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The Investment Tax Credit under Monopolistic Competition

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  • Broer, D Peter
  • Heijdra, Ben J

Abstract

This paper develops a dynamic model of monopolistic competition with finite lives. It investigates the welfare properties of an investment tax credit (ITC) for both finite and infinite lives. For infinite lives, it shows that, lacking lump-sum taxes, an ITC suffices to attain a second-best solution. For finite lives, the paper considers the intergenerational welfare distribution effects of an ITC. In the absence of debt policy, the investment tax credit benefits future generations but may harm most of the existing generations. Using debt financing, the policy maker can redistribute the gains in a completely egalitarian fashion. Copyright 2001 by Oxford University Press.

Suggested Citation

  • Broer, D Peter & Heijdra, Ben J, 2001. "The Investment Tax Credit under Monopolistic Competition," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 318-351, April.
  • Handle: RePEc:oup:oxecpp:v:53:y:2001:i:2:p:318-51
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    Cited by:

    1. Leon Bettendorf & Ben Heijdra, 2001. "Intergenerational and International Welfare Leakages of a Product Subsidy in a Small Open Economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(5), pages 705-729, November.
    2. Leon Bettendorf & Ben Heijdra, 2001. "Intergenerational welfare effects of a tariff under monopolistic competition," Journal of Economics, Springer, vol. 73(3), pages 313-346, October.
    3. Grafeneder-Weissteiner, Theresa & Kubin, Ingrid & Prettner, Klaus & Prskawetz, Alexia & Wrzaczek, Stefan, 2015. "Coping with inefficiencies in a New Economic Geography model: The unintended consequences of policy interventions," Mathematical Social Sciences, Elsevier, vol. 76(C), pages 146-157.

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