Green Capacity Investment Under Subsidy Withdrawal Risk

32 Pages Posted: 9 Jul 2019

See all articles by Roel L. G. Nagy

Roel L. G. Nagy

Norwegian University of Science and Technology (NTNU)

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: July 5, 2019

Abstract

This article studies the effect of different subsidy characteristics, like its size and withdrawal probability, on optimal investment timing and size. We find that increasing the risk of subsidy withdrawal, as well as increasing subsidy size, increases the firm's incentive to invest earlier but decreases the optimal investment size. We show that the optimal investment size is larger when no subsidy is implemented, although the firm will invest later then. A subsidy increases total welfare when subsidy withdrawal risk is very low or absent. If a policy maker aims at maximizing welfare, we show that the larger the subsidy withdrawal risk, the smaller the optimal subsidy is. When the policy maker aims to increase capacity, a subsidy is ineffective. However, a lump-sum tax can increase the firm's optimal capacity, at the cost of a delay in investment.

Keywords: Green Energy, Subsidy, Investment under Uncertainty, Dynamic Public Economics

Suggested Citation

Nagy, Roel L. G. and Hagspiel, Verena and Kort, Peter, Green Capacity Investment Under Subsidy Withdrawal Risk (July 5, 2019). Available at SSRN: https://ssrn.com/abstract=3415532 or http://dx.doi.org/10.2139/ssrn.3415532

Roel L. G. Nagy (Contact Author)

Norwegian University of Science and Technology (NTNU) ( email )

Høgskoleringen
Trondheim NO-7491, 7491
Norway

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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