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Investment Tax Incentives, Prices, and the Supply of Capital Goods

Austan Goolsbee
The Quarterly Journal of Economics
Vol. 113, No. 1 (Feb., 1998), pp. 121-148
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2586987
Page Count: 28
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Investment Tax Incentives, Prices, and the Supply of Capital Goods
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Abstract

Using data on the prices of capital goods, this paper shows that much of the benefit of investment tax incentives does not go to investing firms but rather to capital suppliers through higher prices. A 10 percent investment tax credit increases equipment prices 3.5-7.0 percent. This lasts several years and is largest for assets with large order backlogs or low import competition. Capital goods workers' wages rise, too. Instrumental variables estimates of the short-run supply elasticity are around 1 and can explain the traditionally small estimates of investment demand elasticities. In absolute value, the demand elasticity implied here exceeds 1.

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