Subsidized Capacity Investment Under Uncertainty

CentER Discussion Paper Series No. 2017-043

22 Pages Posted: 3 Nov 2017

See all articles by Xingang Wen

Xingang Wen

Tilburg University - Center for Economic Research (CentER)

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

Date Written: November 2, 2017

Abstract

This paper studies how the subsidy support, e.g. price support and reimbursed investment cost support, affects the investment decision of a monopoly firm under uncertainty and analyzes the implications for social welfare. The analytical results show that the unconditional, i.e., subsidy support that is introduced from the beginning, makes the firm invest earlier. Under a linear demand structure, the unconditional subsidy cannot align the firm's investment decision to the social optimal one. However, a conditional subsidy, i.e., subsidy support introduced at the social optimal investment threshold, can align the two decisions. For a non-linear demand structure, it is possible for the unconditional subsidy to make the firm invest according to the social optimum. When the investment decisions are aligned, the firm's investment leads to the first-best outcome.

Keywords: Investment under Uncertainty, Capacity Choice, Welfare Analysis, Linear Demand, Nonlinear

JEL Classification: D81, L51

Suggested Citation

Wen, Xingang and Hagspiel, Verena and Kort, Peter, Subsidized Capacity Investment Under Uncertainty (November 2, 2017). CentER Discussion Paper Series No. 2017-043, Available at SSRN: https://ssrn.com/abstract=3063942 or http://dx.doi.org/10.2139/ssrn.3063942

Xingang Wen (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Verena Hagspiel

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Peter Kort

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

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