Subsidizing and pricing private toll roads with noncontractible service quality: A relational contract approach

In private toll roads, some elements of the private operator’s performance are noncontractible. As a result, the government cannot motivate the private operator to improve them through a formal contract but through a self-enforcing contract that both parties are unwilling to deviate unilaterally. In this paper, the authors use noncontractible service quality to capture these performance elements. By employing a relational contract approach, the authors aim to investigate the optimal subsidy plan to provide incentives for quality improvement. The authors show that government subsidy is feasible in quality improvement when the discount factor is sufficiently high and marginal cost of public funds is sufficiently small. Under feasible government subsidy, the authors have demonstrated the optimal subsidy plans in different scenarios. Moreover, some comparative statics are presented. Based on the derived subsidy plans, the authors further investigate the optimal toll price. The authors find that the optimal toll price generates zero surplus for the private operator and positive surplus for consumers. The authors then make two extensions of their model to re-investigate the government’s optimal decisions on subsidy plan and toll price when her decision sequence is changed and when government compensation is present upon termination of the relationship. Some implications for practice have been derived from their model results.


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  • Accession Number: 01608838
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Aug 4 2016 4:50PM