TY  - JOUR
AU  - Hassett,Kevin A.
AU  - Hubbard,R. Glenn
TI  - Are Investment Incentives Blunted by Changes in Prices of Capital Goods?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6676
PY  - 1999
Y2  - June 1999
UR  - http://www.nber.org/papers/w6676
L1  - http://www.nber.org/papers/w6676.pdf
N1  - Author contact info:
Kevin Hassett
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
E-Mail: khassett@aei.org

R. Glenn Hubbard
Graduate School of Business
Columbia University, 101 Uris Hall
3022 Broadway
New York, NY  10027
Tel: 212/854-3493
Fax: 212/864-6184
E-Mail: rgh1@columbia.edu, ws2187@columbia.edu
AB  - Recent research on business investment decisions suggests that real investment in plant and equipment is quite sensitive to changes in the user cost of capital, pointing to the possibility that long-run changes in tax policy may have a significant impact on an economy's capital stock.  Indeed, many countries have at times adopted investment tax incentives to stimulate investment. The prevalence of investment incentives suggests that local policymakers believe that incentives are effective in increasing investment at a reasonable cost in terms of lost revenue for a given increment to investment.  In this paper, we explore this issue by estimating the extent to which countries are price-takers in the world market for capital goods.  We find that most countries -- even the United States -- likely currently face a highly elastic supply of capital goods, suggesting that the effect of investment incentives on the price of investment goods is small.  Hence efforts of long-run changes in investment tax policy are likely to materialize in real investment rather than simply being dissipated in changes in capital-goods prices.
ER  -