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User cost of capital with delayed investment grants

  • Jorge Navas Rodenes
  • Jesus Marin Solano

    (Universitat de Barcelona)

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
Date of revision:
Handle: RePEc:bar:bedcje:2006161
Contact details of provider: Postal: Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.
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  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, P.M., 1985. "Optimal dynamic investment policy under financial restrictions and adjustment costs," Research Memorandum FEW 195, Tilburg University, School of Economics and Management.
  3. Treadway, Arthur B, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 227-39, April.
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