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

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Comments on Infrastructure Regulation, Corruption
and PovertyLessons from Jean-Jacques Laffont

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

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Awarding infrastructure contracts

• Auctions
• Mechanisms to optimally trade off informational
  rents and efficiency.
• LDCs 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.

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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.

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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.

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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.

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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.