Optimal timing and capacity choice with taxes and subsidies under uncertainty

Abstract

We develop a real options model that examines the effect of government's subsidies and taxation policy on the timing and size of investments. We find that a higher depreciation rate or subsidy, or a lower tax rate, accelerates investments. The effect of subsidies on the investment size depends on whether the subsidy is fixed or variable: a fixed subsidy induces smaller size investments, whereas a variable subsidy encourages larger size investments. The tax and depreciation rates do not affect the size of the investment. For revenue-neutral incentive packages, the effect of changes in the above variables on the investment timing and size is not necessarily monotonic and it depends on the instrument of the tax-subsidy policy that is used to keep the new policy revenue neutral. There are also economic contexts in which an increase in the tax rate can accelerate investments of a larger scale.

Publication DOI: https://doi.org/10.1016/j.omega.2020.102312
Divisions: College of Business and Social Sciences > Aston Business School > Economics, Finance & Entrepreneurship
College of Business and Social Sciences > Aston Business School
College of Business and Social Sciences > Aston Business School > Centre for Personal Financial Wellbeing
Additional Information: © 2020, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Uncontrolled Keywords: Capacity choice,Investment subsidy,Real options,Taxation policy,Uncertainty,Strategy and Management,Management Science and Operations Research,Information Systems and Management
Publication ISSN: 1873-5274
Last Modified: 16 Apr 2024 07:21
Date Deposited: 08 Sep 2020 10:10
Full Text Link:
Related URLs: http://www.scop ... tnerID=8YFLogxK (Scopus URL)
https://www.sci ... 6666?via%3Dihub (Publisher URL)
PURE Output Type: Article
Published Date: 2021-07
Published Online Date: 2020-07-25
Accepted Date: 2020-07-17
Authors: Azevedo, Alcino (ORCID Profile 0000-0002-4751-6085)
Pereira, Paulo J.
Rodrigues, Artur

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