Abstract (EN):
Given the global financial crisis and, particularly, the European sovereign-debt crisis,
European countries have the urgent need to promote output growth. However, due to the
current financial constraints, it is difficult for the Governments to stimulate economic growth
by directly increasing investment. Alternatively, they can promote private investment, either
by reducing the uncertainty and costs, or by directly subsidizing those investments. In this
paper we try to analyze alternative solutions to promote investment, and hence economic
growth, under a context of Government austerity. We develop a real options model in
order to study optimal investment decisions, considering both the point of view of firms and
Government. So, we incorporate the Government in the baseline real options model, and we
use this extended model to drive the optimal behavior for firms and Government on their
decision to invest and promote investment, respectively. To be more realistic, the model takes
into account, not only inefficiencies (both concerning the implementation and management
of the project), but also the economic benefits of investing, i.e., the investment multiplier
effect in the economy. We also make a sensitivity analysis for the key parameters and define
regions for different types of investment. Alternative solutions are also considered. Among
the main conclusions we find that the probability of being optimal for the Government to
subsidize private investment rather than investing directly is greater the larger the private
investment multiplier effect, the tax rates, the private present value of the profit flows, the
private cost of the investment and, also, the inefficiency level of the Government.
Language:
English
Type (Professor's evaluation):
Scientific
Notes:
Disponível em http://wps.fep.up.pt/wps/wp507.pdf