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A Real Options Framework For Dealing With Uncertainty In Sustainable Transport Investments

Author

Listed:
  • L. SALAHALDIN

    (Institut Telecom, Telecom Ecole de Management, 9 rue Charles Fourier, 91000 Evry, France)

  • T. GRANGER

    (Université Paris Dauphine, Place du Maréchal de Lattre de Tassigny, 75116 Paris, France)

Abstract

In this paper, we develop a real options framework that sets rules for investment decision in sustainable transport projects under both demand and costs uncertainties. First, we present the model we use to calculate the cost of transport externalities. Using stochastic analysis, we show how to maximize inter-generational utility by choosing the optimal time to invest. The method is implemented using a dynamic programming approach that gives, at each moment, the thresholds for demand and cost for which it is optimal to invest. We calculate the expected waiting time until investing and perform a sensitivity analysis to study the impact of the different parameters on the decision.

Suggested Citation

  • L. Salahaldin & T. Granger, 2013. "A Real Options Framework For Dealing With Uncertainty In Sustainable Transport Investments," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 30(04), pages 1-27.
    • Handle: RePEc:wsi:apjorx:v:30:y:2013:i:04:n:s0217595913500024
    DOI: 10.1142/S0217595913500024
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    More about this item

    Keywords

    Real options; sustainable transport; population-growth; uncertainty; inter-generational utility; C61; D81; L91; Q56;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L91 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Transportation: General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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