IDEAS home Printed from
   My bibliography  Save this paper

Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy


  • Gürtler, Marc
  • Sieg, Gernot


We are considering for examination an Irreversible Investment under Uncertainty, subsidized by the government. If the government announces the termination of a form of subsidization, investors may decide to realize their investment in order 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 said subsidy may cost the government more in toto than granting the subsidy on a continuing basis. We would like to show that a better strategy is to cut the subsidy in parts rather than terminate the subsidy in its entirety.

Suggested Citation

  • 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.
  • Handle: RePEc:zbw:tbsifw:fw24v2

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
    2. Mailath George J., 1993. "Endogenous Sequencing of Firm Decisions," Journal of Economic Theory, Elsevier, vol. 59(1), pages 169-182, February.
    3. Irem Batool & Gernot Sieg, 2009. "Bread and the attrition of power: Economic events and German election results," Public Choice, Springer, vol. 141(1), pages 151-165, October.
    4. Saloner, Garth, 1987. "Cournot duopoly with two production periods," Journal of Economic Theory, Elsevier, vol. 42(1), pages 183-187, June.
    5. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    6. Elizabeth Olmstead Teisberg, 1993. "Capital Investment Strategies under Uncertain Regulation," RAND Journal of Economics, The RAND Corporation, vol. 24(4), pages 591-604, Winter.
    7. Giovanni Maggi, 1996. "Endogenous Leadership in a New Market," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 641-659, Winter.
    8. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    9. Sieg, Gernot, 2010. "Grandfather rights in the market for airport slots," Transportation Research Part B: Methodological, Elsevier, vol. 44(1), pages 29-37, January.
    10. Fudenberg, Drew & Tirole, Jean, 1983. "Capital as a commitment: Strategic investment to deter mobility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 227-250, December.
    11. Abel, Andrew B., 1982. "Accelerated depreciation and the efficacy of temporary fiscal policy : Implications for an inflationary economy," Journal of Public Economics, Elsevier, vol. 19(1), pages 23-47, October.
    12. Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-1012, December.
    13. 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.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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.

    More about this item


    Irreversibility; Investments; Announcement effect; subsidies;

    JEL classification:

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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:tbsifw:fw24v2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.