U.s. Highway Privatization and Motorists’ Heterogeneous Preferences

1 Introduction U.S. highways are experiencing a " perfect storm: " traffic congestion and delays are imposing ever greater costs on motorists and shippers; poorly maintained roads and bridges continue to damage vehicles and pose threats to travelers' safety; and for the first time since the Highway Trust Fund was created in 1956, the portion that finances federal highway expenditures is running a deficit. 1 The road system's poor service quality and growing financial problems can be attributed to inefficient government policies, including the failure to charge appropriate prices for congestion and pavement damage, suboptimal road design and maintenance practices, and regulations that increase production costs (Winston (2000)). Efficient policies that would improve the system's performance seem politically intractable because they would threaten long-standing subsidies to road users, rents to suppliers of highway capital and labor, and demonstration projects that improve politicians' re-election prospects. After policymakers accepted the fact that their policies were responsible for creating significant inefficiencies in intercity transportation, they turned to markets for help by deregulating the intercity modes' economic operations. As it has become clear that the public sector needs a large infusion of money to maintain and expand the highway system, policymakers have turned to the private sector for assistance by forming so-called public-private partnerships (PPPs), where the government leases a road to a private investor(s) for a specified period. 2 These partnerships are business deals that are intended to provide budgetary relief to 1 Some money in the trust fund is allocated to public transit. 2 Examples of PPPs include the Chicago Skyway, Indiana toll road, and the proposed Trans-Texas Corridor; high-occupancy-toll (HOT) lanes in California and Texas and that are currently 2 the government and yield an acceptable rate of return for the firms that invest in infrastructure subject to government regulations. At the same time, highway travel conditions may not necessarily improve, especially because the contract between the private firm and the government may be poorly structured and prevent efficient pricing (Engel et al. (2007)). A pure market solution—namely, highway privatization—would not be encumbered by the government and could result in less delay and greater travel reliability, but it could also produce a welfare loss from market power (Vickers and Yarrow (1991)). In this paper, we present exploratory empirical evidence on the economic effects of highway privatization by developing a stylized model where responsibility for providing highway services is transferred from the …