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Auctions for Infrastructure Concessions with Demand Uncertainty and Unknown Costs

Nombela, Gustavo and de Rus, Gines (2001): Auctions for Infrastructure Concessions with Demand Uncertainty and Unknown Costs.

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Abstract

Auction mechanisms commonly used in practice for awarding infrastructure concession contracts induce a bias towards the selection of concessionaires who are optimistic about demand, but are not necessarily cost-efficient. This helps to explain the frequent renegotiation of concessions observed in practice. This paper shows that the fixed-term nature of contracts is the key element for selection errors, and it proposes a better alternative mechanism based on flexible-term contracts. This new auction mechanism reduces the probability of selection errors and contract renegotiation, and it is simple enough to constitute a good option for concessions in sectors like transport and public utilities.

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