 Investment stimuli under government present-biased time preferencesJournal of Economics, 2016, vol. 119, issue 2, No 2, 111 pages Abstract: Abstract This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment setting a lower tax rate on future profits or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a reduced tax rate. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to set a lower tax rate. The government, in fact, when selecting the instrument to be used for speeding up investment, trades off the immediate and certain cost of a subsidy against the random tax revenues accruing from the investment. Hence, from the short-sighted perspective of current government, a lower tax rate may appear optimal as long as the consideration given to the earnings of future governments is small and/or the current government’s duration is short. Keywords: Investment; Real options; Quasi-hyperbolic discounting; Tax reduction; Investment subsidy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0494-4 DOI: 10.1007/s00712-016-0494-4 Access Statistics for this article Journal of Economics is currently edited by Giacomo Corneo More articles in Journal of Economics from Springer |
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