Irreversible Investment With Tax Policy Uncertainty


The effects of tax policy uncertainty on irreversible investment in a continuous-time scenario are studied. A firm invests in a single constant-cost project whose revenues are generated by a geometric Brownian process and whose profits are taxed. The tax rate is subject to a fixed change at an unknown future time. This uncertainty is modeled by considering the project to be the sum of two projects: one taxed at the post-tax change rate and a project taxed at one less the tax rate change, subject to bankruptcy. The effects on investment are ambiguous, depending on a variety of parameters.


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