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    Short-Run Policy Commitment When Investment Timing Is Endogenous: 'More Harm Than Good?'


    Dewit, Gerda and Leahy, Dermot (2011) Short-Run Policy Commitment When Investment Timing Is Endogenous: 'More Harm Than Good?'. Bulletin of Economic Research, 63 (1). pp. 82-107. ISSN 0307-3378

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    Abstract

    In our model, firms choose when to set cost-reducing investment and the government, which only has short-run commitment power, sets an output subsidy. We show that firms that delay investment without government intervention have an incentive to invest early under policy activism, strategically underinvesting or overinvesting to obtain larger subsidies. The policy scheme thus creates a new, potentially more harmful, distortion. Under oligopoly, a firm has a weaker incentive to manipulate policy than under monopoly, which makes policy intervention less harmful. We investigate when the government may do better by adhering to laissez-faire than by engaging in active policy intervention.

    Item Type: Article
    Keywords: investment timing; laissez-faire; microeconomic policy; short-run government commitment; uncertainty; Information, Knowledge, and Uncertainty; Business Taxes and Subsidies; Fiscal Policies and Behavior of Economic Agents; Firm;
    Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
    Item ID: 11364
    Identification Number: https://doi.org/10.1111/j.1467-8586.2009.00332.x
    Depositing User: Gerda Dewit
    Date Deposited: 18 Oct 2019 09:28
    Journal or Publication Title: Bulletin of Economic Research
    Publisher: Wiley
    Refereed: Yes
    URI:

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