Publication Date: February 2002
It has become increasingly common to allocate highway franchises to the bidder that oﬀers to charge the lowest toll. Often, building a highway increases the value of land held by a small group of developers, an eﬀect that is more pronounced with lower tolls. We study the welfare implications of highway franchises that beneﬁt large developers, focusing on the incentives developers have to internalize the eﬀect of the toll they bid on the value of their land. We study how participation by developers in the auction aﬀects equilibrium tolls and welfare. We ﬁnd that large developers bid more aggressively than construction companies that own no land. As long as land ownership is suﬀiciently concentrated, allowing developers in the auction leads to lower tolls and higher welfare. Moreover, collusion among developers is socially desirable. We also analyze the case when the franchise holder can charge lower tolls to those buying her land (‘toll discrimination’). Relative to uniform tolls, discrimination decreases welfare when land is highly concentrated, but increases welfare otherwise. Finally, we consider the welfare implications of subsidies and bonuses for proposing new highway projects.
Demsetz auctions, highway concessions, private participation in infrastructure
JEL Classification Codes: D44, H40, H54, R42, R48
Published in Journal of Urban Economics (May 2005), 57(3): 432-448 [DOI]