Monetizing Positive Externalities to Mitigate the Infrastructure Underinvestment Problem

Hao Bai (), Alain Bensoussan (), Gordon Briest () and Benoît Chevalier-Roignant ()
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Hao Bai: Department of Economics, School of Social Sciences, University of Manchester, Manchester M13 9PL, United Kingdom
Alain Bensoussan: International Center for Decision and Risk Analysis, Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080
Gordon Briest: Faculty of Economics and Management, Otto von Guericke University Magdeburg, 39106 Magdeburg, Germany; and ifak—Institute for Automation and Communication, 39016 Magdeburg, Germany
Benoît Chevalier-Roignant: Emlyon Business School, 69007 Lyon, France

Operations Research, 2025, vol. 73, issue 2, 632-647

Abstract: Many cities face challenges in financing their infrastructure. If a decision maker cannot capture all the benefits of its investment, there is a risk of underinvestment. Hong Kong’s transit operator designed a scheme in which it not only receives fare revenues, but also participates in a property management business, exploiting the positive externalities of public transport on nearby property prices. We develop a stochastic Stackelberg game of timing to explore the rationale of this scheme. The underlying problem is nontrivial because the operator faces a two-dimensional optimal stopping problem that cannot be reduced by a change of numéraire. We determine the operator’s optimal investment policy via the intermediation of a “penalized problem” and derive comparative statics. We determine the circumstances under which monetizing positive externalities effectively favors infrastructure investment. Other management problems have similar structures.

Keywords: Operations; and; Supply; Chain; dynamic programming; real options; two-dimensional optimal stopping; penalization (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:73:y:2025:i:2:p:632-647

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