Investment Externalities and a Corrective Subsidy

Christian Keuschnigg

International Tax and Public Finance, 1998, vol. 5, issue 4, 449-469

Abstract: The paper proposes an intertemporal equilibrium model that highlights the interdependence between aggregate investment and the degree of product differentiation with free entry of monopolistic producers. An investment externality is identified that results in underaccumulation of capital in the decentralized market equilibrium. Some form of investment promotion is called for. The paper compares the effectiveness of a general investment tax credit and an ad valorem output subsidy with policies that favor smaller business size. It is also shown that the complementarity among individual investments creates a potentially powerful investment multiplier. Copyright Kluwer Academic Publishers 1998

Keywords: monopolistic competition; diversification of production; investment multiplier; underaccumulation of capital; small businesses (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (17)

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DOI: 10.1023/A:1008693121752

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