Crunch Time: A Policy to Avoid the 'Announcement Effect' when Terminating a Subsidy

If the government announces the termination of a subsidy paid for an irreversible investment under uncertainty, investors might decide to realize their investment so as to obtain the subsidy. These investors might have postponed an investment if future payment were assured. Depending on the degree of uncertainty and the time preference, the termination of the subsidy might cost the government more in toto than granting the subsidy on a continuing basis. A better strategy would be to reduce the subsidy in parts rather than to terminate the subsidy in its entirety. Copyright 2009 The Authors. Journal Compilation Verein für Socialpolitik and Blackwell Publishing Ltd. 2009.