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

Author

Listed:
  • Michele Moretto

    (University of Padova)

  • Cesare Dosi

    (University of Padova, and CRIEP - Centro Universitario)

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

  • Michele Moretto & Cesare Dosi, 2010. "Licences, "Use or Lose" Provisions and the Time of Investment," Working Papers 2010.24, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2010.24
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    References listed on IDEAS

    as
    1. Lambrecht, Bart & Perraudin, William, 2003. "Real options and preemption under incomplete information," Journal of Economic Dynamics and Control, Elsevier, vol. 27(4), pages 619-643, February.
    2. Dosi, Cesare & Moretto, Michele, 2009. "Auctioning Monopoly Franchises: Award Criteria and Service Launch Requirements," Institutions and Markets Papers 50409, Fondazione Eni Enrico Mattei (FEEM).
    3. Carr, Peter, 1998. "Randomization and the American Put," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 597-626.
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    5. Kristian R. Miltersen & Eduardo S. Schwartz, 2007. "Real Options With Uncertain Maturity and Competition," NBER Working Papers 12990, National Bureau of Economic Research, Inc.
    6. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    7. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
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    More about this item

    Keywords

    Licences; Real Options; Use or Lose Provisions; Time of Investment;
    All these keywords.

    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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