Abstract
Under and overdesign is a major consideration in public infrastructure expansion. Traditional engineering economies of scale leading to overdesign errors must be counterbalanced by greater attention to high cost financing. Uncertainty in demand forecasting and in financial markets make decision tools which incorporate measures of information imperfection increasingly important. Further issues of overall social welfare make the question of short term and intergenerational equity major concerns. A rational expectations stochastic-analog of the conventional, present value, infrastructure expansion model has optimal overdesign properties. The problem is restated as a two-person, planner vs. future, social welfare game in a simple capital loss model. Sensitivity analysis shows the game-theoretic model which favors expansion underdesign is relatively less sensitive to greater demand forecast uncertainty than the rational expectations model.
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Haynes, K.E., Krmenec, A. A sensitivity assessment of uncertainty in infrastructure expansion. Ann Reg Sci 23, 299–309 (1989). https://doi.org/10.1007/BF01579781
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DOI: https://doi.org/10.1007/BF01579781