R. Glenn Hubbard

A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments

Coauthor(s): Jason Cummins, Kevin Hassett, Robert Hall, Ricardo Caballero.

Abstract:
The article focuses on investment behavior using tax reforms as natural experiments. Economists and policymakers have long been interested in measuring the effects of changes in the returns to and costs of business fixed investment. That interest reflects both theoretical and practical concerns which have stimulated a large body of empirical research using aggregate and micro-level data. This literature has reached few unambiguous conclusions. As firm demand for fixed capital is a derived demand, changes in the value of installed capital or in the cost of purchasing or using capital should, all else equal, be fundamental determinants of investing. However, specific applications of this general proposition. including the user cost of capital and q model approaches have not proved empirically successful. By the late 1960s, the neoclassical model developed by researcher Dale Jorgenson and his collaborators had become the standard model for studying investment decisions. The neoclassical approach offers a structural link between tax policy parameters, and the investment tax credit, and investment through the user cost of capital.

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