The Paradox of Concessions in Developing Countries

Authors

  • Mauricio Soares Bugarin Ibmec São Paulo
  • Frederico Ribeiro ANAC

DOI:

https://doi.org/10.12660/bre.v41n12021.83397

Keywords:

Game theory, Mechanism design, Airport concession, Privatization in Latin America

Abstract

This paper presents a game-theoretic analysis of concessions that explicitly considers both the concession auction and the subsequent operation game. The concession contract requires investment to be made, but the concessionaire may benefit from underinvesting and ex-post renegotiating with the regulator. The paper highlights the “Paradox of Concession”: the more successful the auction is, the higher is the probability of underinvestment. We propose a new mechanism, based on benefits for investment rather than punishment for underinvestment. The new mechanism: (i) is efficient; (ii) increases auction bids; (iii) eliminates the “paradox of concessions”; (iv) and can be fine-tuned to reduce the likelihood of underinvestment.

Author Biography

Mauricio Soares Bugarin, Ibmec São Paulo

Pbmec São Paulo Director of Undergraduate Studies in Economics

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Published

2022-06-29

Issue

Section

Articles