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Energy and the Environment, 1998

ISBN Print: 1-56700-127-0



We investigate effects of political uncertainty on the economic viability and time profile of investment in joint international development projects. The case in mind is that of trans-boundary water/energy projects shared by countries in the Middle East. The political uncertainty considered is manifested in the form of sudden, discrete events that, upon occurrence, may irreversibly damage the project and cause its termination and abandonment. Occurrence risk is treated as an exogenous hazard, increasing the effective discount rate. One class of events may occur before or after the project completion date. Other projects are exposed to risk only until completion, following which the benefits are guaranteed. This distinction bears important consequences regarding the time profile of the optimal investment project (particularly its duration) and whether or not it should be undertaken.
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