Wednesday, July 16, 2008

Moral Hazard and Bailouts II

Governor Patrick is proposing a bailout of the Massachusetts Turnpike Authority.

The House, acting swiftly at the administration's request, gave initial approval yesterday to legislation that would allow the Turnpike Authority to use the state's higher credit rating to refinance its debt to lower its interest costs. The move means taxpayers would be responsible for the turnpike's debt if the agency defaults.

Putting aside the history of mismanagement by the Massachusetts Turnpike Authority and the sorry history of the Big Dig, what incentive do the members of the Turnpike Authority have to make sure taxpayers don't end up shouldering the risk?

Unlike the private sector, where shareholders keep management close to the vest, the overseers of public agencies are long gone after making critical decisions. Such political appointees to the turnpike board will not be around 10 years from now. There isn't an incentive to think long-term.

The debate over financing public infrastructure is not exclusively a political problem to pin upon Democrats or Republicans but a public choice problem. The question is "what is the proper institutional setting to prevent the creation of moral hazards in the first place?"

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