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Title:Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy PDF Logo
Authors:Gürtler, Marc
Sieg, Gernot
Issue Date:2006
Series/Report no.:Working papers // Institut für Finanzwirtschaft, Technische Universität Braunschweig FW24V2
Abstract: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.
Subjects:Irreversibility
Investments
Announcement effect
subsidies
JEL:H3
D11
Document Type:Working Paper
Appears in Collections:Working Paper Series, Institut für Finanzwirtschaft, TU Braunschweig

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