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FUND SUBSTITUTION AND THE INCENTIVE EFFECT OF PUBLIC INVESTMENT SUBSIDIES
Author(s) -
Wren Colin
Publication year - 1996
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.1996.tb00949.x
Subject(s) - subsidy , elasticity of substitution , economics , substitution (logic) , investment (military) , incentive , substitution effect , microeconomics , public economics , finance , market economy , production (economics) , politics , computer science , political science , law , programming language
This paper analyses the observed phenomenon of public for private fund substitution in industrial assistance, by examining the public and private sector funding of investment under different assumptions about the nature of the private capital market. This bears on the effectiveness of industrial subsidies, and has implications for welfare and the design of optimal assistance contracts. It is shown that fund substitution depends crucially on the elasticity of investment with respect to the user cost of capital in the without‐subsidy position, and on the nature of any amount and rate constraints on the assistance contract.