Scandinavian Working Papers in Economics

Working Paper Series,
Swedish University of Agricultural Sciences, Department Economics

No 2014:3: Investment stimuli under government present-biased time preferences

Luca Di Corato ()
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Luca Di Corato: Department of Economics, Swedish University of Agricultural Sciences, Postal: Department of Economics, Box 7013, Swedish University of Agricultural Sciences, SE-750 07 Uppsala, Sweden

Abstract: This paper examines the net benefit accruing to a present-biased government contemplating the option of speeding up investment using a tax cut or an investment subsidy as an incentive. The literature generally suggests the use of an investment subsidy rather than a tax cut. However, this study shows that, depending on the degree of present-biasedness, it may be more advantageous for the government to provide a tax cut.

Keywords: Investment; Tax reduction; Investment subsidy; Quasi-hyperbolic discounting; Real options

JEL-codes: C61; H20

7 pages, March 13, 2014

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