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Temporary investment tax incentives: Theory with evidence from bonus depreciation

Publication Abstract

House, C.L., and Matthew D. Shapiro. 2008. "Temporary investment tax incentives: Theory with evidence from bonus depreciation." American Economic Review, 98(3): 737-768.

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.

DOI:10.1257/aer.98.3.737 (Full Text)

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