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

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Author Info
Eduardo M. R. A. Engel
Ronald D. Fischer
Alexander Galetovic

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Abstract

In this paper we show that fixed-term contracts, which are commonly used to franchise highways, do not allocate demand risk optimally. We characterize the optimal risk-sharing contract and show that it can be implemented with a fairly straightforward mechanisma least-present-value-of-revenue auction. Instead of bidding on tolls (or franchise lengths), as in the case of fixed-term franchises, in an LPVR auction the bidding variable is the present value of toll revenues. The lowest bid wins and the franchise ends when that amount has been collected. We also show that the welfare gains that can be attained by replacing fixed-term auctions with LPVR auctions are substantial.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 109 (2001)
Issue (Month): 5 (October)
Pages: 993-1020
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Handle: RePEc:ucp:jpolec:v:109:y:2001:i:5:p:993-1020

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References listed on IDEAS
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  1. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June. [Downloadable!] (restricted)
  2. Oliver E. Williamson, 1976. "Franchise Bidding for Natural Monopolies -- in General and with Respect to CATV," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 73-104, Spring. [Downloadable!] (restricted)
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