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# American Economic Association

## Highway Franchising: Pitfalls and Opportunities

Authors(s): Eduardo Engel, Ronald Fischer and Alexander Galetovic
Source: The American Economic Review, Vol. 87, No. 2, Papers and Proceedings of the
Hundred and Fourth Annual Meeting of the American Economic Association (May, 1997),
pp. 68-72
Stable URL: http://www.jstor.org/stable/2950886
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## In this paper we present a simple framework

I. A Simple Model

## genierfa Industrial, Universidad de Chile Av. Reputblica

way is the same for all firms and equal to I,

## unknown to the government. There are no

Mellon Foundation. We thank Alvaro GonzAlez, who first

## in Engel et al. ( 1997 ).

Meyer (1993).

68

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no risk.

Then,

## rium bids are a function of I only. Demand

Iri
data such as iri or Qi do not affect a firm's bid.

## It follows that there is no winner's curse.

B. Fixed-Term Franchises

PQi(I -e-r')

=Q (- - erf) i = H, L

satisfy

## It is easy to see that PVIL = PVIH = I solves

+ IrHU[P PVQH(T) - I] = u(O)

## demand is high). Note that users pay the same

4We assume that the planner has an upper bound on

rIIQL .

## ' In this example, the result continues to hold if the

planner is risk-averse.

## building costs that must be financed by the firm itself.

term T.

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## GROWTH RATES IN PERCENTAGES

franchise-holder loses money when demand

Highway

## Year Angostura Zapata Lampa

I, so that users pay more on average. Second,

## in the aggregate, users also face risk, as in

1987 8.8 21.5 3.8

## 1989 11.7 13.1 15.9

mand is high. Third, the winning bid is a

## data 7ri and Qi. Thus the winner's curse is

1992 12.4 5.2 18.0

likely to occur.8

IL Comparison

## Notes: The rates correspond to the growth in the flow of

A. Risk
vehicles from one year to the next. For example the ve-

## 8.8-percent larger than in 1986.

An important defect of fixed-term mecha-

investment.

of contract.

## was auctioned in 1993 to the firm offering the highest

of government budget constraints, but also be-

## chises is the reduction in the likelihood of

9 Whether this is desirable depends on the source of

## white elephants. Since white elephants are

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problem.

B. Renegotiation

before a court.

C. Flexibility

D. Effort

## '0 This analysis ignores maintenance and operating

auction the effect of raising tolls is just an earcosts. These are relatively small in comparison to the cost

## of the projects and are fairly easy to estimate.

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Tirole, 1997).

E. Congestion

REFERENCES

1859, 22.

III. Conclusion

## A Comment." Estudios Pu'blicos, 1997

(forthcoming; in Spanish).
" According to recent press reports, Chile's Ministry

## Williamson, Oliver. The economic institutions of

of Public Works is planning to use the LPVR mechanism

## capitalism. New York: Free Press, 1985.

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