Informational externalities, strategic delay, and optimal investment subsidies

Matthew Doyle ()

Canadian Journal of Economics, 2010, vol. 43, issue 3, 941-966

Abstract: This paper examines optimal government policy when private investment generates information, but investors cannot internalize the informational value their actions have to others. Equilibrium exhibits inefficient delay, as investors adopt a wait-and-see approach. The government can alter incentives via an investment subsidy, but complications arise, since future subsidies may induce investors to disregard current policy initiatives. The paper shows that the government achieves its desired outcome only when the the investment subsidy is financed by a non-distortionary, lump-sum tax. When taxation is distortionary, the government faces a time inconsistency problem that may prevent effective policy.

JEL-codes: D83 H2 (search for similar items in EconPapers)
Date: 2010
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Working Paper: Informational Externalities, Strategic Delay, and the Search for Optimal Policy (2002)
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