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Title:Strategic investment in international gas-transport systems: a dynamic analysis of the hold-up problem PDF Logo
Authors:Hubert, Franz
Suleymanova, Irina
Issue Date:2008
Series/Report no.:Discussion papers // German Institute for Economic Research 846
Abstract:We develop a dynamic model of strategic investment in a transnational pipeline system. In the absence of international contract enforcement, countries may distort investment in order to increase their bargaining power, resulting in overinvestment in expensive and underinvestment in cheap pipelines. With repeated interaction, however, there is a potential to increase efficiency through dynamic collusion. In the theoretical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to fit the Eurasian pipeline system for natural gas, we find that the potential to improve efficiency through dynamic cooperation is large. In reality, however, only modest improvements over the non-cooperative solution have been achieved.
Subjects:Multilateral bargaining
hold-up
irreversible investment
collusion
JEL:L95
L14
C71
Document Type:Working Paper
Appears in Collections:Publikationen von Forscherinnen und Forschern des DIW
DIW-Diskussionspapiere

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