Subsidized Capacity Investment under Uncertainty

Xingang Wen, V. Hagspiel, Peter Kort

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Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages22
Volume2017-043
Publication statusPublished - 2 Nov 2017

Publication series

NameCentER Discussion Paper
Volume2017-043

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Keywords

  • Investment under Uncertainty
  • Capacity Choice
  • welfare analysis
  • Linear Demand
  • Non-linear Demand

Cite this

Wen, X., Hagspiel, V., & Kort, P. (2017). Subsidized Capacity Investment under Uncertainty. (CentER Discussion Paper; Vol. 2017-043). Tilburg: CentER, Center for Economic Research.