The Value of Flexibility in the Italian Water Service Sector: A Real Option Analysis

Arbeitspapier

We analyze the optimal investment strategy of a monopolist which has subscribed a concession contract to provide a public utility, i.e. water service. We present a strategic model in which a monopolist chooses both the timing of the investment and the capacity. We focus not only on the value of the immediate investment, but rather on the value of the investment opportunity. We then extend the model to two interdependent projects, where investing in the first project provides the opportunity to acquire the benefits of the new investment by making a new outlay. We show that flexibility to defer an investment may generate, ceteris paribus, additional profits which may induce positive effects in terms of policy and consumers surplus.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Nota di Lavoro ; No. 140.2004

Classification and Topics

• Classification: Wirtschaft ; Criteria for Decision-Making under Risk and Uncertainty ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Gas Utilities; Pipelines; Water Utilities
• Subject: Irreversible investment ; Flexibility to defer ; Capacity expansion choice ; Wasserversorgung ; Wasserwirtschaft ; Investitionsentscheidung ; Monopol ; Kapazitätsplanung ; Italien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Moretto, Michele ; D'Alpaos, Chiara
• Event: Veröffentlichung
• (who): Fondazione Eni Enrico Mattei (FEEM)
• (where): Milano
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/118016
• Last update: 10.03.2025, 11:44 AM CET