NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Austan Goolsbee

NBER Working Paper No. 6192
Issued in September 1997
NBER Program(s):PE

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. The reduction in the cost of capital from 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, low import competition, or with a large fraction of buyers able to use" investment subsidies. 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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Document Object Identifier (DOI): 10.3386/w6192

Published: Quarterly Journal of Economics, Vol. 113, no. 1 (February 1998): 121-148. citation courtesy of

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