Franchise Bidding in the Water Industry – Auction Schemes and Investment Incentives

Urs Meister

Public Economics from University Library of Munich, Germany

Abstract: The periodical re-auction of a water monopoly concession causes the danger of underinvestment. If the life-time of specific assets such as water pipes exceeds the contract length and transferring the ownership of assets is difficult, the incumbent franchisee faces a hold-up problem. Using a simple auction model that considers the specifics of the piped water sector this paper shows that investment incentives may vary depending on the applied auction scheme. The model is designed as a two stage game, where the franchisee decides about investment on the first and competes with a potential market entrant on the second stage. Investment tends to be higher in sealed bid auctions than in an English auction, since the incumbent benefits from an information advantage. Additionally investment may vary in a first- and a second-price sealed bid auction depending on several factors such as costs or effectiveness of investment. The analysis is extended by a vertical separation.

Keywords: Water; Networks; Franchise Bidding; Investment (search for similar items in EconPapers)
JEL-codes: D21 L43 L95 Q25 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2004-12-20
New Economics Papers: this item is included in nep-com and nep-env
Note: Type of Document - pdf; pages: 39
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Franchise Bidding in the Water Industry- Auction Schemes and Investment Incentives (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwppe:0412011

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