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Does public investment reduce private investment risk ? A real option approach


  • Bruno CRUZ

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))


    (DEEP-HEC - Lausanne University)


In this paper, the public investment provision takes place in a stochastic environnement. The role of the government is to remove a part of the uncertainty faced by the firm. If the government simply maximizes the value of the firm, then the optimal tax is smaller under imperfect competition then it is under perfect competition since more public capital reduces the selling price. But if the government seeks to maximize the consumer surplus, tax and public capital provision are a mean to correct the market and the optimal tax is then higher

Suggested Citation

  • Bruno CRUZ & Aude POMMERET, 2002. "Does public investment reduce private investment risk ? A real option approach," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2002039, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2002039

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    References listed on IDEAS

    1. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
    2. Arrow, Kenneth J & Lind, Robert C, 1970. "Uncertainty and the Evaluation of Public Investment Decisions," American Economic Review, American Economic Association, vol. 60(3), pages 364-378, June.
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    More about this item


    irreversible investment; public capital; uncertainty;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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