Abstract
Abstract We examine the timing of a business investment providing valuable external benefits to society. A surge in uncertainty about private returns, a typical feature if not a cause of recessions, delays capital outlays to an extent that may be detrimental to social welfare. Is there an efficiency-improving public policy directed at accelerating investment? By real option analysis, we try answering this question by comparing three fiscal policies: (i) a simple subsidy on investment, (ii) a balanced-budget fiscal stimulus where the subsidy is subsequently covered by profit taxation, and (iii) by taxing external benefits as well. We show that, under a balanced-budget stimulus, investment acceleration may come at the expense of a net economic loss, and the higher is uncertainty on private returns, the higher the likehood of a negative outcome. However, this risk strongly declines when government spending is balanced by taxing both private and public returns on investment.
Highlights
It is a well-known empirical regularity brought to the forefront by Keynes in the General Theory (1936; 1937) and later confirmed by a large body of evidence overThis work is licensed under the 158 | C
Monetary authorities switched to “unconventional policies”, the bulk of which consists of Quantitative Easing (QE), i. e., large injections of liquidity by means of direct purchases of a variety of assets (Bernanke and Reinhart 2004; Borio and Zabai 2016; Driffil 2016)
The problem of persistent stagnation of investment and the limits of monetary stimuli have proven to be challenging in the Euro Zone, where both the former President of the ECB (Draghi 2014a; 2014b) and the President of the European Commission (Juncker 2015) repeatedly called for fiscal policy to share responsibility in sustaining economic recovery
Summary
It is a well-known empirical regularity brought to the forefront by Keynes in the General Theory (1936; 1937) and later confirmed by a large body of evidence over. As for the budgetary sustainability of fiscal stimuli, in parallel to the macroeconomic debate, a microeconomic literature, using real option models, has offered insights about the effects of public subsidies in accelerating business investments as well as the ultimate impact on public accounts Maoz (2011) cast doubts about the seemingly free-lunch subsidy-tax scheme described by Pennings, by pointing out that investment acceleration might come at the expense of reducing the firm’s market value Taken together, these findings suggest that government intervention must find a tighter justification than in Pennings’ model, where it is implicitly taken for granted that investment acceleration will result into a social gain.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
