Licences, Use or Lose Provisions and the Time of Investment Report as inadecuate

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Exclusive rights granted by public authorities, like concessions to develop natural resources or electromagnetic spectrum licences, often have option-like features. However, to avoid licences being unused for lengthy periods, regulators sometimes set time limits, after which the exclusive right of exercise may be revoked. In this paper we analyse the impact of use or lose (UOL) provisions upon the private time of investment. We find that the risk of losing the licence because of inaction generally increases the probability of early investment. However, when capital costs are expected to decline over time, UOL provisions may involve a perverse effect, by increasing, rather than reducing, the expected time of investment, with respect to a situation where the date of investment is left entirely to the licencee’s discretion.

Keywords: Licences ; Real Options ; Use or Lose Provisions ; Time of Investment

Subject(s): Financial Economics

Issue Date: 2010-03

Publication Type: Working or Discussion Paper

PURL Identifier:

Total Pages: 24

JEL Codes: L51; D44; D92

Series Statement: IM


Record appears in: Fondazione Eni Enrico Mattei (FEEM) > Institutions and Markets Papers

Author: Dosi, Cesare ; Moretto, Michele


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