What Do Micro Data Reveal About the User Cost Elasticity?: New Evidence on the Responsiveness of Business Capital Formation
The 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.
(This abstract was borrowed from another version of this item.)
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.:
- Robert S. Chirinko & Huntley Schaller, 1993.
"Why does liquidity matter in investment equations?,"
Research Working Paper
93-13, Federal Reserve Bank of Kansas City.
- Chirinko, Robert S & Schaller, Huntley, 1995. "Why Does Liquidity Matter in Investment Equations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 527-548, May.
- Alan S. Blinder & Louis J. Maccini, 1991. "Taking Stock: A Critical Assessment of Recent Research on Inventories," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 73-96, Winter.
- Robert S. Chirinko, 1992.
"Business Fixed Investment Spending: A Critical survey of Modeling Strategies, Empirical Results, and Policy Implications,"
9213, Harris School of Public Policy Studies, University of Chicago.
- Robert S. Chirinko, 1993. "Business fixed investment spending: a critical survey of modeling strategies, empirical results, and policy implications," Research Working Paper 93-01, Federal Reserve Bank of Kansas City.
- Steven M. Fazzari & Benjamin Herzon, 1995.
"Capital Gains Tax Cuts, Investment, and Growth,"
Economics Working Paper Archive
wp_147, Levy Economics Institute.
- Stephen Oliner & Glenn Rudebusch & Daniel Sichel, 1993.
"New and old models of business investment: a comparison of forecasting performance,"
Working Paper Series / Economic Activity Section
141, Board of Governors of the Federal Reserve System (U.S.).
- Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-826, August.
- Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, vol. 78(2), pages 200-205, May.
- M Arellano & O Bover, 1990.
"Another Look at the Instrumental Variable Estimation of Error-Components Models,"
CEP Discussion Papers
dp0007, Centre for Economic Performance, LSE.
- Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
- Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988.
"Financing Constraints and Corporate Investment,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
- Griliches, Zvi & Hausman, Jerry A., 1986.
"Errors in variables in panel data,"
Journal of Econometrics,
Elsevier, vol. 31(1), pages 93-118, February.
- Chirinko, Robert S, 1988. "Business Tax Policy, the Lucas Critique, and Lessons from the 1980's," American Economic Review, American Economic Association, vol. 78(2), pages 206-210, May.
- Urga, G., 1992. "The Econometrics of Panel Data: A Selective Introduction," Economics Series Working Papers 99151, University of Oxford, Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_175. 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: (Marie-Celeste Edwards)
If references are entirely missing, you can add them using this form.