Taxation and Investment Risk-Taking

Roger Latham

Working Paper from Economics Department, Queen's University

Abstract: This paper investigates whether an increase in corporate tax encourages or discourages risk-taking when there are stochastic decreasing returns to scale. The assumption that the entrepreneur can borrow without limitation at the safe rate is replaced by the assumption that he borrows from a competitive risk-neutral bank at an actuarially fair rate. When the bank observes the level of equity, the entrepreneur may use both debt and equity financing. In this case, an increase in corporate tax reduces the equity share of investment while the effect on debt and total investment is ambiguous.

Pages: 21
Date: 1982
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:474

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