Abstract
| Original language | English |
|---|---|
| Place of Publication | Tilburg |
| Publisher | CentER, Center for Economic Research |
| Number of pages | 22 |
| Volume | 2017-043 |
| Publication status | Published - 2 Nov 2017 |
Publication series
| Name | CentER Discussion Paper |
|---|---|
| Volume | 2017-043 |
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Keywords
- Investment under Uncertainty
- Capacity Choice
- welfare analysis
- Linear Demand
- Non-linear Demand
Cite this
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Subsidized Capacity Investment under Uncertainty. / Wen, Xingang; Hagspiel, V.; Kort, Peter.
Tilburg : CentER, Center for Economic Research, 2017. (CentER Discussion Paper; Vol. 2017-043).Research output: Working paper › Discussion paper › Other research output
TY - UNPB
T1 - Subsidized Capacity Investment under Uncertainty
AU - Wen, Xingang
AU - Hagspiel, V.
AU - Kort, Peter
PY - 2017/11/2
Y1 - 2017/11/2
N2 - This paper studies how the subsidy support, e.g. price support and reimbursed investment cost support, affects the investment decision of a monopoly firm under uncertainty and analyzes the implications for social welfare. The analytical results show that the unconditional, i.e., subsidy support that is introduced from the beginning, makes the firm invest earlier. Under a linear demand structure, the unconditional subsidy cannot align the firm's investment decision to the social optimal one. However, a conditional subsidy, i.e., subsidy support introduced at the social optimal investment threshold, can align the two decisions. For a non-linear demand structure, it is possible for the unconditional subsidy to make the firm invest according to the social optimum. When the investment decisions are aligned, the firm's investment leads to the first-best outcome.
AB - This paper studies how the subsidy support, e.g. price support and reimbursed investment cost support, affects the investment decision of a monopoly firm under uncertainty and analyzes the implications for social welfare. The analytical results show that the unconditional, i.e., subsidy support that is introduced from the beginning, makes the firm invest earlier. Under a linear demand structure, the unconditional subsidy cannot align the firm's investment decision to the social optimal one. However, a conditional subsidy, i.e., subsidy support introduced at the social optimal investment threshold, can align the two decisions. For a non-linear demand structure, it is possible for the unconditional subsidy to make the firm invest according to the social optimum. When the investment decisions are aligned, the firm's investment leads to the first-best outcome.
KW - Investment under Uncertainty
KW - Capacity Choice
KW - welfare analysis
KW - Linear Demand
KW - Non-linear Demand
M3 - Discussion paper
VL - 2017-043
T3 - CentER Discussion Paper
BT - Subsidized Capacity Investment under Uncertainty
PB - CentER, Center for Economic Research
CY - Tilburg
ER -