Franchise Bidding in the Water Industry- Auction Schemes and Investment Incentives
AbstractThe 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.
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Bibliographic InfoPaper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0033.
Length: 54 pages
Date of creation: 2004
Date of revision:
Water; Networks; Franchise Bidding; Investment;
Other versions of this item:
- Urs Meister, 2004. "Franchise Bidding in the Water Industry – Auction Schemes and Investment Incentives," Public Economics 0412011, EconWPA.
- L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
- L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
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