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MTRC’s novel infrastructure financing model

Many municipalities or governments face challenges in financing their infrastructure. Hong Kong’s transit operator designed a novel scheme whereby it receives fare revenues, but also partakes in a property management business, exploiting the positive externalities of public transport on property prices. We develop a Stackelberg game of timing under uncertainty to explore the rationale of this scheme. The underlying mathematical problem is nontrivial because the Stackelberg’s leader faces a two-dimensional optimal stopping problem (which cannot be reduced by a change of numeraire) with a gain function that is nondifferentiable due to strategic interactions. We solve this problem analytically via the intermediation of a ‘penalized problem’ and derive interesting, novel managerial insights. The main insight is that internalizing positive externalities provides additional revenue sources for defraying the overall costs of infrastructure investments, thereby accelerating the delivery of infrastructure.