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To kill a real option – Incomplete contracts, real options and PPP

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  • Krüger, Niclas A.

Abstract

This paper is concerned with the implications of public–private partnership agreements for the execution of expansion options in road infrastructure. More specifically, it analyzes the expansion of an existing two-lane road in Sweden, and examines the real options created by an intermediate type of road with three lanes. Interpreting the results from real option analysis in the light of incomplete contract theory, this paper finds that external congestion costs might necessitate public ownership to ensure a social optimal outcome in public–private partnerships.

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Bibliographic Info

Article provided by Elsevier in its journal Transportation Research Part A: Policy and Practice.

Volume (Year): 46 (2012)
Issue (Month): 8 ()
Pages: 1359-1371

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Handle: RePEc:eee:transa:v:46:y:2012:i:8:p:1359-1371

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Related research

Keywords: Real option analysis; Incomplete contract theory; Investment under uncertainty; PPP; Transportation;

References

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  1. Oliver Hart, 2003. "Incomplete Contracts and Public Ownership: Remarks, and an Application to Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C69-C76, March.
  2. Charles Cheah & Jicai Liu, 2006. "Valuing governmental support in infrastructure projects as real options using Monte Carlo simulation," Construction Management and Economics, Taylor & Francis Journals, vol. 24(5), pages 545-554.
  3. Hart, Oliver & Shleifer, Andrei & Vishny, Robert W, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1127-61, November.
  4. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
  5. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  6. Alonso-Conde, Ana Belen & Brown, Christine & Rojo-Suarez, Javier, 2007. "Public private partnerships: Incentives, risk transfer and real options," Review of Financial Economics, Elsevier, vol. 16(4), pages 335-349.
  7. Gil, Nuno, 2007. "On the value of project safeguards: Embedding real options in complex products and systems," Research Policy, Elsevier, vol. 36(7), pages 980-999, September.
  8. Chow, Joseph Y.J. & Regan, Amelia C. & Ranaiefar, Fatemeh & Arkhipov, Dmitri I., 2011. "A network option portfolio management framework for adaptive transportation planning," Transportation Research Part A: Policy and Practice, Elsevier, vol. 45(8), pages 765-778, October.
  9. S. Ping Ho & Liang Liu, 2002. "An option pricing-based model for evaluating the financial viability of privatized infrastructure projects," Construction Management and Economics, Taylor & Francis Journals, vol. 20(2), pages 143-156.
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