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Infrastructure Investment as a Real Options Game: The Case of European Airport Expansion

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  • Hans T.J. Smit

Abstract

This article analyzes the optional and strategic features of infrastructure investment. Infrastructure investments generate other investment opportunities, and in so doing change the strategic position of the enterprise. A combination of real options theory and game theory can capture the elusive value of a strategic modification of a firm’s position in its industry. My model focuses in particular on an analysis of European airport expansion. Airports with infrastructures that are less constrained by growth regulations capture more value, because they are in a better position to exercise growth options available in the airport industry.

Suggested Citation

  • Hans T.J. Smit, 2003. "Infrastructure Investment as a Real Options Game: The Case of European Airport Expansion," Financial Management, Financial Management Association, vol. 32(4), Winter.
    • Handle: RePEc:fma:fmanag:smit03
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    Cited by:

    1. Pongsak Suttinon & Seigo Nasu, 2010. "Real Options for Increasing Value in Industrial Water Infrastructure," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 24(12), pages 2881-2892, September.
    2. Lozano, Jorge-Mario & Zuluaga, Santiago & Sánchez-Silva, Mauricio, 2020. "Developing flexible management strategies in infrastructure: The sequential expansion problem for infrastructure analysis (SEPIA)," Reliability Engineering and System Safety, Elsevier, vol. 200(C).
    3. Mehtab Alam & Fu-Ren Lin, 2022. "Internalizing Sustainability into Research Practices of Higher Education Institutions: Case of a Research University in Taiwan," Sustainability, MDPI, vol. 14(15), pages 1-30, August.
    4. Hongyan Chen & Ruwen Qin, 2012. "Real options as an incentive scheme for managing revenues in transportation infrastructure projects," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 6(1/2), pages 77-101.
    5. Ko, Chuan-Chuan & Lin, Tyrone T. & Yang, Chyan, 2011. "The venture capital entry model on game options with jump-diffusion process," International Journal of Production Economics, Elsevier, vol. 134(1), pages 87-94, November.
    6. Randrianarisoa, Laingo M. & Zhang, Anming, 2019. "Adaptation to climate change effects and competition between ports: Invest now or later?," Transportation Research Part B: Methodological, Elsevier, vol. 123(C), pages 279-322.
    7. Ye Li & Clemens Kool & Peter-Jan Engelen, 2020. "Analyzing the Business Case for Hydrogen-Fuel Infrastructure Investments with Endogenous Demand in The Netherlands: A Real Options Approach," Sustainability, MDPI, vol. 12(13), pages 1-22, July.
    8. repec:pra:mprapa:40679 is not listed on IDEAS
    9. Smit, Han T.J. & Trigeorgis, Lenos, 2006. "Real options and games: Competition, alliances and other applications of valuation and strategy," Review of Financial Economics, Elsevier, vol. 15(2), pages 95-112.
    10. Xiao, Yi-bin & Fu, Xiaowen & Oum, Tae H. & Yan, Jia, 2017. "Modeling airport capacity choice with real options," Transportation Research Part B: Methodological, Elsevier, vol. 100(C), pages 93-114.
    11. Engelen, Peter-Jan & Kool, Clemens & Li, Ye, 2016. "A barrier options approach to modeling project failure: The case of hydrogen fuel infrastructure," Resource and Energy Economics, Elsevier, vol. 43(C), pages 33-56.
    12. Bos, Frits & Zwaneveld, Peter, 2014. "Reële opties en de waarde van flexibiliteit bij natte infrastructuur [Real options analysis and the value of flexibility for (wet) infrastructure]," MPRA Paper 61506, University Library of Munich, Germany.
    13. Oliveira, A. & Couto, G. & Pimentel, P., 2021. "Uncertainty and flexibility in infrastructure investments: Application of real options analysis to the Ponta Delgada airport expansion," Research in Transportation Economics, Elsevier, vol. 90(C).
    14. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    15. Balliauw, Matteo & Onghena, Evy, 2020. "Expanding airport capacity of cities under uncertainty: Strategies to mitigate congestion," Journal of Air Transport Management, Elsevier, vol. 84(C).
    16. Han T.J. Smit & Lenos Trigeorgis, 2006. "Real options and games: Competition, alliances and other applications of valuation and strategy," Review of Financial Economics, John Wiley & Sons, vol. 15(2), pages 95-112.
    17. Pimentel, Pedro & Couto, Gualter & Tavares, André & Oliveira, André, 2021. "The impacts of real options analysis on EU co-financing policy: the case of Ponta Delgada Port in the Azores," Research in Transportation Economics, Elsevier, vol. 90(C).
    18. Arkin,V. & Slastnikov, A., 2017. "Optimization of Concession Payments in Stochastic Model of Public-Private Partnership," Journal of the New Economic Association, New Economic Association, vol. 36(4), pages 31-47.
    19. Y. Li & C.J.M. Kool & P.J. Engelen, 2016. "Hydrogen-Fuel Infrastructure Investment with Endogenous Demand: A Real Options Approach," Working Papers 16-12, Utrecht School of Economics.
    20. Gorupec Natalia & Tiberius Victor & Brehmer Nataliia & Kraus Sascha, 2022. "Tackling uncertain future scenarios with real options: A review and research framework," The Irish Journal of Management, Sciendo, vol. 41(1), pages 69-88, July.
    21. Ryan Lee & Moayad Shammut & Julian Allen & Xing Gao & Tianren Yang & Mengqiu Cao, 2021. "Investigating the Implications of the London Heathrow Airport Expansion for the Landside Freight Industry," Logistics, MDPI, vol. 5(3), pages 1-18, July.
    22. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    23. Jakob Müllner, 2017. "International project finance: review and implications for international finance and international business," Management Review Quarterly, Springer, vol. 67(2), pages 97-133, April.

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