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Comments on Infrastructure Regulation, Corruption and Poverty: Lessons from Jean-Jacques Laffont

Comments on Infrastructure Regulation, Corruption and Poverty: Lessons from Jean-Jacques Laffont. Lucía Quesada – UW Madison ABCDE, Amsterdam May 23-24 2005. Awarding infrastructure contracts. Auctions Mechanisms to optimally trade off informational rents and efficiency.

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Comments on Infrastructure Regulation, Corruption and Poverty: Lessons from Jean-Jacques Laffont

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  1. Comments on Infrastructure Regulation, Corruption and Poverty:Lessons from Jean-Jacques Laffont Lucía Quesada – UW Madison ABCDE, Amsterdam May 23-24 2005

  2. Awarding infrastructure contracts • Auctions • Mechanisms to optimally trade off informational rents and efficiency. • LDC’s weak institutions imply • Costly enforcement of legal contracts which leads to expropriation, • Favorable environment for illegal “contracts” (collusion) between auctioneer (government) and bidders or among bidders, • Lack of commitment power which may lead to socially harmful renegotiation.

  3. Government Auctioneer Society Bidder 1 Bidder 2 Bidder 3 I. Auction design with collusion • Collusion within the auction process • Give incentives to bidders to compete. Extra rents to “large” bidders. • Governance of the auction design • Incentives to the auctioneer. Constitutional design.

  4. II. Expropriation and outcome of the auction • Risk of expropriation alters the outcome of the auction: Ratchet effect. • Costly enforcement leads to short term contracts, which generate higher rents to provide incentives to compensate the risk of expropriation. • Need to give higher subsidies or allow higher prices. • Efficiency losses due to exacerbated firms incentives to overstate costs. • There is not much to expropriate from inefficient firms. • Low incentives to invest in cost reduction.

  5. III. Ex post renegotiation of the auction outcome • Government has lower (ex post) bargaining power: relation-specific investment. • Lack of competition at the renegotiation stage. • Strategic behavior of firms at the auction stage to exploit ex post monopoly power. “Too good” ex ante deals may end up being too bad. • Ex post renegotiation may undermine efficiency of the mechanism. More problematic in LDCs. • Reputation: short term cost vs. long term benefit.

  6. Designing institutions: Reputation • Renegotiation is good in the short run: • Relation-specific investment is sunk, • Current operator may have acquired useful information, • Saves on costs of new auction set up. • Renegotiation is bad in the long run: • Gives the wrong signal to future bidders, • Favors future strategic behavior. • Align short-run government with long-run society.

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