Optimal concession of water services under common value.

When an incumbent firm is in charge of a distribution network, it accumulates information on the state of the network. This `common value' information creates a winner's curse during auctions for renewing the concession. The municipality contracting out the provision of the service trades off the incumbent's incentives to invest, with lower costs when changing supplier, and must induce effective competition despite the winner's curse. We show that the optimal concession contract can be designed to address this difficulty, with asymmetric auctions in which the incumbent is favored and increasing output schedules. Contrary to standard auctions, the winner's curse can be prevented at no expected cost.