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A Welfare Analysis on Start-Up Decisions under Default Risk

Author

Listed:
  • Nicola Comincioli
  • Paolo Panteghini
  • Sergio Vergalli

Abstract

This short article studies the tax effects on a start-up investment decision under uncertainty. Since the representative firm can decide both when to invest and how much to borrow, the distortive effects are twofold. We thus show that the deadweight loss (namely, the ratio between the welfare loss and tax revenue) ranges from 25 to 32%, whereas mature firms face a lower distortion (as shown by Comincioli et al. (2021) the maximum deadweight loss is about 25%).

Suggested Citation

  • Nicola Comincioli & Paolo Panteghini & Sergio Vergalli, 2021. "A Welfare Analysis on Start-Up Decisions under Default Risk," CESifo Working Paper Series 9478, CESifo.
    • Handle: RePEc:ces:ceswps:_9478
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp9478.pdf
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    References listed on IDEAS

    as
    1. Nicola Comincioli & Paolo M. Panteghini & Sergio Vergalli, 2021. "Welfare effects of business taxation under default risk," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1412-1429, December.
    2. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
    3. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    4. Shackleton, Mark B. & Sodal, Sigbjorn, 2005. "Smooth pasting as rate of return equalization," Economics Letters, Elsevier, vol. 89(2), pages 200-206, November.
    5. Panteghini, Paolo M., 2007. "Interest deductibility under default risk and the unfavorable tax treatment of investment costs: A simple explanation," Economics Letters, Elsevier, vol. 96(1), pages 1-7, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    real options; business taxation; default risk;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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