What Do Micro Data Reveal About the User Cost Elasticity?: New Evidence on the Responsiveness of Business Capital Formation
AbstractThe price sensitivity of business investment spending is a central element in economic analysis. A substantial response of capital spending to its user cost, which combines interest, tax, and depreciation rates with relative prices, is critical to evaluating the effectiveness of monetary policy, deficit reduction, and tax reform. In spite of this central role, however, the supporting evidence for a substantial user cost elasticity (UCE) is modest. Several important concerns suggest a downward bias in elasticities estimated from the aggregate data typically employed in UCE research. These biases may arise from firm heterogeneity, measurement error, capital market frictions, and simultaneity. While such biases are theoretically plausible, their empirical importance remains to be substantiated. With a particularly rich data set, containing over 26,000 observations, this paper explores what can be learned about the UCE from micro data. Investment and firm-level control variables are taken from an extensive panel of Compustrat forms. To construct the user cost, we tap a new data source that provides variation across firms as well as across time. A number of the econometric biases mentioned above have a substantial impact on the estimated UCE. After correcting for the biases, we obtain a precisely estimated but small value for the UCE of about -0.25. The effects of capital gain tax cuts and the "flat-tax" proposal on investment are evaluated with this estimated UCE.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 9805011.
Length: 60 pages
Date of creation: 28 May 1998
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- Robert S. Chirinko & Steven M. Fazzari & Andrew P. Meyer, 1996. "What Do Micro Data Reveal About the User Cost Elasticity?: New Evidence on the Responsiveness of Business Capital Formation," Economics Working Paper Archive wp_175, Levy Economics Institute.
- E - Macroeconomics and Monetary Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-10-02 (All new papers)
- NEP-PKE-1998-10-05 (Post Keynesian Economics)
- NEP-TID-1998-10-02 (Technology & Industrial Dynamics)
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