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Short-run policy commitment when investment timing is endogenous: "More harm than good?"

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  • Gerda Dewit

    () (National University of Ireland Maynooth)

  • Dermot Leahy

    () (University College Dublin)

Abstract

We introduce endogenous leadership in a game between government and firms, in which the government has short-run commitment power only and firms choose when to invest. We show that firms that delay investment in the absence of government intervention have an incentive to invest early and strategically under policy activism. Then, even though a policy scheme succeeds in correcting an existing distortion targeted by the government, it can create a new and potentially more harmful one. We investigate when the government may do better by adhering to laissez-faire than by engaging in active policy intervention.

Suggested Citation

  • Gerda Dewit & Dermot Leahy, 2004. "Short-run policy commitment when investment timing is endogenous: "More harm than good?"," Economics, Finance and Accounting Department Working Paper Series n1400904, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n1400904
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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1169-1189.
    2. Neary, J Peter & Leahy, Dermot, 2000. "Strategic Trade and Industrial Policy towards Dynamic Oligopolies," Economic Journal, Royal Economic Society, vol. 110(463), pages 484-508, April.
    3. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
    4. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, pages 273-286.
    5. Dewit, Gerda & Leahy, Dermot, 2004. "Rivalry in uncertain export markets: commitment versus flexibility," Journal of International Economics, Elsevier, pages 195-209.
    6. 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.
    7. Dani Rodrik, 1987. "Policy Targeting with Endogenous Distortions: Theory of Optimum Subsidy Revisited," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 903-911.
    8. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, pages 956-970.
    9. Spencer, Barbara J. & Brander, James A., 1992. "Pre-commitment and flexibility : Applications to oligopoly theory," European Economic Review, Elsevier, vol. 36(8), pages 1601-1626, December.
    10. Rodrik, Dani, 1992. "Political economy and development policy," European Economic Review, Elsevier, vol. 36(2-3), pages 329-336, April.
    11. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, pages 970-985.
    12. R. W. Staiger & G. Tabellini, 1999. "Do Gatt Rules Help Governments Make Domestic Commitments?," Economics and Politics, Wiley Blackwell, vol. 11(2), pages 109-144, July.
    13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    More about this item

    Keywords

    Short-run government commitment; Microeconomic policy; Endogenous policy leadership; Investment timing; Uncertainty; Laissez faire;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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