Maintenance Incentives in Highway Concession Contracts

In most European countries, the private sector has a direct or indirect participation in the construction, overhaul, maintenance, or operation of highways, normally through concession contracts and often with direct payments (tolls) by users. In this context, we construct a model, where demand also depends on road quality, in order to understand the incentives that a profit-maximising concessionaire has to maintain a highway in proper conditions. We provide an economic rationale for our results and also analyse how they are affected by changes in tolls, costs, and the duration of the concession contract. © 2012 LSE and the University of Bath