 Optimal investment and financing with government subsidies under time to buildXin Xia, Shaoyong Hu and Liu Gan Economic Modelling, 2025, vol. 152, issue C Abstract: This paper develops a real-options model that incorporates the game-theoretic interaction between firms and the government. We examine how government subsidies influence a firm’s optimal investment and financing decisions when accounting for time-to-build delays. Our findings indicate that subsidies induce leveraged firms to accelerate investment, albeit with a smaller investment scale and more conservative debt financing. Additionally, despite receiving fewer subsidies, leveraged firms tend to invest both earlier and at a larger scale than unleveraged firms. Furthermore, as subsidies become more effective at reducing time to build, investment is accelerated, leverage declines, and the optimal investment scale exhibits a U-shaped pattern. Lastly, compared to non-negotiated debt, the effect of negotiated-debt financing on optimal subsidies and investment scale depends on shareholders’ bargaining power. Our model offers novel and practical insights for policymakers designing effective subsidy programs and for managers formulating sound business strategies. Keywords: Government subsidies; Investment decisions; Time to build; Debt financing (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002275 DOI: 10.1016/j.econmod.2025.107232 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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