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Do balanced-budget fiscal stimuli of investment increase its economic value?

Author

Listed:
  • Dosi Cesare
  • Moretto Michele

    (Department of Economics and Management, University of Padova, via del Santo 33, Padova, Italy)

  • Tamborini Roberto

    (Department of Economics and Management, 19034 University of Trento, via Inama 5, Trento, Italy)

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.

Suggested Citation

  • Dosi Cesare & Moretto Michele & Tamborini Roberto, 2022. "Do balanced-budget fiscal stimuli of investment increase its economic value?," German Economic Review, De Gruyter, vol. 23(2), pages 157-179, May.
    • Handle: RePEc:bpj:germec:v:23:y:2022:i:2:p:157-179:n:3
    DOI: 10.1515/ger-2020-0059
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    References listed on IDEAS

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    More about this item

    Keywords

    investment; Fiscal stimulus; balanced-budget constraints; Real options;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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