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

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  • Grimes, Arthur

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.

Suggested Citation

  • Grimes, Arthur, 2011. "Building Bridges: Treating a New Transport Link as a Real Option," Motu Working Papers 291429, Motu Economic and Public Policy Research.
    • Handle: RePEc:ags:motuwp:291429
    DOI: 10.22004/ag.econ.291429
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