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User cost of capital with delayed investment grants

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Author Info
Jorge Navas Rodenes
Jesus Marin Solano (Universitat de Barcelona)
Abstract

The usual assumption when considering investment grants is that grant payments are automatic when investments are undertaken. However, evidence from case studies shows that there can exist some time lag until funds are received by granted firms. In this paper the effects of delays in grant payments on the optimal investment policy of the firm are analyzed. It is shown how these delays lead not only to a higher financing cost but to an effective reduction in the investment grant rate, and in some cases, how benefits from investment grants could be canceled due to interactions with tax effects.

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Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 161.

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Length: 14 pages
Date of creation: 2006
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Handle: RePEc:bar:bedcje:2006161

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Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
Web page: http://www.ere.ub.es
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Find related papers by JEL classification:
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis

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  1. Treadway, Arthur B, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," Review of Economic Studies, Blackwell Publishing, vol. 36(106), pages 227-39, April. [Downloadable!] (restricted)
  2. Kort, Peter M., 1988. "Optimal dynamic investment policy under financial restrictions and adjustment costs," European Economic Review, Elsevier, vol. 32(9), pages 1769-1776, November. [Downloadable!] (restricted)
  3. Ruane, Frances P., 1982. "Corporate income tax, investment grants, and the cost of capital," Journal of Public Economics, Elsevier, vol. 17(1), pages 103-109, February. [Downloadable!] (restricted)
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