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Public capital and private investment, a real option approach

Listed author(s):
  • Bruno CRUZ
  • Aude POMMERET

In this paper, 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 than 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 also a mean to correct the market and the optimal tax is then higher.

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File URL: http://www.hec.unil.ch/deep/textes/03.10.pdf
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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 03.10.

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Length: 19 pages
Date of creation: May 2003
Handle: RePEc:lau:crdeep:03.10
Contact details of provider: Postal:
Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne

Phone: ++41 21 692.33.20
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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  4. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
  5. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
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  7. Kevin J. Lansing, 1998. "Optimal Fiscal Policy in a Business Cycle Model with Public Capital," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 337-364, May.
  8. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  9. Blanchard, Olivier J & Giavazzi, Francesco, 2004. "Improving the SGP Through a Proper Accounting of Public Investment," CEPR Discussion Papers 4220, C.E.P.R. Discussion Papers.
  10. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  11. Paul Cashin, 1995. "Government Spending, Taxes, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 237-269, June.
  12. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  13. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
  14. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  15. Simon Grant & John Quiggin, 2003. "Public Investment and the Risk Premium for Equity," Economica, London School of Economics and Political Science, vol. 70(277), pages 1-18, February.
  16. Nicodeme, Gaetan, 2001. "Computing effective corporate tax rates: comparisons and results," MPRA Paper 3808, University Library of Munich, Germany.
  17. BARRIOS, Salvador & BERTINELLI, Luisito & STROBL, Eric, 2003. "Dry times in Africa: Rainfall and Africa's growth performance," CORE Discussion Papers 2003061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  18. Turnovsky, Stephen J., 1999. "Productive Government Expenditure In A Stochastically Growing Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 3(04), pages 544-570, December.
  19. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  20. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
  21. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  22. 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.
  23. Burguet, Roberto & Fernandez-Ruiz, Jorge, 1998. "Growth through taxes or borrowing? A model of development traps with public capital," European Journal of Political Economy, Elsevier, vol. 14(2), pages 327-344, May.
  24. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
  25. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
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