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Why Is Investment Subsidized?

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  • Hansson, Ingemar
  • Stuart, Charles

Abstract

In most economies, investment is subsidized while capital is taxed. This is difficult to explain in a traditional perfect-foresight, representative-agent setting in which a single government sets all current and future taxes on capital. The authors consider a sequential-game setting in which tax policy in a period is determined by the government in power in that period. In equilibrium, investment is subsidized while capital is taxed. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Hansson, Ingemar & Stuart, Charles, 1989. "Why Is Investment Subsidized?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(3), pages 549-559, August.
  • Handle: RePEc:ier:iecrev:v:30:y:1989:i:3:p:549-59
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    Cited by:

    1. Giorgio Barba Navaretti & Enrico Santarelli & Marco Vivarelli, 2002. "The role of subsidies in promoting Italian joint ventures in least developed and transition economies," Applied Economics, Taylor & Francis Journals, vol. 34(12), pages 1563-1569.
    2. Danielova, Anna & Sarkar, Sudipto, 2011. "The effect of leverage on the tax-cut versus investment-subsidy argument," Review of Financial Economics, Elsevier, vol. 20(4), pages 123-129.
    3. Leung, Charles, 2004. "Macroeconomics and housing: a review of the literature," Journal of Housing Economics, Elsevier, vol. 13(4), pages 249-267, December.
    4. Panu Poutvaara, 2002. "Investment in Education and Redistributive Taxation without Precommitment," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(2), pages 177-188, May.
    5. Barbosa, Diogo & Carvalho, Vitor M. & Pereira, Paulo J., 2016. "Public stimulus for private investment: An extended real options model," Economic Modelling, Elsevier, vol. 52(PB), pages 742-748.
    6. Alan J. Auerbach, 1990. "Public Sector Dynamics," NBER Working Papers 3508, National Bureau of Economic Research, Inc.
    7. Pennings, Enrico, 2005. "How to maximize domestic benefits from foreign investments: the effect of irreversibility and uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 29(5), pages 873-889, May.
    8. Sarkar, Sudipto, 2012. "Attracting private investment: Tax reduction, investment subsidy, or both?," Economic Modelling, Elsevier, vol. 29(5), pages 1780-1785.
    9. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.

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