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Highway Franchising and Real Estate Values

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Author Info

  • Eduardo Engel

    ()
    (Department of Economics, Yale University)

  • Ronald Fischer
  • Alexander Galetovic
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    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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    File URL: http://www.econ.yale.edu/growth_pdf/cdp840.pdf
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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 840.

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    Length: 27 pages
    Date of creation: Feb 2002
    Date of revision:
    Handle: RePEc:egc:wpaper:840

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    Related research

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

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. 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.
    2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "How to Auction an Essential Facility When Underhand Integration Is Possible," Cowles Foundation Discussion Papers 1353, Cowles Foundation for Research in Economics, Yale University.
    3. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1998. "Infraestructure Franchising and Government Guarantees," Documentos de Trabajo 29, Centro de Economía Aplicada, Universidad de Chile.
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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.

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