208/2014 Marco Pani and Carlo Perroni

Because energy subsidies affect incentives to invest in energy-saving equipment and technologies, they entail a classic investment hold-up problem: once investment has taken place, policymakers will tend to overuse them, which will in turn depress investment by forward-looking agents. Reforming energy subsidies thus requires overcoming a policy commitment problem. In this paper we show that, even when commitment is feasible in principle, it may fail to materialize in a political equilibrium due to politicians’ re-election incentives. In particular, it will be those politicians who are comparatively less favourable to energy subsidies who may fail to commit to phase them out.

Political Economy

Energy Economics

http://dx.doi.org/10.1016/j.eneco.2017.12.013