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A contingent claims analysis of optimal investment subsidy

Instefjord, Norvald and Nawosah, Vivekanand and Yang, Pei (2016) 'A contingent claims analysis of optimal investment subsidy.' Journal of Economic Dynamics and Control, 73. 354 - 372. ISSN 0165-1889

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Abstract

This paper uses contingent claims analysis to answer two questions: (i) why are some subsidy markets apparently slow in attracting an optimal subsidy when others are not, and (ii) what can be done about it? The lack of activity in the green investment subsidy markets has been a concern as it appears optimal that countries should offer such support from a welfare point of view but progress has nonetheless been stalling, which motivates this paper. We show that free riding (which is likely to affect the green subsidy market) cools down the subsidy market with harmful welfare effects, and preemption (which is likely to affect the more active FDI subsidy market) overheats the subsidy market with similarly harmful effects. The theory dictates a taxation scheme that offsets these effects to restore the welfare to its maximum point.

Item Type: Article
Uncontrolled Keywords: First-mover advantages, Free riding, Investment subsidy, Preemption risk, Subsidy tax
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 28 Oct 2016 15:58
Last Modified: 25 Oct 2018 01:00
URI: http://repository.essex.ac.uk/id/eprint/17865

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