Short-run policy commitment when investment timing is endogenous: "More harm than good?"
AbstractWe 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper 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.
Length: 30 pages
Date of creation: Sep 2004
Date of revision:
Short-run government commitment; Microeconomic policy; Endogenous policy leadership; Investment timing; Uncertainty; Laissez faire;
Other versions of this item:
- Gerda Dewit & Dermot Leahy, 2011. "Short‐Run Policy Commitment When Investment Timing Is Endogenous: ‘More Harm Than Good?’," Bulletin of Economic Research, Wiley Blackwell, vol. 63(1), pages 82-107, 01.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
This paper has been announced in the following NEP Reports:
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.:
- 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.
- 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.
- Dewit, Gerda & Leahy, Dermot, 2001.
"Rivalry in Uncertain Export Markets: Commitment versus Flexibility,"
CEPR Discussion Papers
2771, C.E.P.R. Discussion Papers.
- 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.
- 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.
- R. W. Staiger & G. Tabellini, 1999. "Do Gatt Rules Help Governments Make Domestic Commitments?," Economics and Politics, Wiley Blackwell, vol. 11(2), pages 109-144, 07.
- Leahy, Dermot & Neary, J Peter, 1998.
"Strategic Trade and Industrial Policy Towards Dynamic Oligopolies,"
CEPR Discussion Papers
1968, C.E.P.R. Discussion Papers.
- Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
- D Leahy & J.P. Neary, 1998. "Strategic Trade and Industrial PolicyTowards Dynamic Oligopolies," CEP Discussion Papers dp0409, Centre for Economic Performance, LSE.
- Neary, J.P. & Leahy, D., 1998. "Strategic Trade and Industrial Policy Towards Dynamic Oligopolies," Papers 98/14, College Dublin, Department of Political Economy-.
- J. Peter Neary & Dermot Leahy, 1998. "Strategic trade and industrial policy towards dynamic oligopolies," LSE Research Online Documents on Economics 20246, London School of Economics and Political Science, LSE Library.
- Hamilton, J.H. & Slutsky, S.M., 1988.
"Endogenous Timing In Duopoly Games: Stackelberg Or Cournot Equilibria,"
88-4, Florida - College of Business Administration.
- 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.
- 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.
- Rodrik, Dani, 1992. "Political economy and development policy," European Economic Review, Elsevier, vol. 36(2-3), pages 329-336, April.
- Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
- Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.