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Building Bridges: Treating a New Transport Link as a Real Option

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  • Arthur Grimes

    ()
    (Motu Economic and Public Policy Research)

Abstract

A transportation investment that materially improves links between centres opens up previously unavailable options for new activities. Traditional cost-benefit analysis does not adequately take account of the value of this option; real options theory must be added to the analysis to evaluate the full benefits. This paper uses a specific example, Auckland’s Harbour Bridge, to motivate the importance of real options analysis. Using illustrative, multi-period models of the real options problem, it highlights how inclusion of real options factors may either increase or decrease the attractiveness of a proposed investment. The models identify situations in which it is optimal to invest even where a standard benefit-cost ratio is less than one.

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File URL: http://motu-www.motu.org.nz/wpapers/11_12.pdf
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Bibliographic Info

Paper provided by Motu Economic and Public Policy Research in its series Working Papers with number 11_12.

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Length: 23 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:mtu:wpaper:11_12

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Keywords: Transport investment; real options; cost-benefit analysis;

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  1. Arthur Grimes & Yun Liang, 2010. "Bridge to Somewhere: Valuing Auckland's Northern Motorway Extensions," Journal of Transport Economics and Policy, London School of Economics and University of Bath, vol. 44(3), pages 287-315, September.
  2. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
  3. Bronwyn HOWELL & Arthur GRIMES, 2010. "Productivity Questions for Public Sector Fast Fibre Network Financiers," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(78), pages 127-146, 2nd quart.
  4. Coleman, Andrew & Grimes, Arthur, 2010. "Betterment taxes, capital gains and benefit cost ratios," Economics Letters, Elsevier, vol. 109(1), pages 54-56, October.
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