Are Investment Incentives Blunted by Changes in Prices of Capital Goods?
Recent research on business investment decisions suggests that real investment in plant and equipment is quite sensitive to changes in the user cost of capital, pointing to the possibility that long-run changes in tax policy may have a significant impact on an economy's capital stock. Indeed, many countries have at times adopted investment tax incentives to stimulate investment. The prevalence of investment incentives suggests that local policy-makers believe these are effective in increasing investment at a reasonable cost in terms of lost revenue. In this paper, we explore this issue by estimating the extent to which countries are price-takers in the world market for capital goods. We find that most countries--even the United States--face a highly elastic supply of capital goods, suggesting that the effect of investment incentives on the price of investment goods is small. Hence effects of long-run changes in investment tax policy are likely to materialize in real investment rather than simply being dissipated in changes in capital-goods prices. Copyright 1998 by Blackwell Publishers Ltd.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 1 (1998)
Issue (Month): 1 (October)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=1367-0271|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=1367-0271|
References listed on IDEAS
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.:
- Kevin A. Hassett, 1999.
"Tax Policy and Investment,"
American Enterprise Institute, number 53049, 9.
- Caballero, Ricardo J., 1999.
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Cohen, Darrel S. & Hassett, Kevin A., 1999.
"Inflation, Taxes, and the Durability of Capital,"
National Tax Journal,
National Tax Association, vol. 52(n. 1), pages 91-98, March.
- Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, September.
- Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1995.
"Tax Reforms and Investment: A Cross-Country Comparison,"
NBER Working Papers
5232, National Bureau of Economic Research, Inc.
- Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
- Cummins, J.G. & Hassett, K.A. & Hubbard, R.G., 1995. "tax Reforms and Investment: A Cross-Country Comparison," Working Papers 95-28, C.V. Starr Center for Applied Economics, New York University.
- Irving B. Kravis & Robert E. Lipsey, 1971. "Price Competitiveness in World Trade," NBER Books, National Bureau of Economic Research, Inc, number krav71-1, September.
- Jason Cummins & Trevor Harris & Kevin Hassett, 1995.
"Accounting Standards, Information Flow, and Firm Investment Behavior,"
in: The Effects of Taxation on Multinational Corporations, pages 181-224
National Bureau of Economic Research, Inc.
- Jason G. Cummins & Trevor S. Harris & Kevin A. Hassett, 1994. "Accounting Standards, Information Flow, and Firm Investment Behavior," NBER Working Papers 4685, National Bureau of Economic Research, Inc.
- Officer, Lawrence H., 1986. "The law of one price cannot be rejected: Two tests based on the tradable/nontradable price ratio," Journal of Macroeconomics, Elsevier, vol. 8(2), pages 159-182.
- Irving B. Kravis & Robert E. Lipsey, 1977.
"Price Behavior in the Light of Balance of Payments Theories,"
NBER Working Papers
0181, National Bureau of Economic Research, Inc.
- Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May.
- Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
- Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1994.
"Reassessing the Social Returns to Equipment Investment,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 109(3), pages 789-802.
- Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1993. "Reassessing the Social Returns to Equipment Investment," NBER Working Papers 4405, National Bureau of Economic Research, Inc.
- Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
When requesting a correction, please mention this item's handle: RePEc:bla:intfin:v:1:y:1998:i:1:p:103-25. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.