Signaling Commitment by Excessive Spending
AbstractA policy is often more effective the more confident are economic agents that the current leader (or principal) will adopt the policy. This paper considers uncertainty about the principal's type, interpreted as uncertainty about the probability that he would adopt a project or policy. We show how a principal who highly values the project can signal that valuation by committing to spend a minimum on the project, even if canceling the program would entail waste, Indeed, the amount committed to spend may exceed the project's cost.
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Bibliographic InfoPaper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 070811.
Length: 13 pages
Date of creation: Feb 2008
Date of revision:
Government spending; Signaling; Commitment;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
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