The Simple Economics of White Elephants

Gerard Llobet and Juan Jose Ganuza Fernandez

No 12557, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper shows that the concession model discourages firms from acquiring information about the future profitability of a project. Uniformed 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)
JEL-codes: D82 D86 H21 L51 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cta, nep-mic and nep-ppm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The simple economics of white elephants (2020)
Working Paper: The Simple Economics of White Elephants (2019)
Working Paper: The simple economics of white elephants (2019)
Working Paper: The Simple Economics of White Elephants (2017)
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