Tax incentives, market power,and corporate investment : a rational expectations model applied to Pakistani and Turkish industries

The objective of this paper is to examine the effect of tax incentives on investment in physical capital and in research and development, and indirectly on output and the demand for labor and materials. For this purpose the authors calculate the effect of tax incentives on the rental prices of the services of physical and knowledge capital, and of these rental prices on both types of investment. The paper outlines the structure of corporate taxation and of investment incentives in Pakistan and Turkey. It presents the theoretical model, with the details of derivations given in appendices 1 to 3. Appendix 4 presents the formulae for the elasticities which were computed; appendix 5 discusses the method of estimation and the non-nested hypothesis tests; while appendix 6 gives the sources for the data and outlines how the variables were constructed from the raw data. Finally, the paper summarizes the empirical results and comments are given on the policy implications of these results.