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Maintenance incentives in highway concession contracts

Author

Listed:
  • Ricardo Gonçalves

    (Faculdade de Economia e Gestão, Universidade Católica Portuguesa - Porto)

  • António Gomes

    (Autoridade da Concorrencia and Universidade de Aveiro)

Abstract

In most European countries, the private sector has a direct or indirect participation in the construction, overhaul, maintenance or operation of highways, normally through concession contracts with a pre-specified duration. The concession company is frequently remunerated through direct payments by road users (road tolls). In this context, it is important to understand the incentives it has to maintain a highway in proper conditions whilst at the same time it seeks to maximise its profits. We model this profit-maximisation problem in a dynamic setting where demand is partly a function of road quality in each period. We find that concession companies have incentives to "shirk" on their maintenance duties and let road quality degrade early in their concession contract; later on, the concession company invests more heavily in maintenance so as to return the highway to the public authority in good working conditions. We also analyse how these results are affected by changes in the road toll, costs and the duration of the concession contract.

Suggested Citation

  • Ricardo Gonçalves & António Gomes, 2007. "Maintenance incentives in highway concession contracts," Working Papers de Economia (Economics Working Papers) 04, Católica Porto Business School, Universidade Católica Portuguesa.
    • Handle: RePEc:cap:wpaper:042007
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    References listed on IDEAS

    as
    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, December.
    2. Vickerman, Roger, 2004. "Maintenance incentives under different infrastructure regimes," Utilities Policy, Elsevier, vol. 12(4), pages 315-322, December.
    3. Rommert Dekker & Raymond Ph. Plasmeijer & Jan H. Swart, 1997. "Evaluation of a New Maintenance Concept for the Preservation of Highways," Tinbergen Institute Discussion Papers 97-129/4, Tinbergen Institute.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. David Martimort & Flavio Menezes & Myrna Wooders & ELISABETTA IOSSA & DAVID MARTIMORT, 2015. "The Simple Microeconomics of Public-Private Partnerships," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(1), pages 4-48, February.
    2. Yarmukhamedov, Sherzod & Smith, Andrew S.J. & Thiebaud, Jean-Christophe, 2020. "Competitive tendering, ownership and cost efficiency in road maintenance services in Sweden: A panel data analysis," Transportation Research Part A: Policy and Practice, Elsevier, vol. 136(C), pages 194-204.
    3. Meng, Qiang & Lu, Zhaoyang, 2017. "Quantitative analyses of highway franchising under build-operate-transfer scheme: Critical review and future research directions," Transportation Research Part B: Methodological, Elsevier, vol. 102(C), pages 105-123.

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    More about this item

    Keywords

    Incentives; Concession contracts; Highways;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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