Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation

Christopher House () and Matthew Shapiro

American Economic Review, 2008, vol. 98, issue 3, 737-68

Abstract: 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.

JEL-codes: G31 H25 H32 (search for similar items in EconPapers)
Date: 2008
Note: DOI: 10.1257/aer.98.3.737
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Citations: View citations in EconPapers (229)

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Working Paper: Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation (2006)
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