Abstract:  Pigouvian subsidies are efficient, but output subsidies with uncertain or limited durations are not Pigouvian. We show that optimal "time-limited" policies must also subsidize investment to correct externalities generated after the output subsidy ends. Furthermore, an output subsidy's optimal duration is characterized by the change in production when it ends. In the wind-energy industry, we find that power generation decreases by 5-10% after the end of facilities' ten-year eligibility for the Renewable Energy Production Tax Credit. This behavioral response has implications for energy transitions and highlights how time limits could cause larger distortions in more elastic industries.

Abstract: We use close elections in parliamentary democracies as natural experiments to estimate public debt levels' effects on real interest rates. We first estimate that an election in which no party achieves a parliamentary majority causes the debt-to-GDP ratio to increase by 17 percentage points over the following five years relative to an election in which one party barely secures a majority. We next estimate that real interest rates rise by a relative 99 basis points following such an election, implying that a one percentage point increase in the debt-to-GDP ratio causes a 5.8 basis point increase in real rates. That effect is larger than most previous estimates in the literature, suggesting the potential importance of simultaneity in the determination of real rates and government debt levels, and has important implications for the analysis of the sustainability of public debt levels.