Strategic Investment in International Gas-Transport Systems: A Dynamic Analysis of the Hold-Up Problem

We develop a dynamic model of strategic investment in a transna- tional pipeline system. In the absence of international contract enforce- ment, countries may distort investment in order to increase their bar- gaining power, resulting in overinvestment in expensive and underinvest- ment in cheap pipelines. With repeated interaction, however, there is a potential to increase e-ciency through dynamic collusion. In the theo- retical part we establish a fundamental asymmetry: it is easier to avoid overinvestment than underinvestment. Calibrating the model to flt the Eurasian pipeline system for natural gas, we flnd that the potential to improve e-ciency through dynamic cooperation is large. In reality, how- ever, only modest improvements over the non{cooperative solution have been achieved.