IDEAS home Printed from https://ideas.repec.org/a/kap/jeczfn/v119y2016i2d10.1007_s00712-016-0494-4.html
   My bibliography  Save this article

Investment stimuli under government present-biased time preferences

Author

Listed:
  • Luca Corato

    (Swedish University of Agricultural Sciences)

Abstract

This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment setting a lower tax rate on future profits or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a reduced tax rate. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to set a lower tax rate. The government, in fact, when selecting the instrument to be used for speeding up investment, trades off the immediate and certain cost of a subsidy against the random tax revenues accruing from the investment. Hence, from the short-sighted perspective of current government, a lower tax rate may appear optimal as long as the consideration given to the earnings of future governments is small and/or the current government’s duration is short.

Suggested Citation

  • Luca Corato, 2016. "Investment stimuli under government present-biased time preferences," Journal of Economics, Springer, vol. 119(2), pages 101-111, October.
    • Handle: RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0494-4
    DOI: 10.1007/s00712-016-0494-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00712-016-0494-4
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1007/s00712-016-0494-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Di Corato, Luca, 2012. "Optimal conservation policy under imperfect intergenerational altruism," Journal of Forest Economics, Elsevier, vol. 18(3), pages 194-206.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
    4. Cesare Dosi & Michele Moretto, 1997. "Pollution Accumulation and Firm Incentives to Accelerate Technological Change Under Uncertain Private Benefits," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 10(3), pages 285-300, October.
    5. Mark Aguiar & Manuel Amador, 2011. "Growth in the Shadow of Expropriation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 651-697.
    6. Yishay D. Maoz, 2011. "Tax, Stimuli Of Investment And Firm Value," Metroeconomica, Wiley Blackwell, vol. 62(1), pages 171-174, February.
    7. Barbosa, Diogo & Carvalho, Vitor M. & Pereira, Paulo J., 2016. "Public stimulus for private investment: An extended real options model," Economic Modelling, Elsevier, vol. 52(PB), pages 742-748.
    8. Enrico Pennings, "undated". "How to Maximize Domestic Benefits from Irreversible Foreign Investments," Working Papers 205, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Christopher Harris & David Laibson, 2013. "Instantaneous Gratification," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(1), pages 205-248.
    10. Sarkar, Sudipto, 2012. "Attracting private investment: Tax reduction, investment subsidy, or both?," Economic Modelling, Elsevier, vol. 29(5), pages 1780-1785.
    11. E. S. Phelps & R. A. Pollak, 1968. "On Second-Best National Saving and Game-Equilibrium Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 35(2), pages 185-199.
    12. Yu, Chia-Feng & Chang, Ta-Cheng & Fan, Chinn-Ping, 2007. "FDI timing: Entry cost subsidy versus tax rate reduction," Economic Modelling, Elsevier, vol. 24(2), pages 262-271, March.
    13. Pennings, Enrico, 2005. "How to maximize domestic benefits from foreign investments: the effect of irreversibility and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 873-889, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Aneta Hintošová & Terézia Barlašová, 2021. "The Role Of Investment Promotion Policy In Attracting Foreign Direct Investment: The Case Of Slovakia," Public administration issues, Higher School of Economics, issue 5, pages 27-40.
    2. Yingjie Niu & Jinqiang Yang & Siqi Zhao, 2022. "Robust stimulus of private investment: Tax rate cut or investment subsidy?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 339-357, September.
    3. Giacomo Corneo & Sergio Vergalli, 2016. "Taxes, subsidies, regulation in dynamic models," Journal of Economics, Springer, vol. 119(2), pages 97-99, October.
    4. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.
    2. Azevedo, Alcino & Pereira, Paulo J. & Rodrigues, Artur, 2021. "Optimal timing and capacity choice with taxes and subsidies under uncertainty," Omega, Elsevier, vol. 102(C).
    3. Barbosa, Diogo & Carvalho, Vitor M. & Pereira, Paulo J., 2016. "Public stimulus for private investment: An extended real options model," Economic Modelling, Elsevier, vol. 52(PB), pages 742-748.
    4. Sarkar, Sudipto, 2012. "Attracting private investment: Tax reduction, investment subsidy, or both?," Economic Modelling, Elsevier, vol. 29(5), pages 1780-1785.
    5. Renz, André, 2016. "Die Relevanz von Replikationen in der experimentellen Steuerforschung: Eine Replikationsstudie zu Wahrnehmungsverzerrungen bei Subventionen," arqus Discussion Papers in Quantitative Tax Research 202, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Lukas, Elmar & Thiergart, Sascha, 2019. "The interaction of debt financing, cash grants and the optimal investment policy under uncertainty," European Journal of Operational Research, Elsevier, vol. 276(1), pages 284-299.
    7. Anna Danielova & Sudipto Sarkar, 2011. "The effect of leverage on the tax‐cut versus investment‐subsidy argument," Review of Financial Economics, John Wiley & Sons, vol. 20(4), pages 123-129, November.
    8. Tan, Yingxian & Pan, Zhihao & Wang, Rui & Wen, Chunhui, 2023. "Macroeconomic conditions and investment stimuli," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    9. Danielova, Anna & Sarkar, Sudipto, 2011. "The effect of leverage on the tax-cut versus investment-subsidy argument," Review of Financial Economics, Elsevier, vol. 20(4), pages 123-129.
    10. Nagy, Roel L.G. & Fleten, Stein-Erik & Sendstad, Lars H., 2023. "Don’t stop me now: Incremental capacity growth under subsidy termination risk," Energy Policy, Elsevier, vol. 172(C).
    11. Cesare Dosi & Michele Moretto & Roberto Tamborini, 2019. "Balanced-Budget Fiscal Stimuli of Investment and Welfare Value," EconPol Working Paper 28, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    12. Yingjie Niu & Jinqiang Yang & Siqi Zhao, 2022. "Robust stimulus of private investment: Tax rate cut or investment subsidy?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 339-357, September.
    13. Di Corato, Luca, 2012. "Optimal conservation policy under imperfect intergenerational altruism," Journal of Forest Economics, Elsevier, vol. 18(3), pages 194-206.
    14. Kyle Hyndman & Alberto Bisin, 2022. "Procrastination, self-imposed deadlines and other commitment devices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(3), pages 871-897, October.
    15. Di Corato, Luca & Hess, Sebastian, 2013. "Farmland Investments in Africa: What’s the Deal?," Working Paper Series 2013:10, Swedish University of Agricultural Sciences, Department Economics.
    16. Luca Di Corato, 2018. "Rural land development under hyperbolic discounting: a real option approach," Letters in Spatial and Resource Sciences, Springer, vol. 11(2), pages 167-182, July.
    17. Mitsuo Inada, 2022. "Promotion or liberalization: The effect of targeted investment policies on foreign direct investment inflows," Pacific Economic Review, Wiley Blackwell, vol. 27(5), pages 489-505, December.
    18. Li, Yuan & Yang, Jinqiang & Zhao, Siqi, 2022. "Present-biased government and sovereign debt dynamics," Journal of Mathematical Economics, Elsevier, vol. 98(C).
    19. Diogo Barbosa & Vitor M. Carvalho & Paulo J. Pereira, 2013. "The interaction between firms and Government in the context of investment decisions: a real options approach," FEP Working Papers 507, Universidade do Porto, Faculdade de Economia do Porto.
    20. Ebert, Sebastian & Wei, Wei & Zhou, Xun Yu, 2020. "Weighted discounting—On group diversity, time-inconsistency, and consequences for investment," Journal of Economic Theory, Elsevier, vol. 189(C).

    More about this item

    Keywords

    Investment; Real options; Quasi-hyperbolic discounting; Tax reduction; Investment subsidy;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0494-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.