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Bouncing Back: Assessing the Resilience of Infrastructure Projects and the Use of Average Outage Factors
Stockholm University, Faculty of Social Sciences, Department of Computer and Systems Sciences. University College London, U.K.; HEC Montréal, Canada.
2017 (English)In: Proceedings of the 21st Annual International Real Options Conference, Boston, MA: Real Options Group , 2017Conference paper, Published paper (Refereed)
Abstract [en]

Motivated by the need to bolster the resilience of infrastructure, such as bridges, nuclear power plants, and ports, in face of extreme weather events, we consider two types of projects: “riskier” and “safer.” Each type of project, once constructed, earns identical instantaneous cash flows and is subject to the same risk of outage, which causes its cash flows to diminish. The only difference between the two projects is that the repair rate of the “safer” project is greater than that of the “riskier” one. Naturally, the “safer” project is more valuable to an investor due to its greater resilience. However, how much extra would an investor be willing to pay for this resilience? Under which circumstances would it be reasonable to replace the outage and repair rates with average outage factors? Using a real options approach, we show that even though the proportions of up- and down-times remain fixed, changes in the transition rates affect the willingness to pay for resilience. This implies that use of average outage factors will incorrectly inflate the resilience premium. In fact, only in the limit when transitions occur at infinitely high rates does the use of average outage factors accurately reflect the investor’s willingness to pay for resilience. Somewhat paradoxically, very frequent transitions reflect a situation in which average outage factors may be used.

Place, publisher, year, edition, pages
Boston, MA: Real Options Group , 2017.
Keyword [en]
OR in environment and climate change, real options, investment analysis
National Category
Other Computer and Information Science
Research subject
Computer and Systems Sciences
Identifiers
URN: urn:nbn:se:su:diva-150177OAI: oai:DiVA.org:su-150177DiVA, id: diva2:1165763
Conference
21st Annual International Real Options Conference, Boston, MA, 29 June 2017 - 01 July 2017
Available from: 2017-12-13 Created: 2017-12-13 Last updated: 2018-02-19Bibliographically approved

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CiteExportLink to record
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Citation style
  • apa
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