Does Taxation Induce Risk-Cowardice in the Risk-Neutral Firm?
Posted: 18 Aug 1998
Date Written: July 1998
A risk-neutral firm should evaluate the investment policy under uncertainty only on the basis of the expected payoffs. Nevertheless if the consolidated profit is liable to different tax brackets, it could happen that even very small portions of risky projects displaying positive excess returns could be refused. Consequently, taxation may induce a neutral-risk firm to display a sort of risk-averse attitude, which we call, in accordance with a revised definition of Samuelson, "coward" behavior. Conditions guaranteeing non-cowardice in terms of tax brackets and expected after-tax revenues are set out.
JEL Classification: D8, H2
Suggested Citation: Suggested Citation