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Infrastructure investment and incentives with supranational funding

Author

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  • Ginés DE RUS
  • M. Pilar 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.

Suggested Citation

  • Ginés DE RUS & M. Pilar SOCORRO, 2009. "Infrastructure investment and incentives with supranational funding," Departmental Working Papers 2009-018, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2009-018
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    More about this item

    Keywords

    Infrastructure project; incentives; fixed-price; cost-plus.;
    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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