Design of investment promotion policies

• Published in: International journal of industrial organization 2012-03, Vol.30 (2), p.127-136
• Main Author: Kartasheva, Anastasia V.
• Format: Article
• Language: English
• Subjects: Economic models; Economic policy; Information disclosure; Infrastructure; Infrastructure financing; Investment; Investment promotion; Policy action; Policy analysis; Political support; Preferences; Profitability; Public infrastructure; Sequential mechanisms; Studies
• ISSN: 0167-7187; 1873-7986
• DOI: 10.1016/j.ijindorg.2011.04.005

Over the last 20years, developing countries have experienced the massive shift of financing and the operation of infrastructure from the public to the private sector. The paper analyzes how the government agency should structure the investment promotion policy. I develop a sequential contracting model between the government, investors and infrastructure providers and derive several properties of the optimal policy. The policy leaves investors uncertain about the project type and prescribes different levels of government support, in the form of tax or price distortions. However, the optimal policy does not change the expectations of investors about distribution of project returns. I characterize how the optimal policy depends on the revenue generation preferences of the government and the profitability of infrastructure projects in the country. ► I analyze the design of investment promotion policy for infrastructure financing. ► All high return projects are approved and pay the tax. ► A share of low return projects are approved and provided financial support. ► The policy does not change the information of investors about the project type. ► Uneven type distribution hinders promotion of low return socially valuable projects.