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The Simple Economics of White Elephants

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  • Ganuza Fernandez, Juan Jose
  • Llobet, Gerard

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.

Suggested Citation

  • Ganuza Fernandez, Juan Jose & Llobet, Gerard, 2018. "The Simple Economics of White Elephants," CEPR Discussion Papers 12557, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12557
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    References listed on IDEAS

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    1. Ganuza, Juan-José & Llobet, Gerard, 2020. "The simple economics of white elephants," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 91-100.
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    5. Richard A. Lambert, 1986. "Executive Effort and Selection of Risky Projects," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 77-88, Spring.
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    7. Eduardo M. R. A. Engel & Ronald D. Fischer & Alexander Galetovic, 2001. "Least-Present-Value-of-Revenue Auctions and Highway Franchising," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 993-1020, October.
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    Cited by:

    1. Ganuza, Juan-José & Llobet, Gerard, 2020. "The simple economics of white elephants," Mathematical Social Sciences, Elsevier, vol. 106(C), pages 91-100.
    2. Turró, Mateu & Penyalver, Domingo, 2019. "Hunting white elephants on the road. A practical procedure to detect harmful projects of transport infrastructure," Research in Transportation Economics, Elsevier, vol. 75(C), pages 3-20.
    3. Alessandra Cepparulo & Gilles Mourre, 2020. "How and How Much? The Growth-Friendliness of Public Spending through the Lens," European Economy - Discussion Papers 2015 - 132, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    Concession contracts; flexible-term concessions; Information Acquisition;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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