Behavioral Responses to Subsidies in Risky Investment Decisions and the Effectiveness of Tax Credits and Grants

29 Pages Posted: 21 Apr 2018

See all articles by Hagen Ackermann

Hagen Ackermann

Otto-von-Guericke-Universität Magdeburg

Martin Fochmann

University of Cologne

Rebecca Temme

University of Cologne

Date Written: April 4, 2018

Abstract

We provide evidence that subsidy types that are identical in monetary terms differ in their behavioral responses and consequently in their effectiveness. In particular, we observe that investments into a subsidized asset are higher under tax credit than under grant. Both subsidy types are essentially very similar, only the mechanism of the subsidy application is different. In case of a grant, an individual gains an amount of money. In case of a tax credit, no money is received directly, but the tax to be paid is decreased by the amount of the tax credit. Our results indicate that these mechanisms have a substantial impact on the effectiveness of subsidies. Applying our findings, governments can ‘nudge’ the investors to support desired investment decisions by using a certain subsidy type. Particularly, our results suggest that when policymakers are indifferent from a budget perspective between providing a subsidy as a grant or as a tax credit, they should implement a tax credit.

Keywords: Behavioral Taxation, Subsidy, Risk-Taking Behavior, Prospect Theory

JEL Classification: C91, D14, H24

Suggested Citation

Ackermann, Hagen and Fochmann, Martin and Temme, Rebecca, Behavioral Responses to Subsidies in Risky Investment Decisions and the Effectiveness of Tax Credits and Grants (April 4, 2018). Available at SSRN: https://ssrn.com/abstract=3156075 or http://dx.doi.org/10.2139/ssrn.3156075

Hagen Ackermann

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Martin Fochmann (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Behavioral Accounting/Taxation/Finance
Cologne, 50923
Germany

HOME PAGE: http://www.taxation.uni-koeln.de/de/team/prof-dr-martin-fochmann/

Rebecca Temme

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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