Monday, Feb 1 at noon, 6050 ISR-Thompson
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.