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User cost of capital with delayed investment grants

Author

Listed:
  • 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.

Suggested Citation

  • Jorge Navas Rodenes & Jesus Marin Solano, 2006. "User cost of capital with delayed investment grants," Working Papers in Economics 161, Universitat de Barcelona. Espai de Recerca en Economia.
  • Handle: RePEc:bar:bedcje:2006161
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    References listed on IDEAS

    as
    1. 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.
    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.
    3. Takayama,Akira, 1985. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521314985.
    4. A. B. Treadway, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," Review of Economic Studies, Oxford University Press, vol. 36(2), pages 227-239.
    5. J. P. Gould, 1968. "Adjustment Costs in the Theory of Investment of the Firm," Review of Economic Studies, Oxford University Press, vol. 35(1), pages 47-55.
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    More about this item

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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