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Taxation and Corporate Investment in Physical and Knowledge Capital: Tests of Perfect Competition Versus Market Power

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  • Dagmar Rajagopal

    (Ryerson Polytechnic University)

  • Anwar Shah

    (World Bank)

Abstract

This article specifies an intertemporal model of firm behavior consistent with rational expectations, assuming either perfect competition or market power. Non-nested hypothesis tests were used to test the two versions of this model against each other. The test results do not support perfectly competitive industries and instead suggest that firms in these industries exerted some market power. The effects of tax allowances for physical and research and development (R&D) capital on the firms' decisions were computed. From the public sector's point of view, neither of these tax incentives was cost-effective for Turkey's chemical industries during the sample period. Their costs to the treasury in terms of foregone revenues were higher than the investment stimulated by these measures. For Turkey's petroleum derivatives industry, the benefits of the tax allowance for physical investment (increased physical investment) exceeded its costs (foregone tax revenue). The tax allowance for R&D investment, however, was not cost-effective for the petroleum derivatives industry either .

Suggested Citation

  • Dagmar Rajagopal & Anwar Shah, 1997. "Taxation and Corporate Investment in Physical and Knowledge Capital: Tests of Perfect Competition Versus Market Power," Public Finance Review, , vol. 25(2), pages 182-212, March.
    • Handle: RePEc:sae:pubfin:v:25:y:1997:i:2:p:182-212
    DOI: 10.1177/109114219702500203
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    References listed on IDEAS

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