How to get firms to invest: A simple solution to the hold-up problem in regulation

Hans Gersbach

Review of Economic Design, 2002, vol. 7, issue 1, 45-56

Abstract: Many governmental programs are effective only if firms make costly investments. The inability of authorities to precommit to a regulatory scheme creates incentives for firms not to invest and to hold-up the regulator. This paper describes a simple subsidy/tax scheme embedded in a four-stage mechanism that solves the hold-up problem. We design a self-financing subsidy/tax scheme which benefits a complying firm at the expense of a non-complying firm. In order to be credible, the subsidy and tax rates must maximize social welfare for any combination of investment decisions. We show that there exists a unique subgame perfect equilibrium in which all firms invest and no actual implementation with subsidies and taxes is required. We discuss in which cases the mechanism can work under incomplete information.

Keywords: Hold-up problem; environmental regulation; tax/subsidy mechanism; self-financing regulation (search for similar items in EconPapers)
JEL-codes: D62 H25 L13 L51 (search for similar items in EconPapers)
Date: 2002-09-05
Note: Received: 30 December 1998 / Accepted: 12 October 2001
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://link.springer.de/link/service/journals/10058/papers/2007001/20070045.pdf (application/pdf)
Access to the full text of the articles in this series is restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reecde:v:7:y:2002:i:1:p:45-56

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/10058

Access Statistics for this article

Review of Economic Design is currently edited by Atila Abdulkadiroglu, Fuhito Kojima and Tilman Börgers

More articles in Review of Economic Design from Springer, Society for Economic Design
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().