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Private investment and public stimulus: a bargaining model

Private investment and public stimulus: a bargaining model Local governments often provide tax-subsidy programs to attract corporate investment. Using a game-theoretic real options model between a firm and a government, this paper aims to explore the interaction between the government’s tax-subsidy policy and the firm’s investment and financing decisions. The optimal incentive policies are derived for cooperative and non-cooperative bargaining settings between a government and a firm. We show that it is optimal for the government to offer a tax-subsidy combination in the cooperative setting. However, this is not true for the non-cooperative setting, in which the optimal policy is to only levy taxes with no investment subsidy. Whereas firms always have an incentive to rely on debt financing in the non-cooperative setting, firms are reluctant to issue debt in the cooperative setting. Finally, it is generally optimal for the government to collect taxes at a lower rate in the case of high risk high-tech enterprises. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Economics Taylor & Francis

Private investment and public stimulus: a bargaining model

Tan, Yingxian; Wang, Yahui
Journal of Applied Economics , Volume 26 (1): 1 – Dec 31, 2023
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Private investment and public stimulus: a bargaining model

Abstract

Local governments often provide tax-subsidy programs to attract corporate investment. Using a game-theoretic real options model between a firm and a government, this paper aims to explore the interaction between the government’s tax-subsidy policy and the firm’s investment and financing decisions. The optimal incentive policies are derived for cooperative and non-cooperative bargaining settings between a government and a firm. We show that it is optimal for the government to...
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Publisher
Taylor & Francis
Copyright
© 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
ISSN
1667-6726
eISSN
1514-0326
DOI
10.1080/15140326.2022.2160897
Publisher site
See Article on Publisher Site

Abstract

Local governments often provide tax-subsidy programs to attract corporate investment. Using a game-theoretic real options model between a firm and a government, this paper aims to explore the interaction between the government’s tax-subsidy policy and the firm’s investment and financing decisions. The optimal incentive policies are derived for cooperative and non-cooperative bargaining settings between a government and a firm. We show that it is optimal for the government to offer a tax-subsidy combination in the cooperative setting. However, this is not true for the non-cooperative setting, in which the optimal policy is to only levy taxes with no investment subsidy. Whereas firms always have an incentive to rely on debt financing in the non-cooperative setting, firms are reluctant to issue debt in the cooperative setting. Finally, it is generally optimal for the government to collect taxes at a lower rate in the case of high risk high-tech enterprises.

Journal

Journal of Applied Economics – Taylor & Francis

Published: Dec 31, 2023

Keywords: Taxes; investment subsidy; non-cooperative game; cooperative game

References

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