Transit technology investment and selection under urban population volatility: A real option perspective

• Propose a real option model to address transit technology investment and selection issues under urban population volatility.
• Consider effects of transit technology investment on urban spatial structure.
• Perform comparative static analyses of urban system and transit technology investment.
• Investigate trigger population threshold for shifting from a transit technology to another.
• Compare transit investment decisions with and without land use equilibrium consideration.

This paper addresses transit technology investment issues under urban population volatility using a real option approach. Two important problems are investigated: which transit technology should be selected and when should it be introduced. A real option model is proposed to incorporate explicitly the effects of transit technology investment on urban spatial structure in terms of households’ residential location choices and housing market. The trigger population thresholds for investing in a transit technology project and for shifting from a transit technology to another are explored analytically. Comparative static analyses of the urban system and transit technology investment are also carried out. It was found that (i) transit technology investment can induce urban sprawl; (ii) ignoring the effects of transit technology investment on urban spatial equilibrium can lead to a late investment; and (iii) there is a significant difference in the trigger population thresholds for transit technology shift estimated by the net present value approach and the real option approach.