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

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  • Arthur Grimes

    (Motu Economic and Public Policy Research)

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

  • Arthur Grimes, 2011. "Building Bridges: Treating a New Transport Link as a Real Option," Working Papers 11_12, Motu Economic and Public Policy Research.
    • Handle: RePEc:mtu:wpaper:11_12
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    References listed on IDEAS

    as
    1. David C. Maré & Daniel J. Graham, 2009. "Agglomeration Elasticities in New Zealand," Working Papers 09_06, Motu Economic and Public Policy Research.
    2. Haughwout, Andrew F., 2002. "Public infrastructure investments, productivity and welfare in fixed geographic areas," Journal of Public Economics, Elsevier, vol. 83(3), pages 405-428, March.
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    5. Arthur Grimes & Yun Liang, 2010. "Bridge to Somewhere: Valuing Auckland's Northern Motorway Extensions," Journal of Transport Economics and Policy, University of Bath, vol. 44(3), pages 287-315, September.
    6. Coleman, Andrew & Grimes, Arthur, 2010. "Betterment taxes, capital gains and benefit cost ratios," Economics Letters, Elsevier, vol. 109(1), pages 54-56, October.
    7. Bronwyn HOWELL & Arthur GRIMES, 2010. "Productivity Questions for Public Sector Fast Fibre Network Financiers," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(78), pages 127-146, 2nd quart.
    8. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
    9. Hugo Priemus & Bent Flyvbjerg & Bert van Wee (ed.), 2008. "Decision-Making on Mega-Projects," Books, Edward Elgar Publishing, number 4112.
    10. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
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    Cited by:

    1. Lyons, Glenn & Davidson, Cody, 2016. "Guidance for transport planning and policymaking in the face of an uncertain future," Transportation Research Part A: Policy and Practice, Elsevier, vol. 88(C), pages 104-116.

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    More about this item

    Keywords

    Transport investment; real options; cost-benefit analysis;
    All these keywords.

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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