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Public capital and private investment, a real option approach

  • 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
Date of revision:
Handle: RePEc:lau:crdeep:03.10
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: +41-21-692.33.65
Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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  1. Stephen Turnovsky, 1998. "Productive Government Expenditure in a Stochastically Growing Economy," Discussion Papers in Economics at the University of Washington 0056, Department of Economics at the University of Washington.
  2. Paul Cashin, 1994. "Government Spending, Taxes, and Economic Growth," IMF Working Papers 94/92, International Monetary Fund.
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  4. Barrios, Salvador & Bertinelli, Luisito & Strobl, Eric, 2003. "Dry Times in Africa: Rainfall and Africa's Growth Performance," MPRA Paper 5705, University Library of Munich, Germany.
  5. 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.
  6. 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.
  7. 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.
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  9. Paul Cashin, 1995. "Government Spending, Taxes, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 237-269, June.
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  12. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
  13. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  14. Eberly, Janice C. & Van Mieghem, Jan A., 1997. "Multi-factor Dynamic Investment under Uncertainty," Journal of Economic Theory, Elsevier, vol. 75(2), pages 345-387, August.
  15. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
  16. 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.
  17. 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.
  18. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
  19. Bertola, Giuseppe, 1998. "Irreversible investment," Research in Economics, Elsevier, vol. 52(1), pages 3-37, March.
  20. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-96, September.
  21. 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 364-78, June.
  22. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
  23. 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).
  24. 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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