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The investment tax credit and irreversible investment

Sumru Altug (), Fanny Demers and Michel Demers ()

Journal of Macroeconomics, 2009, vol. 31, issue 4, 509-522

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.

Keywords: Irreversible; investment; Investment; tax; credit; Tax; policy; Changes; in; persistence; Increases; in; risk (search for similar items in EconPapers)
Date: 2009
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