Crunch time: A policy to avoid the announcement effect when terminating a subsidy
AbstractIf the government announces the termination of a subsidy paid for an irreversible investment under uncertainty, investors might decide to realize their investment so as 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 the subsidy might cost the government more in toto than granting the subsidy on a continuing basis. A better strategy would be to reduce the subsidy in parts rather than to terminate the subsidy in its entirety. --
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Bibliographic InfoPaper provided by Technische Universität Braunschweig, Economics Department in its series Economics Department Working Paper Series with number 1.
Date of creation: 2008
Date of revision:
Irreversibility; Investment; Announcement effect; Subsidy; Tax;
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, 2006. "Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy," Working Papers FW24V2, Technische Universität Braunschweig, Institute of Finance.
- H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
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