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Abstract

Developing countries are introducing private financing in road construction and operation. Franchising process is more and more made though auctions. Private participation is not without problems, some of which are due to the auction design. In this paper we seek to point out the main contributions of Auction Theory that are relevant to design an auction to franchise roads. In auction design details matter and make the difference between a successful auction and a total failure. We pay attention to the mechanism proposed by Engel et al. (97) to allocate road franchises. In particular, we analyze private value and common value aspects present in the model, and we verify the properties (virtues) of the model related to the optimal allocation of risk of Least Present Value Auctions. However we discuss the results of Engel model in relation to optimality of the auction, since it is based in too simple assumptions and does not take into account private value aspects present in the auction. We suggest to implement British auctions to allocate road franchises if bidders are symmetric and risk neutral, and if common value problems are present in the auction. We also suggest that the type of auction to be chosen is not independent of the object to be auctioned. If the object to be auctioned is the duration of the franchise, then the common value problem is bigger than in the case that the object to be auctioned is the present value of income. So, the impact in expected auctioneer income of the use of British auctions is bigger than in the second case.

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Chapter
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