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Short-run policy commitment when investment timing is endogenous: "More harm than good?"

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Author Info
Gerda Dewit () (National University of Ireland Maynooth)
Dermot Leahy () (University College Dublin)

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Abstract

We introduce endogenous leadership in a game between government and firms, in which the government has short-run commitment power only and firms choose when to invest. We show that firms that delay investment in the absence of government intervention have an incentive to invest early and strategically under policy activism. Then, even though a policy scheme succeeds in correcting an existing distortion targeted by the government, it can create a new and potentially more harmful one. We investigate when the government may do better by adhering to laissez-faire than by engaging in active policy intervention.

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Publisher Info
Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1400904.

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Length: 30 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:may:mayecw:n1400904

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Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.may.ie/academic/economics/
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Related research
Keywords: Short-run government commitment; Microeconomic policy; Endogenous policy leadership; Investment timing; Uncertainty; Laissez faire;

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Leahy, Dermot & Neary, J Peter, 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," CEPR Discussion Papers 1968, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March. [Downloadable!] (restricted)
    Other versions:
  3. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March. [Downloadable!] (restricted)
  4. Rodrik, Dani, 1992. "Political economy and development policy," European Economic Review, Elsevier, vol. 36(2-3), pages 329-336, April. [Downloadable!] (restricted)
  5. Dewit, Gerda & Leahy, Dermot, 2004. "Rivalry in uncertain export markets: commitment versus flexibility," Journal of International Economics, Elsevier, vol. 64(1), pages 195-209, October. [Downloadable!] (restricted)
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  6. Sadanand, Asha & Sadanand, Venkatraman, 1996. "Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility," Journal of Economic Theory, Elsevier, vol. 70(2), pages 516-530, August. [Downloadable!] (restricted)
  7. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December. [Downloadable!] (restricted)
  8. Rodrik, Dani, 1987. "Policy Targeting with Endogenous Distortions: Theory of Optimum Subsidy Revisited," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 903-11, November. [Downloadable!] (restricted)
  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  11. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December. [Downloadable!] (restricted)
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