Taxation, user cost of capital and factor demand
AbstractIn this paper we analyze the impact on the demand of capital and labour of changes in their relative costs, using micro data. We especially highlight the role of the user cost of capital, for which we propose an original measure based on the cost of debt and the cost of equity. We hence take advantage of changes in the taxation of capital to build instrument variables and to estimate a complete system of factor demands. First we find that the elasticity of substitution between capital and labour is relatively weak in the non manufacturing sector, about 0,4, whereas this parameter range from 0.6 to 0,8 in the manufacturing sector. Secondly, we show that the price elasticity of the demand for goods is quite high, and is almost equal to 2 in both industries. Thirdly and probably the most interesting result, we find a significant and direct relationship between the user cost of capital and the stock of capital, which does not appear in most former studies on French data. In a standard model of factor demand, our results mean that the wealth effect dominates the substitution effect. As a result, lowering the user cost of capital would lead, at partial equilibrium, to increase not only investment but also the employment level and output.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2001-09.
Date of creation: 2001
Date of revision:
Taxation; user cost of capital; factor demand; firm data;
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John M. Abowd & Laurence Allain, 1996.
"Compensation Structure and Product Market Competition,"
NBER Working Papers
5493, National Bureau of Economic Research, Inc.
- John M. ABOWD & Laurence ALLAIN, 1996. "Compensation Structure and Product Market Competition," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 207-217.
- Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
- Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002.
"Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms,"
IZA Discussion Papers
582, Institute for the Study of Labor (IZA).
- Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002. "Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms," CEPR Discussion Papers 3510, C.E.P.R. Discussion Papers.
- Fumio Hayashi, 1981.
"Tobin's Marginal q and Average a : A Neoclassical Interpretation,"
457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
- Martin Feldstein, 1997.
"The Costs and Benefits of Going from Low Inflation to Price Stability,"
NBER Working Papers
5469, National Bureau of Economic Research, Inc.
- Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
- Brigitte Dormont, 1997. "L'influence du coût salarial sur la demande de travail," Économie et Statistique, Programme National Persée, vol. 301(1), pages 95-109.
- Alan J. Auerbach, 1984.
"Taxation, Corporate Financial Policy and the Cost of Capital,"
NBER Working Papers
1026, National Bureau of Economic Research, Inc.
- Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
- Michel Bua & François Legendre & Philippe Redondo & Philippe Girard, 1990. "Les effets favorables d'une baisse de la fiscalité des entreprises : une évaluation à partir de données individuelles," Économie et Statistique, Programme National Persée, vol. 229(1), pages 41-51.
- Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (D3E).
If references are entirely missing, you can add them using this form.