Robust stimulus of private investment: Tax rate cut or investment subsidy?

Yingjie Niu, Jinqiang Yang and Siqi Zhao

International Journal of Economic Theory, 2022, vol. 18, issue 3, 339-357

Abstract: This paper examines the net benefit accruing to a government when choosing between a lower tax rate on future profits and an investment subsidy as investment stimulation. We hypothesize that either the firm or the government faces Knightian uncertainty in contemplating investment. In the presence of the firm's Knightian uncertainty, the government prefers the investment cost subsidy to tax rate reduction as the conventional wisdom in prior literature. However, if the government is concerned about the model uncertainty, the optimal policy depends on the varying characteristics in reality, such as the ambiguity level, the growth rate, the volatility, as well as the interest rate environment. The tax rate cut is favorable when the growth rate, the discount rate, and the volatility are lower, and when the ambiguity parameter is higher. By taking into account Knightian uncertainty, we provide a potential rationale behind evaluating stimulus policies in different economic environments.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/ijet.12303

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:bla:ijethy:v:18:y:2022:i:3:p:339-357

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1742-7355

Access Statistics for this article

International Journal of Economic Theory is currently edited by Kazuo Nishimura and Makoto Yano

More articles in International Journal of Economic Theory from The International Society for Economic Theory
Bibliographic data for series maintained by Wiley Content Delivery ().