Fiscal Foresight and Perverse Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds

Chirinko, Robert S.; Wilson, Daniel J.

doi:10.2139/ssrn.4422848

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Fiscal Foresight and Perverse Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds

CESifo Working Paper No. 10373

34 Pages Posted: 19 Apr 2023

See all articles by Robert S. Chirinko

Robert S. Chirinko

CESifo (Center for Economic Studies and Ifo Institute); University of Illinois at Chicago, Department of Finance

Daniel J. Wilson

Federal Reserve Bank of San Francisco

Date Written: 2023

Abstract

We study the conditions under which fiscal foresight – forward-looking agents anticipating future policy changes – results in perverse economic behavior through unintended intertemporal tradeoffs. Somewhat surprisingly, fiscal foresight by itself is far from sufficient for policy-induced incentives to perversely distort firm behavior. Rather, we show that there are two additional sets of conditions, at least one of which must hold to generate perverse behavior: (i) storable output, diminishing returns, and a non-competitive output market; (ii) “rolling base” policy design and storable output. These conditions suggest that the estimated impacts of fiscal policies may be sensitive to underlying economic or legislative characteristics and that policies targeted to specific firms or industries with unique characteristics may not be generalizable.

Keywords: fiscal foresight, intertemporal tradeoffs, real distortions, fiscal policy

JEL Classification: E620, H200

Suggested Citation: Suggested Citation

Chirinko, Robert S. and Chirinko, Robert S. and Wilson, Daniel J., Fiscal Foresight and Perverse Distortions to Firm Behavior: Anticipatory Dips and Compensating Rebounds (2023). CESifo Working Paper No. 10373, Available at SSRN: https://ssrn.com/abstract=4422848 or http://dx.doi.org/10.2139/ssrn.4422848