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Behavioral responses to subsidies in risky investment decisions and the effectiveness of tax credits and grants

Hagen Ackermann, Martin Fochmann and Rebecca Temme

No 226, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: We provide evidence that subsidy types that are identical in monetary terms differ in their behavioral responses and consequently in their effectiveness. In particular, we observe that investments into a subsidized asset are higher under tax credit than under grant. Both subsidy types are essentially very similar, only the mechanism of the subsidy application is different. In case of a grant, an individual gains an amount of money. In case of a tax credit, no money is received directly, but the tax to be paid is decreased by the amount of the tax credit. Our results indicate that these mechanisms have a substantial impact on the effectiveness of subsidies. Applying our findings, governments can "nudge" the investors to support desired investment decisions by using a certain subsidy type. Particularly, our results suggest that when policymakers are indifferent froma budget perspective between providing a subsidy as a grant or as a tax credit, they should implement a tax credit.

Keywords: behavioral taxation; subsidy; risk-taking behavior; prospect theory (search for similar items in EconPapers)
JEL-codes: C91 D14 H24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-upt
Date: 2018
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