INVESTMENT TAX INCENTIVES, PRICES, AND THE SUPPLY OF CAPITAL GOODS

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 f irms but rather to capital suppliers through higher prices. A 10 perce nt investment tax credit increases equipment prices 3.5-7.0 percent. T his lasts several years and is largest for assets with large order bac klogs or low import competition. Capital goods workers' wages rise, to o. Instrumental variables estimates of the short-run supply elasticity are around 1 and can explain the traditionally small estimates of inv estment demand elasticities. In absolute value, the demand elasticity implied here exceeds 1.