Working Paper: CEPR ID: DP3459
Authors: James A. Robinson; Ragnar Torvik
Abstract: Underdevelopment is thought to be about lack of investment, and many political economy theories can account for this. Yet, there has been much investment in developing countries. The problem has been that investment growth has not led to output growth. We therefore need to explain not simply underinvestment, but also the misallocation of investment. The canonical example of this is the construction of white elephants - investment projects with negative social surplus. In this paper we propose a theory of white elephants. We argue that they are a particular type of inefficient redistribution that is politically attractive when politicians find it difficult to make credible promises to supporters. We show that it is the very inefficiency of such projects that makes them politically appealing. This is so because it allows only some politicians to credibly promise to build them and thus enter into credible redistribution. The fact that not all politicians can credibly undertake such projects gives those who can a strategic advantage. Socially efficient projects do not have this feature since all politicians can commit to build them and they thus have a symmetric effect on political outcomes. We show that white elephants may be preferred to socially efficient projects if the political benefits are large compared to the surplus generated by efficient projects.
Keywords: development; investment; political economy
JEL Codes: H20; H50; O20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political incentives (D72) | allocation of resources (D61) |
| inefficient redistribution (H23) | political advantage (D72) |
| white elephants (Y91) | credible promises (D86) |
| politicians' struggle to make credible promises (D72) | white elephants (Y91) |
| political benefits from white elephants (Z18) | outweigh social surplus from efficient projects (D61) |
| socially efficient projects (H43) | symmetric political outcomes (D72) |
| political support (D72) | project allocation (O22) |