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

Author

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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 Department Working Paper Series n1400904, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n1400904
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    References listed on IDEAS

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    Cited by:

    1. Gerda Dewit & Dermot Leahy, 2015. "Tax Uniformity: A Commitment Device for Restraining Opportunistic Behavior," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 17(5), pages 641-672, October.

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    More about this item

    Keywords

    Short-run government commitment; Microeconomic policy; Endogenous policy leadership; Investment timing; Uncertainty; Laissez faire;
    All these keywords.

    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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