We examine the timing of a business investment providing valuable external benefits to society. A surge in uncertainty about private returns, a typical feature if not a cause of recessions, delays capital outlays to an extent that may be detrimental to social welfare. Is there an efficiency-improving public policy directed at accelerating investment? By real option analysis, we try answering this question by comparing three fiscal policies: (i) a simple subsidy on investment, (ii) a balanced-budget fiscal stimulus where the subsidy is subsequently covered by profit taxation, and (iii) by taxing external benefits as well. We show that, under a balanced-budget stimulus, investment acceleration may come at the expense of a net economic loss, and the higher is uncertainty on private returns, the higher the likehood of a negative outcome. However, this risk strongly declines when government spending is balanced by taxing both private and public returns on investment.

Do balanced-budget fiscal stimuli of investment increase its economic value? / Dosi, C.; Moretto, M.; Tamborini, R.. - In: GERMAN ECONOMIC REVIEW. - ISSN 1465-6485. - 0:0(2021), pp. 1-23. [10.1515/ger-2020-0059]

Do balanced-budget fiscal stimuli of investment increase its economic value?

Tamborini R.
2021-01-01

Abstract

We examine the timing of a business investment providing valuable external benefits to society. A surge in uncertainty about private returns, a typical feature if not a cause of recessions, delays capital outlays to an extent that may be detrimental to social welfare. Is there an efficiency-improving public policy directed at accelerating investment? By real option analysis, we try answering this question by comparing three fiscal policies: (i) a simple subsidy on investment, (ii) a balanced-budget fiscal stimulus where the subsidy is subsequently covered by profit taxation, and (iii) by taxing external benefits as well. We show that, under a balanced-budget stimulus, investment acceleration may come at the expense of a net economic loss, and the higher is uncertainty on private returns, the higher the likehood of a negative outcome. However, this risk strongly declines when government spending is balanced by taxing both private and public returns on investment.
2021
0
Dosi, C.; Moretto, M.; Tamborini, R.
Do balanced-budget fiscal stimuli of investment increase its economic value? / Dosi, C.; Moretto, M.; Tamborini, R.. - In: GERMAN ECONOMIC REVIEW. - ISSN 1465-6485. - 0:0(2021), pp. 1-23. [10.1515/ger-2020-0059]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11572/326241
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