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Investment stimuli under government present-biased time preferences

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  • Luca Corato

    (Swedish University of Agricultural Sciences)

Abstract

This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment setting a lower tax rate on future profits or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a reduced tax rate. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to set a lower tax rate. The government, in fact, when selecting the instrument to be used for speeding up investment, trades off the immediate and certain cost of a subsidy against the random tax revenues accruing from the investment. Hence, from the short-sighted perspective of current government, a lower tax rate may appear optimal as long as the consideration given to the earnings of future governments is small and/or the current government’s duration is short.

Suggested Citation

  • Luca Corato, 2016. "Investment stimuli under government present-biased time preferences," Journal of Economics, Springer, vol. 119(2), pages 101-111, October.
    • Handle: RePEc:kap:jeczfn:v:119:y:2016:i:2:d:10.1007_s00712-016-0494-4
    DOI: 10.1007/s00712-016-0494-4
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    References listed on IDEAS

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    Cited by:

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    3. Giacomo Corneo & Sergio Vergalli, 2016. "Taxes, subsidies, regulation in dynamic models," Journal of Economics, Springer, vol. 119(2), pages 97-99, October.
    4. Tian, Yuan, 2018. "Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 151-159.

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    More about this item

    Keywords

    Investment; Real options; Quasi-hyperbolic discounting; Tax reduction; Investment subsidy;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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