Abstract
A real option analytical framework for investments made in a network is considered as a method for addressing managerial flexibility in transportation planning. The core of the framework is a hierarchical Bellman equation with continuous network design investment allocation and user-optimal route choice in each recursion. A continuous network investment deferment framework is formulated with stochastic OD flows evolving as discretized geometric Brownian motions. A numerical approach based on Least Squares Monte Carlo simulation and an Iterative Optimization Assignment heuristic is considered. The option premium is shown to decompose into a basic deferment premium and a flexible network design premium. Additionally, the basic deferment premium for a network setting can be further broken down into a set of link deferment premiums plus a non-positive synergy effect premium. The proposed framework is tested on the classic Sioux Falls, SD network.