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The Paradox of Concessions in Developing Countries

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  • Bugarin, Mauricio Soares
  • Ribeiro, Frederico

Abstract

This paper presents a game-theoretic analysis of concessions that explicitly considers both the concession auction and the subsequent operation game. The concession contract requires investment to be made, but the concessionaire may benefit from underinvesting and ex-post renegotiating with the regulator. The paper highlights the “Paradox of Concession”: the more successful the auction is, the higher is the probability of underinvestment. We propose a new mechanism, based on benefits for investment rather than punishment for underinvestment. The new mechanism: (i) is efficient; (ii) increases auction bids; (iii) eliminates the “paradox of concessions”; (iv) and can be fine-tuned to reduce the likelihood of underinvestment.

Suggested Citation

  • Bugarin, Mauricio Soares & Ribeiro, Frederico, 2022. "The Paradox of Concessions in Developing Countries," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 41(1), June.
    • Handle: RePEc:sbe:breart:v:41:y:2022:i:1:a:83397
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    1. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2013. "The Cost of Contract Renegotiation: Evidence from the Local Public Sector," American Economic Review, American Economic Association, vol. 103(6), pages 2352-2383, October.
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    5. J. Luis Guasch & Jean-Jacques Laffont & Stéphane Straub, 2007. "Concessions of infrastructure in Latin America: Government-led renegotiation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(7), pages 1267-1294.
    6. David Martimort & Flavio Menezes & Myrna Wooders & FLÁVIO MENEZES & MATTHEW RYAN, 2015. "Default and Renegotiation in Public-Private Partnership Auctions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 49-77, February.
    7. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 55-73, September.
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