Highway Leasing and Club Theory

In recent years financially stressed jurisdictions have attempted to solve their fiscal shortfalls by leasing highways to private companies. The private company pays an upfront fee or promises a regular stream of cash payments in return for operating and collecting tolls from highway users during a fixed term. In a front page article on August 26, The Wall Street Journal described the efforts Pennsylvania was going through to lease the United States’ oldest, major toll road, the Pennsylvania Turnpike.2 Leasing highways to private parties benefit state and locality finances with a lump sum or a stream of cash that can then be turned to pay for other programs. Other government entities considering highway or other infrastructure leases include Florida, Chicago, and New York State. Mancur Olson is his classic work, The Logic of Collective Action, provides a basis for understanding why providing resources for road construction and maintenance has always been so problematic. Olson argued that large groups have trouble mobilizing for a collective action that would benefit the whole group because each individual realizes that their solitary action would be meaningless unless there is significant action by many others. Olson declares that large group action generally requires some element of coercion.3 The logic of collective action has been a problem for road construction and maintenance since earliest times. Until a coercive force like a king or emperor became involved, systematic road building languished. Once civilization has constructed a highway system, another economic model is useful in describing how government and the highway system interact. Club Theory, which originated from a seminal article by James Buchanan in 19654, has been applied to highways. In an article on intergeneration clubs, Todd Sandler5 showed that when governments provide highways, governments tend to favor the current generation by charging current users less than full cost and providing less upkeep. Sandler termed this tendency: intergenerational myopia.” The highway facilities are thus over-used and deteriorate more rapidly, leaving a worn and torn up infrastructure for future generations. Sandler obtains a different result if an inter-generational club is privately owned. In this case, if the club members’ ownership is represented by securities that can be sold, and the club charges fees adequate to cover current expenses. The facility is not overused and worn down. This implies that a private highway would not have infrastructure repair and funding issues associated with government ownership and operation. But what about the current set of highway lease proposals? This paper analyzes highway leases using a club theory approach. The paper seeks to answer the question whether leased highways would continue to have the problems of government-provided highways regarding maintenance and funding or might more resemble a privately owned and operated highway. The paper finds that highway leases, while ameliorating intergenerational myopia, do not eliminate it entirely.