How to analyze the investment–uncertainty relationship in real option models?

The real options tradition originally predicted a decreasing relationship between uncertainty and investment, through the positive effect of higher uncertainty on the trigger level for revenue relative to costs. An opposing effect on the probability of reaching the level has been identified, yielding a total effect with ambiguous sign. This paper makes three points. The “opposing” effect is not always opposing. Systematic risk cannot generally be assumed to increase with volatility. A probability is not the best measure of investment. The sign of the total effect is again ambiguous. This ambiguity is illustrated, depending on specification of model and parameters.investment; uncertainty; real options; stochastic control

Taxation and systematic risk under decreasing returns to scale

Abstract Lund (2002a) showed in a CAPM-type model how tax depreciation schedules affect required expected returns after taxes. Even without leverage higher tax rates implied lower betas when tax deductions were risk free. Here they are risky, and marginal investment is taxed together with inframarginal in an analytical model of decreasing returns. With imperfect loss offset tax claims are analogous to call options. The beta of equity is still decreasing in the tax rate, but increasing in the underlying volatility. The results are important if market data are used to infer required expected returns, and in discussions of tax design. Keywords: Corporate tax, depreciation, imperfect loss offset, decreasing returns, cost of capital, uncertaint

On the Dynamics of Competitive Screening

Abstract We discuss the existence of a pooling equilibrium in a two-period model of an insurance market with asymmetric information. We solve the model numerically. We pay particular attention to the reasons for non-existence in cases where no pooling equilibrium exists. In addition to the phenom- enon of cream skimming emphasized in earlier literature, we here point to the the importance of the opposite: dregs skimming, whereby high-risk consumers are proÞtably detracted from the candidate pooling contract

Taxation, uncertainty, and the cost of equity for a multinational firm

From a CAPM-type model the cost of equity is derived for a …rm operating under various foreign tax systems. The …rm’s shares are traded in a market which is una¤ected by these systems. The cost of capital depends on the foreign tax system, even for fully equity …nanced projects. This is neglected in much of the literature. For a corporate income tax the main factor which reduces the cost of equity is the depreciation deductions. Compared with a neutral cash ‡ow tax, this reduces the cost of equity because it acts as a loan from the …rm to the government

Investment, taxes, and uncertainty, with applications to the Norwegian petroleum sector

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 1987.MICROFICHE COPY AVAILABLE IN ARCHIVES AND DEWEY.Includes bibliographies.by Diderik Lund.Ph.D

Kraftig subsidiering av norsk petroleum

Stortinget vedtok i juni 2020 midlertidige subsidier til investeringer i norsk petroleumsvirksomhet. Bakgrunnen var den lave lønnsomheten som fulgte koronapandemien og en samtidig svekkelse av prissamarbeid. Hensikten skal være å redde aktivitet, særlig i leverandørnæringen. Subsidiene vil vare i flere år, typisk til slutten av 2020-tallet. De medfører at prosjekter som er klart ulønnsomme under null skatt, vil kunne bli lønnsomme for selskapene. Samlede subsidier har vært anslått til omkring 8 milliarder kroner i samlet nåverdi så lenge ordningen varer. Men dette dreier seg om prosjekter som ville ha vært gjennomført uansett. For de prosjektene som blir gjennomført som følge av ordningen, vil subsidiene kunne bli det mangedobbelte. Noe anslag for dette har ikke vært forelagt Stortinget. Ordningen vil styrke Norges oljeavhengighet i en tid da den burde ha vært redusert. Den kan dessuten føre til en uheldig opphoping av prosjekter i tid