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Private investment and public stimulus: a bargaining model

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  • Yingxian Tan
  • Yahui Wang

Abstract

Local governments often provide tax-subsidy programs to attract corporate investment. Using a game-theoretic real options model between a firm and a government, this paper aims to explore the interaction between the government’s tax-subsidy policy and the firm’s investment and financing decisions. The optimal incentive policies are derived for cooperative and non-cooperative bargaining settings between a government and a firm. We show that it is optimal for the government to offer a tax-subsidy combination in the cooperative setting. However, this is not true for the non-cooperative setting, in which the optimal policy is to only levy taxes with no investment subsidy. Whereas firms always have an incentive to rely on debt financing in the non-cooperative setting, firms are reluctant to issue debt in the cooperative setting. Finally, it is generally optimal for the government to collect taxes at a lower rate in the case of high risk high-tech enterprises.

Suggested Citation

  • Yingxian Tan & Yahui Wang, 2023. "Private investment and public stimulus: a bargaining model," Journal of Applied Economics, Taylor & Francis Journals, vol. 26(1), pages 2160897-216, December.
    • Handle: RePEc:taf:recsxx:v:26:y:2023:i:1:p:2160897
    DOI: 10.1080/15140326.2022.2160897
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