| By: |
Juan José Ganuza;
Gerard Llobet |
| Abstract: |
This paper shows that the concession model discourages firms from acquiring
information about the future profitability of a project. Uninformed
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. |
| JEL: |
D82 D86 H21 L51 |
| Date: |
2019–11 |
| URL: |
http://d.repec.org/n?u=RePEc:upf:upfgen:1681&r=all |