Hold-up and Strategic Investment in International Transport Networks: Gas Pipelines in North Western Europe

Franz Hubert & Svetlana Ikonnikova

2011

Abstract

We propose a variant of the incomplete contract framework to analyze strategic investment in international transport networks, where investment is observable and some, but not all, players cannot make long-term commitments regarding access to their transport infrastructure. Those players who can commit may exchange access rights and ownership titles and coordinate their investment. All others may only join speci c pipeline consortia based on cost sharing. Quasi rents at the final production stage are shared through bargaining. The North-Western corridor for Russian natural gas o ers a nice example for such heterogeneity among players and a rare opportunity to calibrate an incomplete contract model to obtain quantitative results. In line with recent empirical developments in this network, we predict large overinvestment in expensive o shore pipelines (Nord Stream) which crowds out any investment in more cost ecient onshore alternatives.

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