Building bridges: Treating a new transport link as a real option
Grimes, A. (2011). Building bridges: Treating a new transport link as a real option. Motu Working papers 11-12. Motu Economic and Public Policy Trust, Wellington, New Zealand.
Permanent Research Commons link: http://hdl.handle.net/10289/7122
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.
Motu Economic and Public Policy Research Trust
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