Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy

Gürtler Marc and Gernot Sieg
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Gürtler Marc: Technical University,Braunschweig, Germany

German Economic Review, 2010, vol. 11, issue 1, 25-36

Abstract: If the government announces the termination of a subsidy paid for an irreversible investment under uncertainty, investors might decide to realize their investment so as 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 the subsidy might cost the government more in toto than granting the subsidy on a continuing basis. A better strategy would be to reduce the subsidy in parts rather than to terminate the subsidy in its entirety.

Keywords: Irreversibility; investment; announcement effect; subsidy; tax (search for similar items in EconPapers)
Date: 2010
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Journal Article: Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy (2010)
Working Paper: Crunch time: A policy to avoid the announcement effect when terminating a subsidy (2008)
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DOI: 10.1111/j.1468-0475.2009.00463.x

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