How to get firms to invest: A simple solution to the hold-up problem in regulation
AbstractMany governmental programs are effective only if firms make costly investments. The inability of authorities to precommit to a regulatory scheme creates incentives for firms not to invest and to hold-up the regulator. This paper describes a simple subsidy/tax scheme embedded in a four-stage mechanism that solves the hold-up problem. We design a self-financing subsidy/tax scheme which benefits a complying firm at the expense of a non-complying firm. In order to be credible, the subsidy and tax rates must maximize social welfare for any combination of investment decisions. We show that there exists a unique subgame perfect equilibrium in which all firms invest and no actual implementation with subsidies and taxes is required. We discuss in which cases the mechanism can work under incomplete information.
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Bibliographic InfoArticle provided by Springer in its journal Review of Economic Design.
Volume (Year): 7 (2002)
Issue (Month): 1 ()
Note: Received: 30 December 1998 / Accepted: 12 October 2001
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Web page: http://link.springer.de/link/service/journals/10058/index.htm
Find related papers by JEL classification:
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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