Building Bridges: Treating a New Transport Link as a Real Option
AbstractA 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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Bibliographic InfoPaper provided by Motu Economic and Public Policy Research in its series Working Papers with number 11_12.
Length: 23 pages
Date of creation: Dec 2011
Date of revision:
Transport investment; real options; cost-benefit analysis;
Other versions of this item:
- Arthur Grimes, 2011. "Building Bridges: Treating a New Transport Link as a Real Option," ERSA conference papers ersa11p332, European Regional Science Association.
- O18 - Economic Development, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-BEC-2011-12-13 (Business Economics)
- NEP-URE-2011-12-13 (Urban & Real Estate Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Coleman, Andrew & Grimes, Arthur, 2010. "Betterment taxes, capital gains and benefit cost ratios," Economics Letters, Elsevier, vol. 109(1), pages 54-56, October.
- Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
- 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.
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