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The “new” view of investment decisions and public policy analysis: An application to green lights and cold refrigerators

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Author Info

  • Gilbert E. Metcalf

    (Assistant Professor of Economics at Tufts University)

  • Donald Rosenthal

    (Economist with American Management Systems)

Abstract

Recent research in investment theory emphasizes the importance of sunk investment costs, uncertainty in returns, and flexibility in investment timing. Allowing for the presence of these characteristics alters traditional discounted cash flow rules for when to invest. Those rules will recommend investing at lower rate-of-retum thresholds than is optimal. This article describes this research and suggests the range of potential situations to which the theory applies. It also discusses the implications for policy analysis and suggests that government programs to encourage investment may, in some cases, be inappropriate. After discussing a wide array of possible applications, we focus on one in particular: programs to encourage energy-efficient investment. The examples suggest the importance of applying the new investment theory for economic analysis of investment in energy-efficient technologies.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Policy Analysis and Management.

Volume (Year): 14 (1995)
Issue (Month): 4 ()
Pages: 517-531

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Handle: RePEc:wly:jpamgt:v:14:y:1995:i:4:p:517-531

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Web page: http://www3.interscience.wiley.com/journal/34787/home

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  1. Kevin Hassett & Gilbert E. Metcalf, 1994. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," NBER Working Papers 4780, National Bureau of Economic Research, Inc.
  2. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, National Bureau of Economic Research, Inc, in: The Effects of Taxation on Capital Accumulation, pages 295-304 National Bureau of Economic Research, Inc.
  3. Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(3), pages 479-508, August.
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  1. repec:reg:wpaper:256 is not listed on IDEAS
  2. Stavins, Robert & Jaffe, Judson & Schatski, Todd, 2007. "Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp07-016, Harvard University, John F. Kennedy School of Government.
  3. Stavins, Robert N. & Jaffe, Judson & Schatzki, Todd, 2007. "Too Good to Be True? Three Economic Assessments of California Climate Change Policy," Discussion Papers, Resources For the Future dp-07-12, Resources For the Future.

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