Changes In User Cost Research Articles

Do tax credits stimulate R&D spending? The effect of the R&D tax credit in its first decade

This paper examines the impact of the U.S. federal R&D tax credit between 1981–1991 using confidential IRS data from corporate tax returns. The empirical analysis makes two key advances on previous work. First, it implements a new instrumental variables (IV) strategy based on tax changes that directly addresses the simultaneity of R&D spending and marginal credit rates. Second, the analysis makes use of new restricted-access IRS corporate return data describing R&D expenditures. Estimates imply that a10% reduction in the user cost of R&D leads the average firm to increase its research intensity—the ratio of R&D spending to sales—by 19.8% in the short-run. Long-run estimates imply that the average firm faces adjustment costs and increases spending over time, though small and young firms show evidence of reversing initial increases. Analysis of the components of qualified research shows that wages and supplies account for the bulk of the increase in research spending. Elasticities of qualified and total research intensities from a smaller sample suggest firms respond to user cost changes largely by increasing their qualified spending, meaning that the type of R&D the federal credit deems qualified research is an important margin on which the credit affects firm behavior.

Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade

This paper examines the impact of the R&D tax credit between 1981-1991 using confidential IRS data from corporate tax returns. The key advances on previous work are an instrumental variables strategy based on tax law changes that addresses the simultaneity between R&D spending and its user cost and the use of new confidential data. Estimates imply that a ten percent reduction in the user cost of R&D leads the average firm to increase its research intensity -- the ratio of R&D spending to sales -- by 11 percent in the short-run. Long-run estimates imply that firms do face adjustment costs and further increase spending over the longer-run. Analysis of the components of qualified research shows that wages and supplies account for the bulk of the increase in research spending. Comparisons of the elasticity across firms of different sizes, industries, tax status, multi-national status and credit history are also made. Neither small nor young firms appear more responsive in the static analysis but the dynamic model reveals stronger short-run responses, suggesting that they may face lower adjustment costs or liquidity constraints in financing R&D. Long-run and re-timing analyses show no evidence that firms allocate their qualified research spending over time to maximize their R&D tax credits. Elasticities of qualified and total research intensities from a smaller sample suggest firms respond to user cost changes largely by increasing their qualified spending, meaning that what R&D the federal credit deems qualified research is an important margin on which the credit affects firm behavior.

Size of home, homeownership, and the mortgage interest deduction

This paper offers an empirical test of the effect of the mortgage interest deduction (MID) on both the extensive (own vs. rent) and intensive (size of home) housing purchase margins. Using state level differences in MID availability to identify, I examine this relationship using standard ordinary least squares, instrumental variables, regression discontinuity, and sample selection estimation techniques. I find the MID to be responsible for a 10.9–18.4% increase in the size of home purchased, but that no relationship exists between the MID and home ownership. These results imply an elasticity of home size with respect to changes in user cost between −1 and −1.4.

Firm Investment and Monetary Policy Transmission in the Euro Area

We present a comparable set of results on the monetary transmission channels on firm investment for the four largest euro-area countries (Germany, France, Italy and Spain). With particularly rich micro datasets for each country containing over 215,000 observations from 1985 to 1999, we explore what can be learned about the interest channel and the broad credit channel. For each of those countries, we estimate neo-classical investment relationships, explaining investment by its user cost, sales and cash flow. We find investment to be sensitive to user cost changes in all those four countries. This implies an operative interest channel in these euro-area countries. We also find investment in all countries to be quite sensitive to cash flow movements. However, only in Italy do smaller firms react more to cash flow movements than large firms, implying that a broad credit channel might not be equally pervasive in all countries.

User Cost Changes, Unemployment and Home-ownership: Evidence from Spain

This paper develops a macroeconomic model that permits analysis of the relationship between unemployment and home-ownership rates using aggregate data at the provincial level within Spain, besides other influential variables such as the changes of the relative user costs of owning and renting or household life-cycle attributes. The model constructed permits the authors to question the evidence of Oswald, Nickell and Layard, and partially of Green and Hendershott, that home-ownership leads to higher unemployment. The results point out that, taking into account the simultaneity determination issue and reducing the omitted variable bias, a higher unemployment discourages home-ownership.

Monetary Transmission: Empirical Evidence from Luxembourg Firm-Level Data

This paper investigates the transmission of monetary policy using data from a panel of Luxembourg firms. The results indicate that the sales accelerator may be at work. A very robust result is the negative effect of the user cost of capital on firms' investment ratio. Changes in user costs are significantly affected by changes in the monetary policy indicator. In addition, firm specific balance sheet characteristics, such as the lagged cash stock to capital ratio influence the investment behaviour according to the broad credit channel theory. Using various sample splits, it is shown that young firms, in particular, are more sensitive to user cost changes, sales growth and the lagged cash to capital ratio.

Firm Investment and Monetary Policy Transmission in the Euro Area

This paper presents a comparable set of results on the monetary transmission channels on firm investment (the interest rate channel and the broad credit channel) for the four largest euro-areacountries (Germany, France, Italy and Spain), using particularly rich micro datasets for eachcountry containing over 215,000 observations from 1985 to 1999. For each of those countries,investment relationships are estimated explaining investment by its user cost, sales and cash flow.A first result is that investment is sensitive to user cost changes in all those four countries. Thisimplies an operative interest channel in these euro-area countries. A second result is that investmentin all countries is quite sensitive to cash flow movements. However, only in Italy do smaller firmsreact more to cash flow movements than large firms, implying that a broad credit channel might notbe equally pervasive in all countries.

In search of empirical evidence that links rent and user cost

Most models of the rental housing market assume a close link between the level of residential rents and the after-tax user cost of rental housing capital. However, little empirical evidence exists to establish the strength of this link or the speed with which rents adjust to changes in user cost or tax policy. This paper develops and estimates an econometric model of the rental housing market to shed light on both of these issues. U.S. annual data for 1964–1993 are used to generate two-stage least-squares estimates of a four-equation structural model. Although the results are generally consistent with expectations and reveal several interesting relationships among the system variables, the estimates fail to identify a strong relationship between rent and user cost. About half of any increase in user cost is ultimately passed along as higher rent. The adjustment process also takes a long time, with only about a third of the long-run effect realized within 10 years of a user cost shock. The fundamental reason for this result is that our estimate of the user cost series, based on widely accepted procedures, is much more volatile than the residential rent series.

User Cost and the Demand for Housing Attributes

A number of studies have related changes in the demand for housing to changes in user cost. All have treated housing as a composite good rather than as a bundle of characteristics. We consider the effect of changing user cost on the demand for the component characteristics of owner‐occupied housing, and, given information about the supply of the characteristics, we predict implicit price responses. An empirical test of our model indicates that reductions in user cost result in higher real prices for the non‐replicable attributes of housing, examples being location and access to fixed amenities. In contrast, the price of attributes that are perfectly elastic in supply are not affected by changes in user costs. We conclude that the effects of changing user cost are not uniform across housing types and locations, thus generating the appearance of housing submarkets.