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Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem

  • Franz Hubert
  • Irina Suleymanova

We develop a dynamic model of strategic investment in a transnational pipeline system. In the absence of international contract enforcement, countries may distort investment in order to increase their bargaining power, resulting in overinvestment in expensive and underinvestment in cheap pipelines. With repeated interaction, however, there is a potential to increase efficiency through dynamic collusion. In the theoretical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to fit the Eurasian pipeline system for natural gas, we find that the potential to improve efficiency through dynamic cooperation is large. In reality, however, only modest improvements over the non-cooperative solution have been achieved.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.93118.de/dp846.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 846.

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Length: 31 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp846
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  1. Switgard Feuerstein & Hans Gersbach, 2003. "Is capital a collusion device?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(1), pages 133-154, 01.
  2. Hubert, Franz & Ikonnikova, Svetlana, 2009. "Investment Options and Bargaining Power the Eurasian Supply Chain for Natural Gas," MPRA Paper 17854, University Library of Munich, Germany.
  3. Waft Grais & Kangbin Zheng, 1996. "Strategic Interdependence in European East-West Gas Trade: A Hierarchical Stackelberg Game Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 61-84.
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