How time-inconsistent preferences affect investment timing for rail transit

Qian-Wen Guo, Shumin Chen, Paul Schonfeld and Zhongfei Li

Transportation Research Part B: Methodological, 2018, vol. 118, issue C, 172-192

Abstract: We address optimal rail transit investment issues considering time-inconsistent preferences and population uncertainty. Instead of adopting the typical real options approach which assumes that authorities possess a constant discount rate over time, we propose an extension of real options analysis by modeling authorities’ intertemporal choices with a quasi-hyperbolic discount function. Depending on the assumption about the strategies guiding the behaviors of future authorities, we consider three types of authorities, namely time-consistent authority, naïve authority and sophisticated authority, of which the latter two are time-inconsistent. First, an optimal transit investment timing model is proposed. Then, solutions for the above three types of authorities are derived and compared. We demonstrate the performance of the proposed model by conducting numerical tests and applying it to Dalian, China. Main findings include: (1) an authority with time-inconsistent preferences makes decisions earlier than a standard, time-consistent authority; (2) the sophisticated authority invests earlier than the naïve authority. Other implications of considering time-inconsistent preferences are also identified.

Keywords: Rail transit investment; Time-inconsistent preferences; Real options; Population volatility (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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DOI: 10.1016/j.trb.2018.10.009

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