This article considers the effect on an irreversible investment of a subsidy to investment in combination with a taxation of future profits. It is shown that such a combination raising a zero expected revenue decreases the trigger value of investment. The tax rate for which the stimulus works at zero expected cost decreases as heterogeneity in the group of investors increases. The importance of the result is exemplified by the graduate tax.

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Keywords investment, irreversibility, options, taxes
JEL Intertemporal Firm Choice and Growth, Investment, or Financing (jel D92), Capital; Investment (including Inventories); Capacity (jel E22), Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation (jel E62), Capital Budgeting; Investment Policy (jel G31)
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Journal European Economic Review
Pennings, H.P.G. (2000). Taxes and Stimuli of Investment under Uncertainty. European Economic Review, 44(2), 383–391. doi:10.1016/S0014-2921(98)00078-6