Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem

Franz Hubert and Irina Suleymanova

No 846, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We develop a dynamic model of strategic investment in a transnational pipeline system. In the absence of international contract enforcement, countries may distort investment in order to increase their bargaining power, resulting in overinvestment in expensive and underinvestment in cheap pipelines. With repeated interaction, however, there is a potential to increase efficiency through dynamic collusion. In the theoretical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to fit the Eurasian pipeline system for natural gas, we find that the potential to improve efficiency through dynamic cooperation is large. In reality, however, only modest improvements over the non-cooperative solution have been achieved.

Keywords: Multilateral bargaining; Hold-up; irreversible investment; collusion (search for similar items in EconPapers)
JEL-codes: C71 L14 L95 (search for similar items in EconPapers)
Pages: 31 p.
Date: 2008
New Economics Papers: this item is included in nep-ene and nep-gth
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-up Problem (2007)
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