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Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach

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  • Caren Sureth

Abstract

The paper applies contingent claims analysis in a real option investment model in order to investigate taxation's influence on investor's decisions under uncertainty. The results show the distortion from realistic‐type tax systems, allow to identify a tax‐induced paradox in option valuation for specific settings and acknowledge the property of investment neutrality of well‐known ‘ideal’ tax systems in the context of different degrees of irreversibility. Furthermore, it is clarified that the idea of risk‐neutral valuation cannot be adopted by the real option approach in general.

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  • Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    • Handle: RePEc:bla:germec:v:3:y:2002:i:2:p:185-221
    DOI: 10.1111/1468-0475.00057
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