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Flexibility of individual decisions in a real-option setting: an experimental study of transport choice

Author

Listed:
  • Laurent Denant-Boèmont

    () (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

  • Sabrina Hammiche

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

The authors conducted an experimental study about road haulers' choice between railways and roads. If road haulers choose to load their truck on a train, they are not able to switch to using the road again until they reach the end of the line. On the contrary, highway choice is flexible in that the road hauler can change road at any time. Building upon the irreversibility of one of the two choices, the authors build a model in which traffic levels are risky using both infrastructures. In the model, they found that haulers' choices depend on the infrastructure price for railways and on the information level obtained by the hauler during travel. The flexible option is more valuable the more informed the agent is about traffic levels. These theoretical predictions are tested by implementing two experimental treatments. In the first, agents gain no information during their travel; in the second they become perfectly informed about traffic conditions during the travel. It is important that experimental payoffs are calibrated upon transport data about time and operating costs and infrastructure tariffs in France. From the experiment, the authors found that more risk-averse agents assign more value to the flexible option. The second result is that participants overreact to infrastructure price changes. The results indicate that, as the model stands, price levels and information level are important explanatory variables of choice. The higher the price is for railways and the higher the information is, the more participants give value to flexible option (highway), especially if participants are risk averse. The second result is that participants overreact to infrastructure price modification. The authors observed that, except for low levels of price, participants tend to choose the flexible option more frequently, even if it is suboptimal.

Suggested Citation

  • Laurent Denant-Boèmont & Sabrina Hammiche, 2010. "Flexibility of individual decisions in a real-option setting: an experimental study of transport choice," Post-Print halshs-00495727, HAL.
  • Handle: RePEc:hal:journl:halshs-00495727
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00495727
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