We study the effect of a potential subsidy retraction of a lump-sum subsidy on optimal investment timing and size.

We find that increasing the probability of subsidy withdrawal increases the incentive to invest earlier but decreases the optimal investment size. We show that a firm investing at the optimal timing installs larger capacity when the policy is not provided than when it is. Providing a larger subsidy the policy maker is able to accelerate investment but only at the cost of smaller investment. If a policy maker aims at maximizing welfare, we show that the larger the policy uncertainty the smaller the subsidy that should be provided.