Crunch time: A policy to avoid the announcement effect when terminating a subsidy

Marc Gürtler and Gernot Sieg

No 1, Economics Department Working Paper Series from Technische Universität Braunschweig, Economics Department

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)
JEL-codes: D11 H3 (search for similar items in EconPapers)
Date: 2008
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https://www.econstor.eu/bitstream/10419/51310/1/58386659X.pdf (application/pdf)

Related works:
Journal Article: Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy (2010)
Journal Article: Crunch Time: A Policy to Avoid the ‘Announcement Effect’ when Terminating a Subsidy (2010)
Working Paper: Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy (2006)
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