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The Simple Economics of White Elephants

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  • Llobet, Gerard
  • Ganuza Fernandez, Juan Jose

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

  • Llobet, Gerard & Ganuza Fernandez, Juan Jose, 2018. "The Simple Economics of White Elephants," CEPR Discussion Papers 12557, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:12557
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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.
    2. Silaghi, Florina & Sarkar, Sudipto, 2021. "Agency problems in public-private partnerships investment projects," European Journal of Operational Research, Elsevier, vol. 290(3), pages 1174-1191.
    3. Alessandra Cepparulo & Gilles Mourre, 2020. "How and How Much? The Growth-Friendliness of Public Spending through the Lens," European Economy - Discussion Papers 132, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Daniel Albalate & Germà Bel & Albert Gragera, 2018. "“When politics and lobbyism combine to promote white elephants by using PPPs”," IREA Working Papers 201823, University of Barcelona, Research Institute of Applied Economics, revised Oct 2018.
    5. Parra, Carlos, 2025. "Shortfalls in profitability: Internal Rate of Return re-estimation based on ex-ante indicators and ex-post deviations," MPRA Paper 126981, University Library of Munich, Germany.
    6. Daniel, Albalate & Germà, Bel & Albert, Gragera, 2019. "Politics, risk, and white elephants in infrastructure PPPs," Utilities Policy, Elsevier, vol. 58(C), pages 158-165.
    7. 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.

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    Keywords

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    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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