Licences, "Use or Lose" Provisions and the Time of Investment

Michele Moretto and Cesare Dosi
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Cesare Dosi: University of Padova, and CRIEP - Centro Universitario

No 2010.24, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Exclusive rights granted by public authorities, like concessions to develop natural resources or electromagnetic spectrum licences, often have option-like features. However, to avoid licences being unused for lengthy periods, regulators sometimes set time limits, after which the exclusive right of exercise may be revoked. In this paper we analyse the impact of use or lose ("UOL") provisions upon the private time of investment. We find that the risk of losing the licence because of inaction generally increases the probability of early investment. However, when capital costs are expected to decline over time, UOL provisions may involve a "perverse effect", by increasing, rather than reducing, the expected time of investment, with respect to a situation where the date of investment is left entirely to the licencee’s discretion.

Keywords: Licences; Real Options; Use or Lose Provisions; Time of Investment (search for similar items in EconPapers)
JEL-codes: D44 D92 L51 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-ind
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Working Paper: Licences, "Use or Lose" Provisions and the Time of Investment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2010.24

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