Do balanced-budget fiscal stimuli of investment increase its economic value?

We examine the timing of a business investment providing valuable external benefits to society. A surge in uncertainty about private returns, a typical feature if not a cause of recessions, delays capital outlays to an extent that may be detrimental to social welfare. Is there an efficiency-improving public policy directed at accelerating investment? By real option analysis, we try answering this question by comparing three fiscal policies: (i) a simple subsidy on investment, (ii) a balanced-budget fiscal stimulus where the subsidy is subsequently covered by profit taxation, and (iii) by taxing external benefits as well. We show that, under a balanced-budget stimulus, investment acceleration may come at the expense of a net economic loss, and the higher is uncertainty on private returns, the higher the likehood of a negative outcome. However, this risk strongly declines when government spending is balanced by taxing both private and public returns on investment.

Evaluation of Flexibility in Adaptation Projects for Climate Change

Climate change adaptation inherently entails investment decision-making under the high levels of uncertainty. Under these circumstances, the option of deferring a decision to adapt is one of possible strategies to address uncertainty. However, this decision will potentially leave people and areas exposed to the risk of coastal flooding during the deferral. In order to address this issue, a single fixed large investment can be divided into two or more sequential investments. This reduces the initial investment cost and adds flexibility about the size and timing of subsequent investment decisions as the magnitude of climate change becomes more available. This paper employs a real option analysis framework, as an analytical tool, to evaluate adaptations including flexibility to reduce both the risk and uncertainty of climate change, against increasing coastal flooding due to sea-level rise as an example. This paper considers (i) how to design the sequence of adaptation options under the growing risk of sea-level rise, and (ii) how to make the efficient use of flexibility included in adaptations for addressing uncertainty. This research incorporates a set of flexibilities (i.e. wait or future growth) into single-stage investments (i.e. raising coastal defence from 2.5 mAOD to 3.5mAOD or 4.0 mAOD) in two or three stages so that a set of multiple-stage adaptations are created to address both the risk and uncertainty of climate change. The proposed method compares the multiple-stage adaptations in economic terms, including optimisation, providing important additional information on the efficiency of flexible adaptation strategies given the uncertainty of climate change. The results from the analysis suggest that an efficient and robust strategy can be chosen for a short- and long- term adaptation.

Real option analysis. The viability of real estate projects

Traditional methods used for real estate project valuation, such as the static Net Present Value, have some limitations, as these methods do not consider the possibility of a change in the initial conditions of the project or during its development. On the other hand, the real options approach allows for flexibility in evaluating a real estate project, improving the decision-making process as it helps identify the optimal strategy and timing for the construction phases. The paper deals with evaluating an actual real estate project in La Rioja (Spain) using different options to estimate its final Net Present Value. The results show that the real estate project would be profitable under several scenarios, although the valuations can vary significantly among the different types of options. This is because some options add more value to the project than others, depending on their cost and the uncertainty they eliminate. In contrast, the results obtained using the traditional static method would have led a real estate developer to discard the project completely, as its Net Present Value would have been negative. This confirms that the introduction of flexibility in real estate developments creates additional value by allowing developers and investors to dynamically react to changes in the market, thus making better investment decisions and finding real estate investment opportunities that otherwise would not be considered at all.