Maintenance incentives in highway concession Contracts

Abstract

In most European countries, the private sector has a direct or indirect participa- tion in the construction, overhaul, maintenance or operation of highways, normally through concession contracts with a pre-speci ed duration. The concession company is frequently remunerated through direct payments by road users (road tolls). In this context, it is important to understand the incentives it has to maintain a highway in proper conditions whilst at the same time it seeks to maximise its pro ts. We model this pro t-maximisation problem in a dynamic setting where demand is partly a func- tion of road quality in each period. We nd that concession companies have incentives to shirk on their maintenance duties and let road quality degrade early in their con- cession contract; later on, the concession company invests more heavily in maintenance so as to return the highway to the public authority in good working conditions. We also analyse how these results are a¤ected by changes in the road toll, costs and the duration of the concession contract.