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Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy

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  • Gürtler, Marc
  • Sieg, Gernot

Abstract

We are considering for examination an Irreversible Investment under Uncertainty, subsidized by the government. If the government announces the termination of a form of subsidization, investors may decide to realize their investment in order to obtain the subsidy. These investors might have postponed an investment if future payment were assured. Depending on the degree of uncertainty and the time preference, the termination of said subsidy may cost the government more in toto than granting the subsidy on a continuing basis. We would like to show that a better strategy is to cut the subsidy in parts rather than terminate the subsidy in its entirety. --

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Bibliographic Info

Paper provided by Technische Universität Braunschweig, Institute of Finance in its series Working Papers with number FW24V2.

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Date of creation: 2006
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Handle: RePEc:zbw:tbsifw:fw24v2

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Keywords: Irreversibility; Investments; Announcement effect; subsidies;

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References

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  1. Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  6. Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 227-250, December.
  7. Sieg, Gernot, 2009. "Grandfather rights in the market for airport slots," Economics Department Working Paper Series 4, Technische Universität Braunschweig, Economics Department.
  8. Batool, Irem & Sieg, Gernot, 2009. "Bread, peace and the attrition of power: Economic events and German election results," Economics Department Working Paper Series 3, Technische Universität Braunschweig, Economics Department.
  9. Andrew B. Abel, 1980. "Accelerated Depreciation and the Efficacy of Temporary Fiscal Policy: Implications for an Inflationary Economy," NBER Working Papers 0596, National Bureau of Economic Research, Inc.
  10. Mailath George J., 1993. "Endogenous Sequencing of Firm Decisions," Journal of Economic Theory, Elsevier, vol. 59(1), pages 169-182, February.
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  13. 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.
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Cited by:
  1. Kratzsch, Uwe & Sieg, Gernot, 2009. "When to regulate airports: A simple rule," Economics Department Working Paper Series 6, Technische Universität Braunschweig, Economics Department.

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