The investment tax credit and irreversible investment
AbstractWe examine the impact of random changes in investment tax credit (ITC) policy on the irreversible investment decisions of a monopolistically competitive firm facing demand uncertainty. We examine the impact of increases in risk and changes in persistence in the ITC policy on investment behavior. Our results indicate that a temporary ITC (lower policy persistence) generally increases the variability of investment both in the short and the long-run. It lowers investment in the short-run and raises it in the long-run. Thus, perhaps surprisingly, a temporary ITC does not always lead to higher investment but always leads to more volatile investment. Policy-makers may thus face a long-run trade-off between the level and the volatility of investment. We also find that increases in risk defined in terms of mean-preserving spreads may lead to lower investment.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 31 (2009)
Issue (Month): 4 (December)
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Web page: http://www.elsevier.com/locate/inca/622617
Irreversible investment Investment tax credit Tax policy Changes in persistence Increases in risk;
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