How Does Uncertainty Over Future Environmental Policy Affect Investment Decisions in Transition Economies?
A firm-level sequential investment model is developed to analyze how uncertainty about environmental policies in the future affects current investment decisions. Three specific policies are considered -- a pollution tax, an investment credit in the presence of liquidity constraints, and a pollution standard. Using a location-scale framework for expectations, the analysis shows how expectations about the future policy (i.e. the mean and variance of the future tax, credit, or standard) affect current investment decisions.
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