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Informational externalities, strategic delay, and optimal investment subsidies

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  • Matthew Doyle

Abstract

This paper examines optimal government policy when private investment generates information, but investors cannot internalize the informational value their actions have to others. Equilibrium exhibits inefficient delay, as investors adopt a wait-and-see approach. The government can alter incentives via an investment subsidy, but complications arise, since future subsidies may induce investors to disregard current policy initiatives. The paper shows that the government achieves its desired outcome only when the the investment subsidy is financed by a non-distortionary, lump-sum tax. When taxation is distortionary, the government faces a time inconsistency problem that may prevent effective policy.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 43 (2010)
Issue (Month): 3 (August)
Pages: 941-966

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Handle: RePEc:cje:issued:v:43:y:2010:i:3:p:941-966

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Cited by:
  1. Smith, L. & Sorensen, P., 1997. "Informational Herding and Optimal Experimentation," Economics Papers 139, Economics Group, Nuffield College, University of Oxford.
  2. Heidhues, Paul & Melissas, Nicolas, 2012. "Rational exuberance," European Economic Review, Elsevier, Elsevier, vol. 56(6), pages 1220-1240.

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