Monetizing Positive Externalities to Mitigate the Infrastructure Underinvestment Problem

Hao Bai, Alain Bensoussan, Gordon Briest and Benoit Chevalier-Roignant ()
Additional contact information
Hao Bai: University of Manchester [Manchester]
Alain Bensoussan: ICDRiA - International Center for Decision and Risk Analysis - UT Dallas - University of Texas at Dallas [Richardson]
Gordon Briest: OVGU - Otto-von-Guericke-Universität Magdeburg = Otto-von-Guericke University [Magdeburg]
Benoit Chevalier-Roignant: EM - EMLyon Business School

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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: 2024-11-20
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Citations: View citations in EconPapers (1)

Published in Operations Research, In press, 16 p. ⟨10.1287/opre.2023.0075⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04817939

DOI: 10.1287/opre.2023.0075

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