise length adjusts endogenously to demand realizations. Assuming that the regulator is not allowed to make transfers to the franchise holder that firms are unable to diversify risk completely due to agency problems auctions are optimal, even when the regulator does not know firms' construction costs. Furthermore, for demand uncertainty and risk aversion parameters typical of developing countries, welfare gains associated with substituting a LPVR auction for a fixed-term auction are large (e.g. one-third of the cost of the highway).

JEL-codes: D81 H42 (search for similar items in EconPapers)
Date: 1998-08
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

Published as Engel, Eduardo M. R. A., Ronald D. Fischer and Alexander Galetovic. "Least-Present-Value-Of-Revenue Auctions And Highway Franchising," Journal of Political Economy, 2001, v109(5,Oct), 993-1020.

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Journal Article: Least-Present-Value-of-Revenue Auctions and Highway Franchising (2001)
Working Paper: Least-Present-Value-of-Revenue Auctions and Highway Franchising (1998)
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