This paper shows that the effects of financial liberalization on the credit market of a small and capital constrained economy depend on the market structure of domestic banks prior to liberalization. Specifically, under perfect competition in the domestic credit market prior to liberalization, liberalization leads to lower domestic interest rates, in turn leading to increased credit penetration. However, when the initial market structure is one of imperfect competition, liberalization can lead to the exclusion of less wealthy entrepreneurs from the credit market. This provides a rationale for the mixed empirical evidence concerning the effects of liberalization on access to credit in developing markets. Moreover, the analysis provides new insights into the consequences of foreign lenders’ entry into developing economies.

We build a conceptual framework to analyze the virtues and limitations of alternative mechanisms that can be used to auction a highway. We argue that current mechanisms, which fix the term of the franchise, create unnecesary risk and facilitate post-contract opportunism by the regulator and the franchise-holder. We propose a new mechanism that allocates the franchise to the firm asking the least present value of toll revenue. We argue that this mechanisms is clearly superior to those currently in use.

In this paper we show that fixed‐term contracts, which are commonly used to franchise highways, do not allocate demand risk optimally. We characterize the optimal risk‐sharing contract and show that it can be implemented with a fairly straightforward mechanism—a least‐present‐value‐of‐revenue auction. Instead of bidding on tolls (or franchise lengths), as in the case of fixed‐term franchises, in an LPVR auction the bidding variable is the present value of toll revenues. The lowest bid wins and the franchise ends when that amount has been collected. We also show that the welfare gains that can be attained by replacing fixed‐term auctions with LPVR auctions are substantial.