Smart City Investments

78 Pages Posted: 17 Mar 2018 Last revised: 29 Oct 2019

See all articles by Jussi Keppo

Jussi Keppo

National University of Singapore - NUS Business School

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics

Date Written: October 28, 2019

Abstract

Central and local governments around the world are seeking investments from private firms to create smart city solutions. Motivated by this, we model a risk-averse investor who optimizes the size of an investment, leverage used in the investment, and the level of costly information on the investment. We show that borrowing-constrained or highly risk-averse investors have low demand for information. We also show that the demand of information is highest for investment opportunities with high expected returns, and the demand is lumpy for opportunities with low expected returns even without fixed cost of information. Furthermore, the falling marginal cost of information driven by smart cities' datasets and analytics raises investment amounts and leverage, which leads to higher losses during crises. Therefore, the governments should monitor, and possibly regulate, the leverage of smart city investments since they are the lenders of last resort in these investments.

Keywords: information, analytics, investment, leverage, smart city

JEL Classification: D81, D83, G11

Suggested Citation

Keppo, Jussi and Tan, Hong Ming and Zhou, Chao, Smart City Investments (October 28, 2019). Available at SSRN: https://ssrn.com/abstract=3141043 or http://dx.doi.org/10.2139/ssrn.3141043

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Hong Ming Tan

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Chao Zhou

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543
Singapore

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