Licences, "Use or Lose" Provisions and the Time of Investment
AbstractExclusive rights granted by public authorities, like concessions to develop natural resources or electromagnetic spectrum licences, often have option-like features. However, to avoid licences being unused for lengthy periods, regulators sometimes set time limits, after which the exclusive right of exercise may be revoked. In this paper we analyse the impact of use or lose ("UOL") provisions upon the private time of investment. We find that the risk of losing the licence because of inaction generally increases the probability of early investment. However, when capital costs are expected to decline over time, UOL provisions may involve a "perverse effect", by increasing, rather than reducing, the expected time of investment, with respect to a situation where the date of investment is left entirely to the licencee’s discretion.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.24.
Date of creation: Feb 2010
Date of revision:
Licences; Real Options; Use or Lose Provisions; Time of Investment;
Find related papers by JEL classification:
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- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
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