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Highway franchising and real estate values

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  • Engel, Eduardo
  • Fischer, Ronald
  • Galetovic, Alexander

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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Suggested Citation

  • Engel, Eduardo & Fischer, Ronald & Galetovic, Alexander, 2005. "Highway franchising and real estate values," Journal of Urban Economics, Elsevier, vol. 57(3), pages 432-448, May.
  • Handle: RePEc:eee:juecon:v:57:y:2005:i:3:p:432-448
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    References listed on IDEAS

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    1. 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, January.
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    3. Fujita,Masahisa, 1991. "Urban Economic Theory," Cambridge Books, Cambridge University Press, number 9780521396455, December.
    4. Engel Eduardo M & Fischer Ronald & Galetovic Alexander, 2004. "Toll Competition Among Congested Roads," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-21, March.
    5. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October.
    6. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2000. "How to Auction an Essential Facility when Underhand Integration is Possible," Documentos de Trabajo 79, Centro de Economía Aplicada, Universidad de Chile.
    7. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, January.
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    10. 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, September.
    11. 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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    14. Carlos Diaz & Raimundo Soto, "undated". "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.
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    Cited by:

    1. 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.
    2. Beatriz Marulanda & Miguel Montes, 2004. "Desarrollo de proyectos viales y aportes del estado en terrenos," IDB Publications (Working Papers) 49398, Inter-American Development Bank.
    3. Karolien De Bruyne & Jan Van Hove, "undated". "Explaining Spatial Variation in Housing Prices: An Economic Geography Approach," Regional and Urban Modeling 283600023, EcoMod.
    4. Beatriz Marulanda & Miguel Montes, 2004. "Desarrollo de proyectos viales y aportes del estado en terrenos," IDB Publications (Working Papers) 3242, Inter-American Development Bank.

    More about this item

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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