Research Of Investing In Urban Transportation Infrastructure Under Uncertainty

Most investment decisions possess at different degree: irreversibility, uncertainty of returns, optional timing. Reciprocity of the three aspacts decide the optimal decision of the investors. Traditional investment theory has always ignored these three basic characters of the investment decisions and reciprocity among them. Investing in urban transportation infrastructure is just a typical irreversible investing opportunity. The core thesis of this article is how to evaluate the benefits of the investment items under uncertainty of the urban population level and congestion, including the optimal timing of the investment.Real option is a technical that it applies the option theory of the financial market to the investment decision of the corporations. It is a burgeoning method of item appraising that is simple , agility but very effective frame. The applying range of real option theory is so widely that it can be used in the evaluating of venture, the R&D of the corporations, the pricing of the products in particular industries etc. This article analyze the impact of uncertainty and irreversibility on the timing to invest in urban transportation infrastructure using real options. Firstly, I consider a monocentric city whose population varies stochastically, which impacts land rents, land prices, and transportation costs through congestion; a transportation agency can decide when to buy land and build transportation infrastructure to reduce congestion. Its numerical results, using realistic parameters values, show that some of the basic insights of simple investment models do not hold because of barriers on the city population. The results also underline the importance of accounting for uncertainty when investing to relieve urban externalities.As a result, real options have become quite popular to analyze private investmentdecisions. This approach has been fruitfully applied to the understanding of land conversion but it has not received much attention for public investments. Although we analyze urban transportation infrastructure, our framework is applicable to most large infrastructure investments undertaken by the public sector.