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Optimization of Budget Subsidies on Credits for Investment Projects

Author

Listed:
  • Arkin, V.

    (Central Economics and Mathematics Institute, Moscow, Russia)

  • Slastnikov, A.

    (Central Economics and Mathematics Institute, Moscow, Russia)

Abstract

The paper studies the mechanism of budgetary subsidies on interest rates for credit granted for the financing and implementation of investment projects. To evaluate the potential of the mechanism of budgetary subsidies we consider an optimization approach in which the value of subsidized interest rate (not exceeding the given boundary) is chosen so that the budgetary effect from the implemented project was maximal. The formulas for the optimal value of the subsidized interest rate on loan are obtained. We explore how various parameters of the investment project and the tax burden influence the optimal value of subsidies and optimal investment level (which specifies the time for investment into the project under the optimum value of subsidies). We derive conditions under which for state it is not profitable (in terms of the budgetary effect) to provide subsidies on the loan. It is proved the possibility of reconciling the interests of the investors and the state in which the increase of subsidized interest rate (within certain limits) becomes profitable not only for investors, but also for the state.

Suggested Citation

  • Arkin, V. & Slastnikov, A., 2016. "Optimization of Budget Subsidies on Credits for Investment Projects," Journal of the New Economic Association, New Economic Association, vol. 29(1), pages 12-26.
    • Handle: RePEc:nea:journl:y:2016:i:29:p:12-26
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    References listed on IDEAS

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    1. António Antunes & Tiago Cavalcanti & Anne Villamil, 2015. "The effects of credit subsidies on development," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 1-30, January.
    2. Gale, William G, 1991. "Economic Effects of Federal Credit Programs," American Economic Review, American Economic Association, vol. 81(1), pages 133-152, March.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    5. Vadim Arkin & Alexander Slastnikov, 2007. "The effect of depreciation allowances on the timing of investment and government tax revenue," Annals of Operations Research, Springer, vol. 151(1), pages 307-323, April.
    6. Li, Wenli, 2002. "Entrepreneurship and government subsidies: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1815-1844, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Arkin,V. & Slastnikov, A., 2017. "Optimization of Concession Payments in Stochastic Model of Public-Private Partnership," Journal of the New Economic Association, New Economic Association, vol. 36(4), pages 31-47.

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    More about this item

    Keywords

    investment project; credit; subsidies on interest rate; budgetary effect;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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