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Infrastructure Investment and Incentives with Supranational Funding

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  • Ginés Rus
  • M. Socorro

Abstract

Public infrastructure investment is usually co-financed by supranational organizations. The selection of projects is supposed to be decided using the information provided by conventional cost-benefit analysis. Nevertheless, we show that the type of institutional design regarding the financing mechanism affects the incentives of national governments to reduce costs and increase revenues, affecting project selection, the infrastructure capacity, the choice of technology, and the type of contract used for the construction and operation of projects. With a total cost-plus financing mechanism there is no incentive in being efficient and the price charged for the use of the new infrastructure is zero, the market quantity excessive, and the level of supranational financing disproportionate. In contrast, with a sunk cost-plus financing mechanism social optimal pricing is always implemented, though there is no incentive in being efficient. Finally, with a fixed-price financing mechanism the maximal efficiency may be achieved, and the socially optimal pricing is always implemented.
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Suggested Citation

  • Ginés Rus & M. Socorro, 2010. "Infrastructure Investment and Incentives with Supranational Funding," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 17(3), pages 551-567, September.
    • Handle: RePEc:spr:trstrv:v:17:y:2010:i:3:p:551-567
    DOI: 10.1007/s11300-010-0163-1
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    Cited by:

    1. De Rus, Ginés, 2011. "The BCA of HSR: Should the Government Invest in High Speed Rail Infrastructure?," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(1), pages 1-28, January.
    2. Jorge Valido, 2020. "Large Infrastructure Investments: Financing Mechanisms and Incentives in Decentralised Countries," Fiscal Studies, John Wiley & Sons, vol. 41(4), pages 905-921, December.
    3. Ginés de Rus, 2015. "La política de infraestructuras en España. Una reforma pendiente," Policy Papers 2015-08, FEDEA.
    4. De Borger, Bruno & Proost, Stef, 2012. "Transport policy competition between governments: A selective survey of the literature," Economics of Transportation, Elsevier, vol. 1(1), pages 35-48.
    5. Ginés de Rus & Javier Campos & Daniel Graham & M. Pilar Socorro & Jorge Valido, 2020. "Evaluación Económica de Proyectos y Políticas de Transporte: Metodología y Aplicaciones. Parte 1: Metodología para el análisis coste-beneficio de proyectos y políticas de transporte," Working Papers 2020-11, FEDEA.
    6. Chiara DEL BO, 2009. "Recent advances in public investment, fiscal policy and growth," Departmental Working Papers 2009-25, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.

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    More about this item

    Keywords

    Infrastructure project; Incentives; Fixed-price; Cost-plus; D82; H50; L90;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General

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