Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy
AbstractWe 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 InfoPaper provided by Technische Universität Braunschweig, Institute of Finance in its series Working Papers with number FW24V2.
Date of creation: 2006
Date of revision:
Irreversibility; Investments; Announcement effect; subsidies;
Other versions of this item:
- Marc Gürtler & Gernot Sieg, 2010. "Crunch Time: A Policy to Avoid the 'Announcement Effect' when Terminating a Subsidy," German Economic Review, Verein für Socialpolitik, vol. 11, pages 25-36, 02.
- Gürtler, Marc & Sieg, Gernot, 2008. "Crunch time: A policy to avoid the announcement effect when terminating a subsidy," Economics Department Working Paper Series 1, Technische Universität Braunschweig, Economics Department.
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
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