Does favorable tax-treatment of housing reduce non-housing investment?

It is often argued that low tax rates on owner-occupied housing divert inve stment from non-housing capital, like equipment and R&D. This paper demonst rates that if people are heterogeneous in their propensity to save, and if there are constraints on borrowing, favorable tax treatment of owner-occupi ed housing up to a certain value can increase non-housing investment. This is because low housing taxes encourage renters to become owner-occupiers, l eading existing owner-occupiers to shift their portfolio of other assets fr om rental housing to non-housing capital. (C) 2001 Elsevier Science BY All rights reserved.