Infrastructure Investment and Incentives with Supranational Funding |
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Authors: | Ginés de Rus M Pilar Socorro |
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Institution: | (1) Department of Applied Economic Analysis, University of Las Palmas de Gran Canaria, Las Palmas de Gran Canaria, Spain |
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Abstract: | Public infrastructure investment is usually co-financed by supranational organizations. The selection of projects is supposed
to be decided using the information provided by conventional cost-benefit analysis. Nevertheless, we show that the type of
institutional design regarding the financing mechanism affects the incentives of national governments to reduce costs and
increase revenues, affecting project selection, the infrastructure capacity, the choice of technology, and the type of contract
used for the construction and operation of projects. With a total cost-plus financing mechanism there is no incentive in being
efficient and the price charged for the use of the new infrastructure is zero, the market quantity excessive, and the level
of supranational financing disproportionate. In contrast, with a sunk cost-plus financing mechanism social optimal pricing
is always implemented, though there is no incentive in being efficient. Finally, with a fixed-price financing mechanism the
maximal efficiency may be achieved, and the socially optimal pricing is always implemented. |
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