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The Value of Flexibility in the Italian Water Service Sector: A Real Option Analysis

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  • Michele Moretto

    (University of Brescia)

  • Chiara D’Alpaos

    (University of Brescia)

Abstract

We analyze the optimal investment strategy of a monopolist which has subscribed a concession contract to provide a public utility, i.e. water service. We present a strategic model in which a monopolist chooses both the timing of the investment and the capacity. We focus not only on the value of the immediate investment, but rather on the value of the investment opportunity. We then extend the model to two interdependent projects, where investing in the first project provides the opportunity to acquire the benefits of the new investment by making a new outlay. We show that flexibility to defer an investment may generate, ceteris paribus, additional profits which may induce positive effects in terms of policy and consumers surplus.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.140.

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Date of creation: Nov 2004
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Handle: RePEc:fem:femwpa:2004.140

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Keywords: Irreversible investment; Flexibility to defer; Capacity expansion choice;

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Cited by:
  1. Chiara D'Alpaos & Cesare Dosi & Michele Moretto, 2005. "Concession lenght and investment timing flexibility," Working Papers ubs0502, University of Brescia, Department of Economics.

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