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Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation

  • Christopher L. House
  • Matthew D. Shapiro

The intertemporal elasticity of investment for long-lived capital goods is nearly infinite. Consequently, investment prices should fully reflect temporary tax subsidies, regardless of the investment supply elasticity. Since prices move one-for-one with the subsidy, elasticities can be inferred from quantities alone. This paper uses a recent tax policy--bonus depreciation--to estimate the investment supply elasticity. Investment in qualified capital increased sharply. The estimated elasticity is high--between 6 and 14. There is no evidence that market prices reacted to the subsidy, suggesting that adjustment costs are internal, or that measurement error masks the price changes.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.3.737
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File URL: http://www.aeaweb.org/aer/data/june08/20060888_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 3 (June)
Pages: 737-68

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:3:p:737-68
Note: DOI: 10.1257/aer.98.3.737
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