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Auctions for Infrastructure Concessions with Demand Uncertainty and Unknown Costs

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  • Nombela, Gustavo
  • de Rus, Gines

Abstract

Auction mechanisms commonly used in practice for awarding infrastructure concession contracts induce a bias towards the selection of concessionaires who are optimistic about demand, but are not necessarily cost-efficient. This helps to explain the frequent renegotiation of concessions observed in practice. This paper shows that the fixed-term nature of contracts is the key element for selection errors, and it proposes a better alternative mechanism based on flexible-term contracts. This new auction mechanism reduces the probability of selection errors and contract renegotiation, and it is simple enough to constitute a good option for concessions in sectors like transport and public utilities.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12023.

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Date of creation: 2001
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Handle: RePEc:pra:mprapa:12023

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Related research

Keywords: concessions; auctions; renegotiation; infrastructure;

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  1. Jofre-Bonet, Mireia & Pesendorfer, Martin, 2000. "Bidding behavior in a repeated procurement auction: A summary," European Economic Review, Elsevier, Elsevier, vol. 44(4-6), pages 1006-1020, May.
  2. Milgrom, Paul R, 1979. "A Convergence Theorem for Competitive Bidding with Differential Information," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 679-88, May.
  3. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1997. "Highway Franchising: Pitfalls and Opportunities," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 15, Centro de Economía Aplicada, Universidad de Chile.
  4. Thiel, Stuart E, 1988. "Some Evidence of the Winner's Curse," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 884-95, December.
  5. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
  6. Laffont, Jean-Jacques, 1997. "Game theory and empirical economics: The case of auction data 1," European Economic Review, Elsevier, Elsevier, vol. 41(1), pages 1-35, January.
  7. Klemperer, P., 1999. "Auction Theory: a Guide to the Literature," Economics Papers 1999-w12, Economics Group, Nuffield College, University of Oxford.
  8. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, Econometric Society, vol. 52(6), pages 1473-1518, November.
  9. Hinojosa, Sergio & Gomez-Lobo, Andres, 2000. "Broad roads in a thin country - infrastructure concessions in Chile," Policy Research Working Paper Series 2279, The World Bank.
  10. Che, Y.K., 1991. "Design Competition through Multidimensional Auctions," Working papers, Wisconsin Madison - Social Systems 9123, Wisconsin Madison - Social Systems.
  11. Porter, Robert H, 1995. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Econometrica, Econometric Society, Econometric Society, vol. 63(1), pages 1-27, January.
  12. Holt, Charles A, Jr, 1980. "Competitive Bidding for Contracts under Alternative Auction Procedures," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(3), pages 433-45, June.
  13. Wang, Ruqu, 2000. "Bidding and renegotiation in procurement auctions," European Economic Review, Elsevier, Elsevier, vol. 44(8), pages 1577-1597, August.
  14. Riordan, Michael H & Sappington, David E M, 1987. "Awarding Monopoly Franchises," American Economic Review, American Economic Association, American Economic Association, vol. 77(3), pages 375-87, June.
  15. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(3), pages 511-18, October.
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Cited by:
  1. Andrés Pereyra, 2003. "Marchas y contramarchas en la concesión de carreteras en Uruguay," Documentos de Trabajo (working papers), Department of Economics - dECON 1703, Department of Economics - dECON.

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