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The simple economics of white elephants

Juan-José Ganuza and Gerard Llobet

Mathematical Social Sciences, 2020, vol. 106, issue C, 91-100

Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uninformed contractors carry out good and bad projects because they are profitable in expected terms even though it would have been optimal to invest in screening them out according to their value. White elephants are identified as avoidable negative net present-value projects that are nevertheless undertaken. Institutional arrangements that limit the losses that firms can bear exacerbate this distortion. We characterize the optimal concession contract, which fosters the acquisition of information and achieves the first best by conditioning the duration of the concession to the realization of the demand and includes payments for not carrying out some projects.

Keywords: Concession contracts; Information acquisition; Flexible-term concessions (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: The Simple Economics of White Elephants (2019) Downloads
Working Paper: The simple economics of white elephants (2019) Downloads
Working Paper: The Simple Economics of White Elephants (2018) Downloads
Working Paper: The Simple Economics of White Elephants (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:106:y:2020:i:c:p:91-100

DOI: 10.1016/j.mathsocsci.2020.01.011

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