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The investment tax credit and irreversible investment

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  • Altug, Sumru
  • Demers, Fanny S.
  • Demers, Michel

Abstract

We 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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  • Altug, Sumru & Demers, Fanny S. & Demers, Michel, 2009. "The investment tax credit and irreversible investment," Journal of Macroeconomics, Elsevier, vol. 31(4), pages 509-522, December.
    • Handle: RePEc:eee:jmacro:v:31:y:2009:i:4:p:509-522
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    3. Andrés Blanco & Isaac Baley, 2022. "The Macroeconomics of Irreversibility," Working Papers 1312, Barcelona School of Economics.
    4. Bermperoglou, Dimitrios & Deli, Yota & Kalyvitis, Sarantis, 2019. "Investment tax incentives and their big time-to-build fiscal multiplier," Kiel Working Papers 2143, Kiel Institute for the World Economy.
    5. Spilimbergo, Antonio & Jirasavetakul, La-Bhus, 2018. "Economic Policy Uncertainty in Turkey," CEPR Discussion Papers 13352, C.E.P.R. Discussion Papers.
    6. Unal Zenginobuz & Sumru Altug, 2009. "What has been the Role of Investment in Turkey's Growth Performance?," Working Papers 2009/02, Bogazici University, Department of Economics.
    7. Matteo Ghilardi & Roy Zilberman, 2025. "Fiscal Uncertainty in Habit-Forming and Lumpy Economies," Working Papers 431361324, Lancaster University Management School, Economics Department.
    8. M. V. Chernovalova & I. M. Makarova, 2022. "Development of street lighting systems based on projects in the field of energy conservation and the use of alternative energy sources," Entrepreneur’s Guide, JSC “Publishing Agency “Science and Educationâ€, vol. 15(1).
    9. Jie Mao & Chunhua Wang, 2016. "Tax incentives and environmental protection: Evidence from China’s taxpayer-level data," China Finance and Economic Review, De Gruyter, vol. 5(4), pages 3-32, December.

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