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3511. Green Technology Investment: Announced vs. Unannounced Subsidy Retraction

Invited abstract in session MC-33: Dynamics of the Firm II, stream Optimal Control Theory and Applications.

Monday, 12:30-14:00
Room: 42 (building: 303A)

Authors (first author is the speaker)

1. Xingang Wen
Business Administration and Economics, Bielefeld University
2. Verena Hagspiel
NTNU
3. Peter Kort
Tilburg University

Abstract

Policy uncertainty affects firms’ investment decisions and the corresponding societal welfare (total surplus). One common perception is that, policy uncertainty has negative welfare effects, and therefore, the regulator should make policy changes “transparent” by announcing future policy changes. This paper investigates a firm’s green technology investment decision in a dynamic setting, where it decides about the investment timing and size under the market uncertainty in the form of stochastic investment costs, and under the policy uncertainty in the form of unannounced subsidy retractions. In particular, we consider two scenarios, depending on whether the regulator announces the subsidy retraction in advance. We show that, a larger policy uncertainty makes the firm invest earlier and less. Besides, the subsidy retraction announcement can motivate the firm to invest early to “take” the subsidy, which is a typical rent-seeking behavior. This has two negative welfare implications: an inefficiently small investment size due to the early investment, and a large subsidy cost due to the firm “taking” the subsidy. Comparing the total surplus generated by firm’s investment decision in the two scenarios, we conclude that the rent-seeking behavior in the announced scenario makes it possible that not-announcing the retraction threshold yields a larger total surplus. This result is robust for several common subsidy types.

Keywords

Status: accepted

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