Smart City Investments
78 Pages Posted: 17 Mar 2018 Last revised: 29 Oct 2019
Date Written: October 28, 2019
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: Suggested Citation