Working paper

A Theory of BOT Concession Contracts

Emmanuelle Auriol, and Pierre M. Picard

Abstract

In this paper, we discuss the choice for build-operate-and-transfer (BOT) concessions when governments and firm managers do not share the same information regarding the operation characteristics of a facility. We show that larger shadow costs of public funds and larger information asymmetries entice governments to choose BOT concessions. This result stems from a trade-off between the government’s shadow costs of financing the construction and the operation of the facility and the excessive usage price that the consumer may face during the concession period. The incentives to choose BOT concessions increase as a function of ex-ante informational asymmetries between governments and potential BOT concession holders and with the possibility of transferring the concession cost characteristics to public firms at the termination of the concession.

Keywords

Public-private-partnership; privatization; adverse selection; regulation; natural monopoly; infrastructure; facilities;

JEL codes

  • L43: Legal Monopolies and Regulation or Deregulation
  • L51: Economics of Regulation
  • D83: Search • Learning • Information and Knowledge • Communication • Belief
  • L33: Comparison of Public and Private Enterprises and Nonprofit Institutions • Privatization • Contracting Out

Replaced by

Emmanuelle Auriol, and Pierre M. Picard, A Theory of BOT Concession Contracts, Journal of Economic Behavior and Organization, vol. 89, 2013, pp. 187–209.

See also

Published in

TSE Working Paper, n. 11-228, March 25, 2011