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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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.
- 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.
- Coleman, Andrew & Grimes, Arthur, 2010. "Betterment taxes, capital gains and benefit cost ratios," Economics Letters, Elsevier, vol. 109(1), pages 54-56, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tui Head).
If references are entirely missing, you can add them using this form.