Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach

Caren Sureth

German Economic Review, 2002, vol. 3, issue 2, 185-221

Abstract: The paper applies contingent claims analysis in a real option investment model in order to investigate taxation's influence on investor's decisions under uncertainty. The results show the distortion from realistic‐type tax systems, allow to identify a tax‐induced paradox in option valuation for specific settings and acknowledge the property of investment neutrality of well‐known ‘ideal’ tax systems in the context of different degrees of irreversibility. Furthermore, it is clarified that the idea of risk‐neutral valuation cannot be adopted by the real option approach in general.

Date: 2002
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German Economic Review is currently edited by Bernhard Felderer, Joseph F. Francois, Ivo Welch, Urs Schweizer and David E. Wildasin

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