The Investment Tax Credit under Monopolistic Competition

Peter Broer and Ben Heijdra ()

Oxford Economic Papers, 2001, vol. 53, issue 2, 318-51

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.

Date: 2001
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