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Business Formation and Aggregate Investment

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  • Christian Keuschnigg
Abstract
The paper proposes an intertemporal equilibrium model of vintage capital and monopolistic competition. Reflecting a tradeoff between the number and capacity of new machines, investment may be extensive or intensive. External gains from specialization and rationalization result in distorted investment decisions. The paper compares the effectiveness of a general investment tax credit with a start‐up subsidy that shifts the direction of investment towards a more extensive form. An optimal policy of investment promotion is derived.

Suggested Citation

  • Christian Keuschnigg, 2001. "Business Formation and Aggregate Investment," German Economic Review, Verein für Socialpolitik, vol. 2(1), pages 31-55, February.
    • Handle: RePEc:bla:germec:v:2:y:2001:i:1:p:31-55
    DOI: 10.1111/1468-0475.00026
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    References listed on IDEAS

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    1. Michael Spence, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 43(2), pages 217-235.
    2. Caballero, Ricardo J. & Lyons, Richard K., 1992. "External effects in U.S. procyclical productivity," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 209-225, April.
    3. Heijdra, Ben J, 1998. "Fiscal Policy Multipliers: The Role of Monopolistic Competition, Scale Economies, and Intertemporal Substitution in Labour Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 659-696, August.
    4. J. Bradford De Long & Lawrence H. Summers, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 445-502.
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    6. Steven J. Davis & John Haltiwanger, 1990. "Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 123-186, National Bureau of Economic Research, Inc.
    7. Satyajit Chatterjee & Russell Cooper, 2014. "Entry And Exit, Product Variety, And The Business Cycle," Economic Inquiry, Western Economic Association International, vol. 52(4), pages 1466-1484, October.
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    15. repec:hoo:wpaper:e-95-3 is not listed on IDEAS
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    Cited by:

    1. Keuschnigg, Christian & Kohler, Wilhelm, 1996. "Commercial policy and dynamic adjustment under monopolistic competition," Journal of International Economics, Elsevier, vol. 40(3-4), pages 373-409, May.
    2. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2007. "Nordic dual income taxation of entrepreneurs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 407-426, August.
    3. Martin D. Dietz & Christian Keuschnigg, 2004. "Corporate Income Tax Reform in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(IV), pages 483-519, December.
    4. Martin D. Dietz, 2004. "Dividend and Capital Gains Taxation in a Cross-Section of Firms," Public Economics 0405004, University Library of Munich, Germany.
    5. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The “New View” of Dividend Taxation Reconsidered," CESifo Working Paper Series 1476, CESifo.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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