Inflation and the Choice of Asset Life / Alan J. Auerbach, Martin Feldstein.

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Auerbach, Alan J

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0253.Publication details: Cambridge, Mass. National Bureau of Economic Research 1978.Description: 1 online resource: illustrations (black and white)Online resources:

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Abstract: Given the current corporate tax structure in the U.S., inflation may have an important impact on the production decisions of firms, notably the choice of capital durability. This paper presents a model of competitive behavior in which firms may choose the durability of their capital goods. We find that in the presence of inflation, the taxation of corporate profits may influence both the choice of asset life and the market value of equity. In particular, the failure to index depreciation allowances depresses share values and biases the choice of asset life toward greater durability. Integrating this analysis with the traditional one-sector monetary growth model, we study the general equilibrium impact of inflation on such long run characteristics of the economy as output per capita and the real rate of return received by investors.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w0253 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0250 The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains /	nber w0251 A Theory of the Natural Unemployment Rate and the Duration of Employment /	nber w0252 The Nature and Measurement of Unemployment /	nber w0253 Inflation and the Choice of Asset Life /	nber w0254 Wealth Maximization and the Cost of Capital /	nber w0255 Share Valuation and Corporate Equity Policy /	nber w0256 Children's Health and the Family /	Next

July 1978.

Given the current corporate tax structure in the U.S., inflation may have an important impact on the production decisions of firms, notably the choice of capital durability. This paper presents a model of competitive behavior in which firms may choose the durability of their capital goods. We find that in the presence of inflation, the taxation of corporate profits may influence both the choice of asset life and the market value of equity. In particular, the failure to index depreciation allowances depresses share values and biases the choice of asset life toward greater durability. Integrating this analysis with the traditional one-sector monetary growth model, we study the general equilibrium impact of inflation on such long run characteristics of the economy as output per capita and the real rate of return received by investors.