TAXATION AND CORPORATE-INVESTMENT IN PHYSICAL AND KNOWLEDGE CAPITAL -TESTS OF PERFECT COMPETITION VERSUS MARKET POWER

This article specifies an intertemporal model of firm behavior consist ent with rational expectations, assuming either perfect competition or market power. Non-nested hypothesis tests were used to test the two v ersions of this model against each other. The test results do not supp ort perfectly competitive industries and instead suggest that firms in these industries exerted some marker power. The effects of tax allowa nces for physical and research and development (R&D) capital on the fi rms' decisions were computed. From the public sector's point of view, neither of these tax incentives was cost-effective for Turkey's chemic al industries during the sample period. Their costs to the treasury in terms of foregone revenues were higher than the investment stimulated by these measures. For Turkey's petroleum derivatives industry, the b enefits of the tar allowance for physical investment (increased physic al investment) exceeded its costs (forgone tax revenue). The tax allow ance for R&D investment, however was not cost-effective for the petrol eum derivatives industry either.