Transit technology investment and selection under urban population volatility: A real option perspective

This paper addresses transit technology investment issues under urban population volatility using a real option approach. Two important problems are investigated: which transit technology should be selected and when should it be introduced. A real option model is proposed to incorporate explicitly the effects of transit technology investment on urban spatial structure in terms of households’ residential location choices and housing market. The trigger population thresholds for investing in a transit technology project and for shifting from a transit technology to another are explored analytically. Comparative static analyses of the urban system and transit technology investment are also carried out. It was found that (i) transit technology investment can induce urban sprawl; (ii) ignoring the effects of transit technology investment on urban spatial equilibrium can lead to a late investment; and (iii) there is a significant difference in the trigger population thresholds for transit technology shift estimated by the net present value approach and the real option approach.

[1]  L. Trigeorgis.  Real Options: Managerial Flexibility and Strategy in Resource Allocation , 1996 .

[2]  Antonio Sánchez Soliño,et al.  A Real Options Approach for the Valuation of Highway Concessions , 2010, Transp. Sci..

[3]  Alejandro Tirachini,et al.  Comparing operator and users costs of light rail, heavy rail and bus rapid transit over a radial public transport network , 2010 .

[4]  Eric Christian Bruun,et al.  Bus Rapid Transit and Light Rail: Comparing Operating Costs with a Parametric Cost Model , 2005 .

[5]  William H. K. Lam,et al.  Optimal density of radial major roads in a two-dimensional monocentric city with endogenous residential distribution and housing prices , 2013 .

[6]  Alejandro Tirachini,et al.  Hybrid predictive control strategy for a public transport system with uncertain demand , 2012 .

[7]  R. McDonald,et al.  The Value of Waiting to Invest , 1982 .

[8]  William H. K. Lam,et al.  Modeling transit technology selection in a linear transportation corridor , 2015 .

[9]  Chung-Li Tseng,et al.  Highway Development Decision-Making under Uncertainty: A Real Options Approach , 2004 .

[10]  R. Kirwan.  Location and Land Use: Toward a General Theory of Land Rent , 1966 .

[11]  S. Polzin,et al.  Timing rules for major transportation investments , 2000 .

[12]  Keechoo Choi,et al.  Modeling the effects of integrated rail and property development on the design of rail line services in a linear monocentric city , 2012 .

[13]  Alejandro Tirachini,et al.  Restating modal investment priority with an improved model for public transport analysis , 2010 .

[14]  S. C. Wirasinghe,et al.  A line haul transit technology selection model , 2001 .

[15]  A. Anas.  Residential location markets and urban transportation : economic theory, econometrics, and policy analysis with discrete choice models , 1982 .

[16]  Amelia C. Regan,et al.  Network-based real option models , 2011 .

[17]  Chung-Li Tseng,et al.  Valuing Flexibility in Infrastructure Expansion , 2003 .

[18]  John M. Stutsman,et al.  Bus Rapid Transit or Light Rail Transit—How to Decide?: Los Angeles Case Study , 2002 .

[19]  Masahisa Fujita.  Urban Economic Theory , 1989 .

[20]  Roger J Allport.  THE COSTING OF BUS, LIGHT RAIL TRANSIT AND METRO PUBLIC TRANSPORT SYSTEMS , 1981 .

[21]  Joseph Y. J. Chow,et al.  Real Option Pricing of Network Design Investments , 2011, Transp. Sci..

[22]  Tao Yao,et al.  Securitizing congestion: The congestion call option , 2008 .

[23]  Agachai Sumalee,et al.  Design of a Rail Transit Line for Profit Maximization in a Linear Transportation Corridor , 2011 .

[24]  Martin J. Beckmann,et al.  Spatial equilibrium in the housing market , 1974 .

[25]  Stefan Szymanski.  THE OPTIMAL TIMING OF INFRASTRUCTURE INVESTMENT. , 1991 .

[26]  Solowrm.  CONGESTION, DENSITY, AND THE USE OF LAND IN TRANSPORTATION , 1972 .

[27]  Jean-Daniel Saphores,et al.  Uncertainty and the timing of an urban congestion relief investment.: The no-land case , 2006 .

[28]  R. Arnott,et al.  A Companion to Urban Economics , 2006 .

[29]  Yonglin Gao,et al.  Incorporating Knightian uncertainty into real options analysis: Using multiple-priors in the case of rail transit investment , 2013 .

[30]  William Miller,et al.  Flexibility in Engineering Design , 2012 .

[31]  E. Prescott,et al.  Investment Under Uncertainty , 1971 .

[32]  John M. Quigley,et al.  The production of housing services and the derived demand for residential energy , 1984 .

[33]  Amelia C. Regan,et al.  A network option portfolio management framework for adaptive transportation planning , 2011 .

[34]  Robert M. Solow,et al.  Congestion Cost and the Use of Land for Streets , 1973 .

[35]  Samer Madanat,et al.  Access and the choice of transit technology , 2014 .

[36]  John F. McDonald,et al.  The effect of anticipated transportation improvement on residential land values , 1995 .

[37]  David R. Bowes,et al.  Identifying the Impacts of Rail Transit Stations on Residential Property Values , 2001 .

[38]  Martin J. Beckmann,et al.  On the distribution of urban rent and residential density , 1969 .

[39]  Timothy J. Riddiough,et al.  Insights on the Effect of Land Use Choice: The Perpetual Option on the Best of Two Underlying Assets , 1996 .