DP12557 The Simple Economics of White Elephants
|Author(s):||Juan Jose Ganuza Fernandez, Gerard Llobet|
|Publication Date:||January 2018|
|Keyword(s):||Concession contracts, flexible-term concessions, Information Acquisition|
|JEL(s):||D82, D86, H21, L51|
|Programme Areas:||Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12557|
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.