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TheDesignofTransnationalPublicGoodMechanismsforDevelopingCountriesJean-JacquesLa ontyandDavidMartimortzRevisedVersion:October13,2003AbstractWeanalyzethedesignofincentivemechanismsfortheprovisionoftransnationalpublicgoodsunderasymmetricinformation.Transnationalpublicgoodsareinfras-tructuresthatnosinglecountrycana ordtobuiltforitself.Weshowthattheexternalconstraintsimposedbythismechanismmaya ectconsumption,pricingandthetrueredistributiveconcernsoflocalgovernments.Wequantifythecorre-spondingdistortions.Wealsodiscusstheimpactofthepreferencesforredistributionoftheinternationalagencyinchargeofdesigningthemechanismandtheroleofitsabilitytoenforcethatmechanism.Keywords:TransnationalPublicGoods,IncentiveMechanisms.JELCodes:H41,D82.WethankPaulinaBeatoforsuggestingthisresearchandPierreDuboisforveryusefulcommentsonanearlierversion.Tworefereesmadeinsightfulcommentswhichhavemuchimprovedthepaper.Theusualdisclaimerapplies.yUniversitdeToulouse,(IDEI,GREMAQ,ARQADE)andUniversityofSouthCaliforniaatLosAngeles.zUniversitdeToulouse(IDEI,GREMAQ)andInstitutUniversitairedeFrance.11IntroductionItiswellrecognizedbynow,bothamongpractitionersandscholars,thatproperinfras-tructuresarekeytoeconomicdevelopment.Severalempiricalstudiesillustratetheimpactofinfrastructuresoneconomicgrowth.1A1%increaseinthestockofinfrastructurescanincreaseGDPbyupto.20%.Despitethisimportance,somecountrieshavefacedasigni cantshortageinaccessingtocrucialinfrastructures.Forinstance,thestockandqualitylevelsofinfrastructuresinLatinAmericaandCaribbeancountrieshaslostsigni -cantgroundrelativetoEastAsiaandOECDcountries.Toillustratethatpoint,CalderonandServen(2002)showthat,from1980to1997,theLatinAmericainfrastructuregaprelativetoEastAsiagrewby40%forroads,70%fortelecommunicationsandnearly90%forpowergeneration.Theyarguethatthiswideninginfrastructuregapcanaccountfornearly25%oftheLatinAmerica'sGDPoutputgaprelativetotheEastAsianeconomiesoverthe1980-2000period.Inresponsetothis,andgiventhescarcityofpublicfundsinLDCs,2mostdevelopingcountrieshaveturnedtotheforeignprivatesectorfor nancingandoperatinginfrastruc-ture.However,anumberofdicultieshaveemergedfromthisstrategy.First,somecountrieshavefailedtoattractforeigninvestments.Second,eventhosewhosucceededhavesometimesfacedahighrateofrenegotiationforthesecontracts.3Initiatedbygov-ernmentsorconcessionnaries,thoserenegotiationshaveoftencreatedpublicoppositiontowhatissometimespresented,forwaterconcessionsinparticular,asalossofsovereignty.Whateverthestrengthofthemotivationsbehindthesepublicpositions,alternativewaysof nancinginfrastructuresshouldbelookedfor.HowtoreconciletheneedformoreinvestmentinpublicinfrastructuresandtheaspirationofLDCsforaclosecontroloftheirpublicservicesisamajorpoliticalquestiontoday.CooperationamongsmallLDCs,suchasthoseofCentralAmericaoroftheMediter-aneanRim,mightbeapotentialsolution.Sometimestheleast-costapproachtoimprov-ingthesupplyofinfrastructureservicesrequirescross-countryintegrationofnetworksorsharedaccesstoacommonresource.Thisiscertainlythecaseforinfrastructureprojectsthatariseoutofthegrowthofcommerceandtrade.Examplesincluderoadandrailnetworks,powergrids4andtelecommunicationnetworks.Thisisalsothecase1SeeforthecaseofLatinAmerica,Calderon,EasterlyandServen(2002)andCalderonandServen(2002)amongothers.2ArecentreportbytheWorldBankmentioned\Whentimesarehard,capitalspendingoninfrastruc-tureisthe rstitemtogo...Despitethelong-termeconomicscostsofslashinginfrastructurespending,governments nditlesspoliticallycostlythanreducingpublicemploymentorwages.WorldDevelopmentReport1994,p.19.3SeeGuasch,La ontandStraub(2002).4AtypicalexampleofsuchajointprojectistheItaipuhydroelectricitypowerplantontheBrasilian-Paraguayborder.Togiveanideaofthescaleofsuchaproject,thatdamcorrespondsto25%ofenergy2forprojectswhicharelesscommercially-drivensuchthatinvestmentsinenvironmentalprotectionandthemanagementofsharedresourcessuchaswater.5Thispaperdevelopsatheoreticalframeworkforexploringtheallocativeanddistributiveconsequencesofthosetransnationalcoordinations.Infrastructuresoftenentail xedcostswhicharesolargethatnosinglecountrycana ordtobuildtheinfrastructurealone.Those xedcostsmustbesharedbyseveralcoun-tries.Infrastructurescanthusbeviewedaspublicgoodsforwhich nancingmechanismsmustbeagreeduponbythepartnersoftheprojects.Thisperspectiveraisesofcoursetheuglyheadofthefree-riderproblemwhichariseswhenanecientCoasianbargainingfails.Suchinecienciesareparticularlyrelevantincontextsplaguedbyinformationalasymmetries.Agenerallessonfromtheliteratureonpublicgoodmechanismsdevelopedoverthelastthirtyyearsisthat,underasymmetricinformation,theoptimalmechanismcallsingeneralfordeviationsawayfromthe rst-best.Inourcontext,acountrymaypretendhavingalowerwillingnesstopayforthepublicgoodthanwhatithasreallytominimizeitsowncontributionandletpartnersbearthebulkofinvestment.Tocurbthoseincentives,theprojectshouldbesometimesgivenupeventhoughitwouldhavebeenoptimaltobuilditundercompleteinformation.Thisimportantinsighthasbeensofarderivedbylookingattheprovisionofapublicgoodforindiv