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Highway Franchising and Real Estate Values

Author

Listed:
  • Eduardo Engel

    (Cowles Foundation)

  • Ronald Fischer

    (University of Chile)

  • Alexander Galetovic

    (University of Chile)

Abstract

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.

Suggested Citation

  • Eduardo Engel & Ronald Fischer & Alexander Galetovic, 2002. "Highway Franchising and Real Estate Values," Cowles Foundation Discussion Papers 1354, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1354
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    Cited by:

    1. Karolien De Bruyne & Jan Van Hove, 2013. "Explaining the spatial variation in housing prices: an economic geography approach," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1673-1689, May.
    2. Bruce L. Benson, 2007. "Private Policing And Private Roads: A Coasian Approach To Drunk‐Driving Policy," Economic Affairs, Wiley Blackwell, vol. 27(4), pages 30-38, December.
    3. Beatriz Marulanda & Miguel Montes, 2004. "Desarrollo de proyectos viales y aportes del estado en terrenos," IDB Publications (Working Papers) 49398, Inter-American Development Bank.
    4. Marulanda, Beatriz & Montes, Miguel, 2004. "Desarrollo de proyectos viales y aportes del estado en terrenos," IDB Publications (Working Papers) 3242, Inter-American Development Bank.

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    More about this item

    Keywords

    Demsetz auctions; highway concessions; private participation in infrastructure;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy

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