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 ofquot; investment tax incentives does not go to investing firms but rather to capital suppliers throughquot; higher prices. The reduction in the cost of capital from a 10 percent investment tax creditquot; increases equipment prices 3.5-7.0 percent. This lasts several years and is largest for assets withquot; large order backlogs, low import competition, or with a large fraction of buyers able to usequot; investment subsidies. Capital goods workers' wages rise, too. Instrumental variables estimatesquot; of the short-run supply elasticity are around 1 and can explain the traditionally small estimates ofquot; investment demand elasticities. In absolute value, the demand elasticity implied here exceeds 1.quot