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Highway Franchising and Real Estate Values

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Author Info

  • Eduardo Engel

    (Cowles Foundation)

  • Ronald Fischer

    (University of Chile)

  • Alexander Galetovic

    (University of Chile)

Abstract

It has become increasingly common to allocate highway franchises to the bidder that offers to charge the lowest toll. Often, building a highway increases the value of land held by a small group of developers, an effect that is more pronounced with lower tolls. We study the welfare implications of highway franchises that benefit large developers, focusing on the incentives developers have to internalize the effect of the toll they bid on the value of their land. We study how participation by developers in the auction affects equilibrium tolls and welfare. We find that large developers bid more aggressively than construction companies that own no land. As long as land ownership is sufficiently concentrated, allowing developers in the auction leads to lower tolls and higher welfare. Moreover, collusion among developers is socially desirable. We also analyze the case when the franchise holder can charge lower tolls to those buying her land ('toll discrimination'). Relative to uniform tolls, discrimination decreases welfare when land is highly concentrated, but increases welfare otherwise. Finally, we consider the welfare implications of subsidies and bonuses for proposing new highway projects.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1354.

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Length: 28 pages
Date of creation: Feb 2002
Date of revision:
Publication status: Published in Reprinted in Journal of Urban Economics (2005), 57: 432-448
Handle: RePEc:cwl:cwldpp:1354

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Keywords: Demsetz auctions; highway concessions; private participation in infrastructure;

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References

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  1. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Infraestructure Franchising and Government Guarantees," Documentos de Trabajo 29, Centro de Economía Aplicada, Universidad de Chile.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1999. "Toll competition among congested roads," Documentos de Trabajo 54, Centro de Economía Aplicada, Universidad de Chile.
  3. Jehiel, Phillipe & Moldovanu, Benny & Stacchetti, E., 1997. "Multidimensional Mechanism Design for Auctions with Externalities," Sonderforschungsbereich 504 Publications 97-04, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  4. ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
  5. Eduardo M.R.A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "How to Auction an Essential Facility When Underhand Integration is Possible," NBER Working Papers 8146, National Bureau of Economic Research, Inc.
  6. Eduardo M.R.A. Engel & Ronald D. Fischer & Alexander Galetovic, 1998. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," NBER Working Papers 6689, National Bureau of Economic Research, Inc.
  7. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, December.
  8. Carlos Diaz & Raimundo Soto, . "Open-Access Issues in the Chilean Telecommunications and Electricity Sectors," ILADES-Georgetown University Working Papers inv124, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  9. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2004. "How to Auction a Bottleneck Monopoly When Underhand Vertical Agreements are Possible," Journal of Industrial Economics, Wiley Blackwell, vol. 52(3), pages 427-455, 09.
  10. Harstad, Ronald M & Crew, Michael A, 1999. "Franchise Bidding without Holdups: Utility Regulation with Efficient Pricing and Choice of Provider," Journal of Regulatory Economics, Springer, vol. 15(2), pages 141-63, March.
  11. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  12. 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.
  13. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, vol. 77(3), pages 375-87, June.
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Cited by:
  1. Beatriz Marulanda & Miguel Montes, 2004. "Desarrollo de proyectos viales y aportes del estado en terrenos," IDB Publications 49398, Inter-American Development Bank.
  2. Karolien De Bruyne & Jan Van Hove, 2013. "Explaining the spatial variation in housing prices: an economic geography approach," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1673-1689, May.

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