Dominant assurance contracts as patterns of options contracts

[Kragen Sitaker]

I happened to read Anton Sherwood's blog the other day.  In
http://www.ogre.nu/wp/?p=1642 he mentioned several things that he had
"almost invented", i.e. he'd invented them independently and then
discovered they were already well-known.

One was Alex Tabarrok's dominant assurance contracts; another was a
way of building e.g. railroad right-of-way without eminent domain and
without having to pay outrageously high prices to the last landowner
on the route, a way which turns out (Anton said) to be standard
practice for laying pipelines.

The technique is: buy call options on parcels of land until you make a
path; then exercise the options along that path.  This way you handle
the increasing-returns nature of the land ownership more smoothly.

It occurred to me today, as I was explaining this technique today,
that dominant assurance contracts are similarly a way to handle an
increasing-returns problem, and can actually be explained in the same
way.  The escrow agent (or "entrepreneur," as Tabarrok calls him) is
offering the amount $F to buy a "put" option for the existence of the
public good he is trying to provide, at exercise price $S.  So,
perhaps, he is offering a "put" option for the existence of a bridge
at exercise price $100, which is probably a pretty good deal.