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Oxford Economic Papers 2001; 53:318-351
Copyright © 2001 Oxford Universty Press

Article

The investment tax credit under monopolistic competition

DP Broer and BJ Heijdray

CPB Netherlands Bureau of Economic Policy Analysis, PO Box 80510, 2508 GM The Hague, The Netherlands
OCFEB, Erasmus University, Rotterdam, The Netherlands
E-mail: dpb@cpb.nl
y Department of Economics, University of Groningen, Groningen, The Netherlands

Abstract

This paper develops a dynamic model of monopolistic competition with finite lives. It investigates the welfare properties of an investment tax credit (ITC) for both finite and infinite lives. For infinite lives, it shows that, lacking lump-sum taxes, an ITC suffices to attain a second-best solution. For finite lives, the paper considers the intergenerational welfare distribution effects of an ITC. In the absence of debt policy, the investment tax credit benefits future generations but may harm most of the existing generations. Using debt financing, the policy maker can redistribute the gains in a completely egalitarian fashion.


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