Lucía Quesada – UW Madison ABCDE, Amsterdam May 23-24 2005 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. 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.

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. Government Auctioneer Bidder 1 Bidder 2 Bidder 3 Society

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.

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.

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.