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Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy

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  • Gürtler Marc

    (Technical University,Braunschweig, Germany)

  • Sieg Gernot

    (Technical University,Braunschweig, Germany)

Abstract

If 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.

Suggested Citation

  • Gürtler Marc & Sieg Gernot, 2010. "Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy," German Economic Review, De Gruyter, vol. 11(1), pages 25-36, February.
    • Handle: RePEc:bpj:germec:v:11:y:2010:i:1:p:25-36
    DOI: 10.1111/j.1468-0475.2009.00463.x
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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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    More about this item

    Keywords

    Irreversibility; investment; announcement effect; subsidy; tax;
    All these keywords.

    JEL classification:

    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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