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Licences, "Use or Lose" Provisions and the Time of Investment

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  • Dosi, Cesare
  • Moretto, Michele

Abstract

Exclusive 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.

Suggested Citation

  • Dosi, Cesare & Moretto, Michele, 2010. "Licences, "Use or Lose" Provisions and the Time of Investment," Institutions and Markets Papers 59756, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemim:59756
    DOI: 10.22004/ag.econ.59756
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    References listed on IDEAS

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    1. Kristian R. Miltersen & Eduardo S. Schwartz, 2007. "Real Options With Uncertain Maturity and Competition," NBER Working Papers 12990, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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