The Simple Economics of White Elephants

39 Pages Posted: 8 Jan 2018

See all articles by Juan-José Ganuza

Juan-José Ganuza

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR)

Date Written: January 2018

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, flexible-term concessions, Information Acquisition

JEL Classification: D82, D86, H21, L51

Suggested Citation

Ganuza, Juan and Llobet, Gerard, The Simple Economics of White Elephants (January 2018). CEPR Discussion Paper No. DP12557, Available at SSRN: https://ssrn.com/abstract=3098133

Juan Ganuza (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 19 (Phone)
(34-98) 542 17 46 (Fax)

Gerard Llobet

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
SPAIN
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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