How to Franchise Highways

Abstract

Electronic toll collection has trimmed transaction costs and moved highways out of the public goods box and into the public utilities box. Economists and policymakers should think of highways as a service to be made demand-responsive, self-financing, and privately owned. This paper proposes a novel method of franchise bidding called marginal return bidding. The scheme negotiates the knowledge and incentive problems of upfront bidding to provide a practical path for policy. The paper provides practical advice on other aspects of privatizing highways.