Least‐present‐value‐of‐revenue auctions and highway franchising
Least-Present.pdf (279.0Kb)Abstract
In this paper we show that fixed-term contracts, which are commonly
used to franchise highways, do not allocate demand risk optimally.
We characterize the optimal risk-sharing contract and show that it can
be implemented with a fairly straightforward mechanism—a least-present-value-of-revenue
auction. Instead of bidding on tolls (or franchise
lengths), as in the case of fixed-term franchises, in an LPVR auction
the bidding variable is the present value of toll revenues. The lowest
bid wins and the franchise ends when that amount has been collected.
We also show that the welfare gains that can be attained by replacing
fixed-term auctions with LPVR auctions are substantial.
Patrocinador
Financial support from Fondecyt (grants 1980658 and 1981188); the Direccio´n de Investigacio´n,
Facultad de Ciencias Fı´sicas y Matema´ticas, Universidad de Chile; and institutional
grants to the Centro de Economı´a Aplicada from the Mellon and Hewlett Foundations
are gratefully acknowledged. This paper benefited from comments by James Hines,
Jean Tirole, the editor (Sherwin Rosen), an anonymous referee, and seminar participants
and discussants at the Econometric Society meetings in Seattle (2000) and Cancu´n (1999);
the International Economic Association meeting in Buenos Aires (1999); London School
of Economics; Massachusetts Institute of Technology; Harvard, Hebrew, and Stanford
Universities; Universities of California (Santa Cruz), Chile, Michigan, Paris (Centre
d’Enseignement et de Recherche en Analyse Socioe´conomique), Pompeu Fabra, and
Toulouse.
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Journal of Political Economy, Vol. 109, No. 5 (October 2001), pp. 993-1020
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