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Matthew D Shapiro - One of the best experts on this subject based on the ideXlab platform.
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temporary investment tax incentives theory with evidence from bonus depreciation
The American Economic Review, 2008Co-Authors: Christopher L House, Matthew D ShapiroAbstract:Investment decisions are inherently forward-looking. The payoff of acquiring Capital Goods, particularly long-lived Capital Goods, is governed almost exclusively by events in the far future. Because the timing of the investment itself does not affect future payoffs, there are strong incentives to delay or accelerate investment to take advantage of predictable intertemporal variations in cost. For sufficiently long-lived Capital Goods, these incentives are so strong that the intertemporal elasticity of investment demand is nearly infinite. As a consequence, for a temporary tax change, the shadow price of long-lived Capital Goods must reflect the full tax subsidy regardless of the elasticity of investment supply. While price data provide no information on the elasticity of supply, they can reveal the extent to which adjustment costs are internal or external to the firm. In contrast, the elasticity of investment supply can be inferred from quantity data alone. The bonus depreciation allowance passed in 2002 and increased in 2003 presents an opportunity to test the sharp predictions of neoclassical investment theory. In the law, certain types of long-lived Capital Goods qualify for substantial tax subsides while others do not. The data show that investment in qualified properties was substantially higher than for unqualified property. The estimated elasticity of investment supply is high--between 10 and 20. Market prices do not react to the subsidy as the theory dictates. This suggests either that internal (unmeasured) adjustment costs play a significant role or that measurement problems in the price data effectively conceal the price changes. While the policy noticeably increased investment in types of Capital that benefited substantially from bonus depreciation, the aggregate effects of the policy were modest. The analysis suggests that the policy may have increased output by roughly 0.1 percent to 0.2 percent and increased employment by roughly 100,000 to 200,000 jobs.
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temporary investment tax incentives theory with evidence from bonus depreciation
The American Economic Review, 2008Co-Authors: Christopher L House, Matthew D ShapiroAbstract:Even modest reductions in the after-tax cost of Capital purchases provide strong incentives for increased investment. Indeed, for tax subsidies that are temporary, and for Capital Goods that are very long-lived, the incentive to invest when the after-tax price is temporarily low is essentially infinite. Firms that would have purchased new Capital equipment in the future, instead make their purchases during the period of the subsidy. For tax increases, the effects are the opposite. Firms, that would have normally invested now, delay until the tax rate returns to normal. We present a model of the equilibrium effects of temporary investment tax incentives. The model reveals a simple relationship between the shadow price of investment Goods and the size of a temporary investment tax incentive. Specifically, for sufficiently long-lived Capital Goods (Goods with very low rates of economic depreciation) and for sufficiently short-lived investment tax subsidies, the shadow value of Capital should be nearly unchanged, and thus the pre-tax shadow price of Capital Goods should fully reflect the magnitude of the tax subsidy. This result holds regardless of the elasticity of investment supply and regardless of the underlying demand for Capital. Instead, it relies only on the firm’s ability to arbitrage predictable movements in the after-tax price of long-lived Capital over time. Two conclusions immediately follow. First, observ ing price increases following a temporary tax incentive is not evidence that investment supply is relatively inelastic. A temporary investment tax subsidy can substantially affect investment even if it bids up the price of investment sharply. Second, because economic theory dictates that the shadow price of investment moves one-for-one with a temporary tax subsidy, the elasticity of supply can be inferred from quantity data alone. Recent changes in US tax law allow us to use the model and its implications to estimate struc tural parameters that govern the supply of investment. The 2002 and 2003 tax bills provided temporarily accelerated tax depreciation called bonus depreciation for certain types of qualified Capital Goods. Under the 2002 bill, firms could immediately deduct 30 percent of investment purchases and then depreciate the remaining 70 percent under standard depreciation schedules.
Christopher L House - One of the best experts on this subject based on the ideXlab platform.
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temporary investment tax incentives theory with evidence from bonus depreciation
The American Economic Review, 2008Co-Authors: Christopher L House, Matthew D ShapiroAbstract:Investment decisions are inherently forward-looking. The payoff of acquiring Capital Goods, particularly long-lived Capital Goods, is governed almost exclusively by events in the far future. Because the timing of the investment itself does not affect future payoffs, there are strong incentives to delay or accelerate investment to take advantage of predictable intertemporal variations in cost. For sufficiently long-lived Capital Goods, these incentives are so strong that the intertemporal elasticity of investment demand is nearly infinite. As a consequence, for a temporary tax change, the shadow price of long-lived Capital Goods must reflect the full tax subsidy regardless of the elasticity of investment supply. While price data provide no information on the elasticity of supply, they can reveal the extent to which adjustment costs are internal or external to the firm. In contrast, the elasticity of investment supply can be inferred from quantity data alone. The bonus depreciation allowance passed in 2002 and increased in 2003 presents an opportunity to test the sharp predictions of neoclassical investment theory. In the law, certain types of long-lived Capital Goods qualify for substantial tax subsides while others do not. The data show that investment in qualified properties was substantially higher than for unqualified property. The estimated elasticity of investment supply is high--between 10 and 20. Market prices do not react to the subsidy as the theory dictates. This suggests either that internal (unmeasured) adjustment costs play a significant role or that measurement problems in the price data effectively conceal the price changes. While the policy noticeably increased investment in types of Capital that benefited substantially from bonus depreciation, the aggregate effects of the policy were modest. The analysis suggests that the policy may have increased output by roughly 0.1 percent to 0.2 percent and increased employment by roughly 100,000 to 200,000 jobs.
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temporary investment tax incentives theory with evidence from bonus depreciation
The American Economic Review, 2008Co-Authors: Christopher L House, Matthew D ShapiroAbstract:Even modest reductions in the after-tax cost of Capital purchases provide strong incentives for increased investment. Indeed, for tax subsidies that are temporary, and for Capital Goods that are very long-lived, the incentive to invest when the after-tax price is temporarily low is essentially infinite. Firms that would have purchased new Capital equipment in the future, instead make their purchases during the period of the subsidy. For tax increases, the effects are the opposite. Firms, that would have normally invested now, delay until the tax rate returns to normal. We present a model of the equilibrium effects of temporary investment tax incentives. The model reveals a simple relationship between the shadow price of investment Goods and the size of a temporary investment tax incentive. Specifically, for sufficiently long-lived Capital Goods (Goods with very low rates of economic depreciation) and for sufficiently short-lived investment tax subsidies, the shadow value of Capital should be nearly unchanged, and thus the pre-tax shadow price of Capital Goods should fully reflect the magnitude of the tax subsidy. This result holds regardless of the elasticity of investment supply and regardless of the underlying demand for Capital. Instead, it relies only on the firm’s ability to arbitrage predictable movements in the after-tax price of long-lived Capital over time. Two conclusions immediately follow. First, observ ing price increases following a temporary tax incentive is not evidence that investment supply is relatively inelastic. A temporary investment tax subsidy can substantially affect investment even if it bids up the price of investment sharply. Second, because economic theory dictates that the shadow price of investment moves one-for-one with a temporary tax subsidy, the elasticity of supply can be inferred from quantity data alone. Recent changes in US tax law allow us to use the model and its implications to estimate struc tural parameters that govern the supply of investment. The 2002 and 2003 tax bills provided temporarily accelerated tax depreciation called bonus depreciation for certain types of qualified Capital Goods. Under the 2002 bill, firms could immediately deduct 30 percent of investment purchases and then depreciate the remaining 70 percent under standard depreciation schedules.
Alexander Nezlobin - One of the best experts on this subject based on the ideXlab platform.
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investment Capital stock and replacement cost of assets when economic depreciation is non geometric
Journal of Financial Economics, 2021Co-Authors: Dmitry Livdan, Alexander NezlobinAbstract:Abstract This paper extends the Q -theory of investment to Capital Goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm’s Capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm’s investment history. If Capital Goods have constant efficiency over a finite useful life, simple proxies are readily available for both the replacement cost of assets in place and Capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We show these components exhibit significantly different economic determinants and behavior.
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investment Capital stock and replacement cost of assets when economic depreciation is non geometric
Social Science Research Network, 2017Co-Authors: Dmitry Livdan, Alexander NezlobinAbstract:This paper extends the Q-theory of investment to Capital Goods with arbitrary efficiency profiles. When efficiency is non-geometric, the firm's Capital stock and the replacement cost of its assets are fundamentally different aggregates of the firm's investment history. If Capital Goods have constant efficiency over a finite useful life, then simple proxies are readily available for both the replacement cost of assets in place and Capital stock. Under this assumption, we decompose the total investment rate along two dimensions: into its net and replacement components, and into its cash and non-cash components. We then show that these components exhibit significantly different economic determinants and behavior.
Vladimir M Veliov - One of the best experts on this subject based on the ideXlab platform.
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financially constrained Capital investments the effects of disembodied and embodied technological progress
Journal of Mathematical Economics, 2008Co-Authors: Gustav Feichtinger, Richard F Hartl, Peter M Kort, Vladimir M VeliovAbstract:Abstract Empirical studies stress the significance of financing constraints in business investment. Especially high tech investment is likely to be affected by Capital market imperfections. The reason is that their returns are highly uncertain so that it is difficult to get outside finance for this kind of investment. This paper studies the combined effect of technological progress and the Capital market being imperfect on the firm’s investment behavior. We show that it is crucial to make a distinction between embodied and disembodied technological progress. Embodied technological progress affects only the Capital Goods built after the technological breakthrough while disembodied technological progress influences the productivity of all Capital Goods installed. It is shown that where disembodied technological progress leads to a positive anticipation phase before the technological breakthrough occurs, a negative anticipation phase will occur before an embodied technological breakthrough. During this negative anticipation phase the firm builds up a stock of liquid financial assets in order to be able to finance increased investments in the improved Capital Goods from after the technological breakthrough.
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Capital accumulation under technological progress and learning a vintage Capital approach
European Journal of Operational Research, 2006Co-Authors: Gustav Feichtinger, Richard F Hartl, Peter M Kort, Vladimir M VeliovAbstract:Abstract In standard Capital accumulation models all Capital Goods are equally productive and produce Goods of the same quality. However, due to technological progress, in reality it holds most of the time that newer Capital Goods are either more productive (process innovation) or produce Goods of better quality (product innovation). Implications of process innovation for the firm’s investment policies are investigated while the output price development is subject to a business cycle, and a given generation of Capital Goods gets more productive over time due to learning. The problem is turned into an optimal control model that distinguishes the vintages of Capital Goods, and where, unlike most of the recent contributions, it is possible to keep on investing in older technologies. It is shown that (i) learning is one of the reasons why a firm may invest in old technologies even when apparently superior technologies are available, (ii) investments in machines of a given age increase more over time under faster technological progress, (iii) under faster technological progress investments are more vulnerable to output price developments, and (iv), on average, machines are older during recessions. In deciding whether to invest in newer or older Capital Goods, also the lower productivity due to aging versus differences in cost of discounting and acquisition have to be taken into account.
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anticipation effects of technological progress on Capital accumulation a vintage Capital approach
Research Papers in Economics, 2006Co-Authors: Gustav Feichtinger, Richard F Hartl, Peter M Kort, Vladimir M VeliovAbstract:Abstract Due to embodied technological progress new generations of Capital Goods are more productive. Therefore, in order to study the effects of technological progress, a model must be analyzed in which different generations of Capital Goods can be distinguished. We determine in what way the firm adjusts current investments to predictions of technological progress. In the presence of market power we show that a negative anticipation effect occurs, i.e. current investments in recent generations of Capital Goods decline when faster technological progress will take place in the future, because then it becomes more attractive to wait for new generations of Capital Goods. In case that only investments in new machines are possible, actually a whole wave of anticipation phases arises.
Yosuke Jin - One of the best experts on this subject based on the ideXlab platform.
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Capital embodied technological progress and obsolescence how do they affect investment behavior
Social Science Research Network, 2018Co-Authors: Yosuke JinAbstract:I estimate a dynamic stochastic general equilibrium model to investigate the effects of Capital-embodied technological progress on business cycle fluctuations, highlighting the role of economic obsolescence. Against a temporary shock to Capital-embodied technological progress, I find that investments rise only in quality-adjusted terms. The behavioral response of agents in new investment is muted, thereby avoiding substantial discards of old Capital Goods, which are made obsolete more than usual. By incorporating the loss in the value of old Capital Goods, while specifying properly the rise in the rental rate and the value of a marginal unit of Capital so that they reflect their market value, the reaction of new investment remains limited while the utilization of old vintages intensifies. I argue that agents compensate for Capital losses on old Capital Goods caused by such a shock and avoid further discards of old Capital Goods in the production process by limiting new investment.
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Capital embodied technological progress and obsolescence how do they affect investment behaviour
Research Papers in Economics, 2017Co-Authors: Yosuke JinAbstract:This paper analyses how technological progress embodied in Capital Goods raises productivity and income, while at the same time it can modify the allocation of consumption, investment and the Capital stock. With Capital-embodied technological progress, new Capital Goods become more productive, thus more valuable, but the production capacity of the existing Capital Goods declines comparatively and they become less valuable. In a dynamic and stochastic general equilibrium framework, a shock to the process of Capital-embodied technological progress is shown not to raise investment as much as could be expected, allowing the owners of Capital Goods mainly to raise consumption instead. As a result, overall capacity taking account of the improvement in the quality of Capital Goods rises only modestly. The muted investment response might seem very conservative, because the owners of Capital could take greater advantage of the sudden acceleration in the improvement of the quality of Capital Goods which allows them to raise their production capacity more than usually. However, this conservative behaviour is consistent with an anticipated faster decline in the value of Capital Goods which become quickly obsolete, raising the cost of Capital for the owners. Finally, this paper analyses the implications of the shock to Capital-embodied technological progress coinciding with other shocks, namely, a positive one to the investment accelerator mechanism and a negative one to the risk premium. With deceleration in the quality improvement of Capital Goods, investors would require higher rates of return while affecting negatively the valuation of the Capital stock.
