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The Joy of Flying: Efficient Airport PPP Contracts

We examine the optimal concession contract for an infrastructure that generates both user fee revenue and ancillary commercial revenue. For example, airports charge user fees to passengers and airlines (aviation revenue) and collect revenue from shops, restaurants, parking lots and hotels (non-aviation revenue). While passenger flow and the demand for the infrastructure are exogenous, the demand for ancillary services depends both on exogenous passenger flow and on the concessionaire’s effort and diligence. We show that the optimal principal agent contract separates exogenous and endogenous risks. On the one hand, the term of the concession is longer when passenger flow is low, so that the concessionaire bears no exogenous demand risk. On the other hand, the concessionaire bears part or all of ancillary risk, which fosters effort. The optimal contract can be implemented with a standard Present-Valueof-Revenue (PVR) auction in which bidders bid on the present value of aviation revenue only. The concession ends when the bid is collected.

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Eduardo Engel
Ronald Fischer
Alexander Galetovic
Publication Date
January, 2016