NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation and the Choice of Asset Life

Alan J. Auerbach, Martin Feldstein

NBER Working Paper No. 253 (Also Reprint No. r0031)
Issued in 1980
NBER Program(s):   PE

Given the current corporate tax structure in the U.S., inflation may have an important impact on the production decisions of firms, notably the choice of capital durability. This paper presents a model of competitive behavior in which firms may choose the durability of their capital goods. We find that in the presence of inflation, the taxation of corporate profits may influence both the choice of asset life and the market value of equity. In particular, the failure to index depreciation allowances depresses share values and biases the choice of asset life toward greater durability. Integrating this analysis with the traditional one-sector monetary growth model, we study the general equilibrium impact of inflation on such long run characteristics of the economy as output per capita and the real rate of return received by investors.

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Published: Auerbach, Alan J. "Inflation and the Choice of Asset Life." Journal of Political Economy, Vol.87, No. 3, (1979), pp. 621-638.

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