Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/75960 
Year of Publication: 
2002
Series/Report no.: 
CESifo Working Paper No. 709
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This article deals with the integration of taxes into real option-based investment models under risk neutrality and risk averison. It compares the possible approaches dynamic programming and contingent claims analysis to analyze their effects on the optimal investment rules before and after taxes. It can be shown that despite their different assumptions, dynamic programming and contingent claims analysis yield identical investment thresholds under risk neutrality. In contrast, under risk aversion, there are severe problems in determining an adequate risk-adjusted discount rate. The application of contingent claims analysis is restricted to cases with a dividend rate unaffected by risk. Therefore, only dynamic programming permits an explicit investment threshold without taxation. After taxes, both approaches fail to reach general solutions. Nevertheless, using a sufficient condition, it is possible to derive neutral tax systems under risk aversion as is demonstrated by using dynamic programming.
JEL: 
H21
H25
Document Type: 
Working Paper
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