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Concession lenght and investment timing flexibility

Author

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  • Chiara D'Alpaos
  • Cesare Dosi
  • Michele Moretto

Abstract

When assigning a concession contract, the regulator faces the issue of setting the concession length. Another key issue is whether or not the concessionare should be allowed to set the timing of new invest- ments. In this paper we investigate the impact of concession length and investment timing ?exibility on the ?concession value?. It is generally argued that long-term contracts are privately valuable as they enable a concessionaire to increase her overall discounted returns. Moreover, the real option theory suggests that investment ?exibility has an in- trinsic value, as it allows concessionaires to avoid costly errors. By combining these two conventional wisdoms, one may argue that long- term contracts, which allow for investment timing ?exibility, should always result in higher concession values. Our result suggests that this is not always the case. Firstly, investment ?exibility does not always increase the concession value. Secondly, long-term contracts do not necessarily increase the concession value.

Suggested Citation

  • Chiara D'Alpaos & Cesare Dosi & Michele Moretto, 2005. "Concession lenght and investment timing flexibility," Working Papers ubs0502, University of Brescia, Department of Economics.
    • Handle: RePEc:ubs:wpaper:ubs0502
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    References listed on IDEAS

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    Cited by:

    1. Dosi, Cesare & Moretto, Michele, 2006. "Concession Bidding Rules and Investment Time Flexibility," Conference Papers 6630, University of Minnesota, Center for International Food and Agricultural Policy.
    2. D'Alpaos, Chiara & Moretto, Michele & Valbonesi, Paola, 2006. "Time is Money: Optimal Investment Delay in Procurement (and Concession) Contracts," Conference Papers 6642, University of Minnesota, Center for International Food and Agricultural Policy.
    3. Pasquale L. Scandizzo & Marco Ventura, 2008. "A model of public and private partnership through concession contracts," ISAE Working Papers 104, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    4. Coco, Giuseppe & De Vincenti, Claudio, 2008. "Optimal price-cap reviews," Utilities Policy, Elsevier, vol. 16(4), pages 238-244, December.

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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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