Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem
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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- 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.
- Franz Hubert & Svetlana Ikonnikova, 2011.
"Investment Options And Bargaining Power: The Eurasian Supply Chain For Natural Gas,"
Journal of Industrial Economics,
Wiley Blackwell, vol. 59(1), pages 85-116, 03.
- 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.
- 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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