Private information, competition and the renewal of delegation contracts: an econometric analysis of water services in France

The renewal of franchise bidding for natural monopolies is often considered to be insufficiently competitive. We hypothesize that this may be due to the fact that the incumbent operator knows the existing network better than his competitors. This type of private information creates what is referred to as the “winner’s curse” during renewal auctions. Since bidders anticipate it, the competition may be less fierce, leading to a less effective selection procedure. We propose a methodology that makes it possible to distinguish this type of information from the more standard private information parameter that characterizes the idiosyncratic productivity of each operator. We have built a model that simultaneously explains the choice of operator made by the local community and the degree of competition during the renewal process. This selection model makes it possible to estimate prices in a second step without a selection bias. We use an original database for the renewal of a lease contract for water utility operations in France. The results highlight the effect of common value information on the selection of an operator, combined with local concentration effects. This approach provides some perspectives for improving the effectiveness of franchise bidding procedures