Mackay, Daniel (2011): Estimating the impact of investment tax credits on aircraft demand.
Download (1552Kb) | Preview
This paper uses exogenous price changes from the shifting tax policies of the 1980’s to identify the parameters of a nested-logit discrete choice model of the aircraft market. The federal Investment Tax Credit (ITC) was a tax credit of 6-10% of a firm's new capital investment that was removed by the Tax Reform Act of 1986 (TRA86). Such tax credits continue to be proposed as tools to spur investment, and they are still utlized in many states and select industries. This research adds to the small body of empirical work on taxes in imperfectly competitive markets. I model the oligopoly market structure of aircraft manufacturers by assuming Bertrand competition. The demand-side parameters are estimated using 2SLS with cost-shifting instruments. The demand-side choices are purchasing new or used aircraft, or refraining from purchasing an aircraft. I then estimate linear mark-up equations using the demand-side parameter estimates and other cost variables. I use the full set of parameter estimates to simulate aircraft transactions before and after the TRA86. This structural approach allows me to isolate the effects of the ITC through counterfactual policy simulations. I find that the ITC encourages firms to upgrade to more expensive capital by purchasing a more expensive aircraft than they would have without the ITC; however, the ITC has very limited impact enticing firms to purchase new aircraft instead of used aircraft. The overall effect on new purchases is small. Thus, most of the incidence of the tax credit was gained by the suppliers of aircraft; moreover the ITC exacerbated the market power of suppliers, leading to further distortions.
|Item Type:||MPRA Paper|
|Original Title:||Estimating the impact of investment tax credits on aircraft demand|
|Keywords:||Business Subsidy: TRA86: Differentiated Products: Aircraft|
|Subjects:||L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L93 - Air Transportation
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies
|Depositing User:||Daniel Mackay|
|Date Deposited:||12. Aug 2011 18:37|
|Last Modified:||13. Feb 2013 04:56|
Anderson, Simon; Andre de Palma and Brent Kreider (2001), “Tax Incidence in Differentiated Product Oligopoly,” Journal of Public Economics, 81, 173-92.
Auerbach, Alan and Slemrod, Joel (1997). “The Economic Effect of the Tax Reform Act of 1986,” Journal of Economic Literature, June 1997, 35 pp. 589-632,
Baldwin, Richard and Paul Krugman (1988). “Industrial Policy and International Competition in Wide-Bodied Jet Aircraft.” In Robert E. Baldwin (ed.), Trade Policy Issues and Empirical Analysis. Chicago: University of Chicago Press for the NBER.
Barnett, Paul; Thomas Keeler and The-wei Hu (1995). “Oligopoly Structure and the Incidence of Cigarette Excise Taxes,” Journal of Public Economics, 57 (3): pp457-470.
Benkard, C. Lanier (2000), “Learning and Forgetting: The Dynamics of Commercial Aircraft Production,” American Economic Review, 90, 1034-54.
Benkard, C. Lanier (2004) “A Dynamic Analyses of the Market for Wide-Bodied Commercial Aircraft,” Review of Economic Studies Vol 71 pp. 581-611.
Berry, Steven T. (1994),“Estimating Discrete-Choice Models of Product Differentiation”, RAND Journal of Economics, 25(2), 242-262.
Berry, Steven, James Levinsohn, Arial Pakes (1995), “Automobile Prices in Market Equilibrium”, Econometrica, 63(4), 841-890.
Bossi, Luca (2007), “Per Unit Versus As Valorem Taxes Under Dynamic Monopoly,” University of Miami, Working Paper Number 0703.
Carbaugh, Robert and John Olienyk (2001) , “Boeing-Airbus Subsidy Dispute: An Economic and Trade Perspective” Global Economy Quarterly, 2(4), 261-82.
Chiliberto, Federico and Elie Tamer (2009), "Market Structure and Multiple Equilibria in the Airline Markets," Econometrica, 77, 1791-1828.
Cummins, J, Kevin Hassett and R. G. Hubbard (1996), “Tax Reforms and Investment: A Cross-Country Comparison,” Journal of Public Economics, 62, 237-273.
Delipalla, Sofia and Michael Keen (1992), “The comparison between ad valorem and specific taxation under imperfect competition,” Journal of Public Economics, 49, 351-67.
Devereux, Michael and Gauthier Lanot (2003), “Measuring Tax Incidence: an application to mortgage provisions in the UK,” Journal of Public Economics, 87, 1747-78.
Feldstein, Martin S. (1983), Inflation, Tax Rules, and Capital Formation. Chicago : University of Chicago Press.
Fershtman, Chaim; Neil Gandal and Markovich, Sarit (1999), “Estimating the Effect of Tax Reform in Differentiated Product Oligopolistic Markets,” Journal of Public Economics, 74, 151-70.
Frawley, Gerard (2003), The International Directory of Civil Aircraft 2003/2004, Fyshwick: Aerospace Publications.
Fullerton, Don and Metcalf, Gilbert (2002), "Tax Incidence," in A. Auerbach and M. Feldstein, eds., Handbook of Public Economics, Vol. 4, Amsterdam: Elsevier.
Gravelle, Jane (1994), The Economics Effects of Taxing Capital Income, MIT Press, Cambridge, MA
Goolsbee, Austan (1998), “Investment Tax Incentives, Prices, and the Supply of Capital Goods,” Quarterly Journal of Economics, 113, 121-48.
Hamilton, Stephen (1999). “Tax Incidence Under Oligopoly: A Comparison of Policy Approaches,” Journal of Public Economics, 71, 233-45.
Hausman, Jerry A., Gregory K Leonard, and Daniel McFadden (1995). "A Utility-Consistent, Combined Discrete Choice and Count Data Model Assessing Recreational Use Losses Due to Natural Resource Damage," Journal of Public Economics, 56, 1-30.
Hendel, Igal (1999), “Estimating Multiple-Discrete Choice Models: An Application to Computerization Returns”, Reviewof Economic Studies, 66(2), 423–446.
Irwin, Douglas and Nina Pavcnik (2004), "Airbus versus Boeing Revisited: International Competition in the Aircraft Market," Journal of International Economics, 64(2), 223-245.
Jorgenson, Dale and Yun Kun-Young (1990), “Tax Reform and US Economic Growth,” Journal of Political Economy, 98, 151-193.
Karp, Larry S., Jeffrey Perloff (1989), “Estimating Market Structure and Tax Incidence: The Japanese Television Market,” Journal of Industrial Economics, March 1989, 225-39.
McLure, Charles E., Jr.; George R Zodrow (1987), “Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform,” Journal of Economic Perspectives, Summer 1987, 37-58.
Pechman, Joseph (1987), “Tax Reform: Theory and Practice,” Journal of Economic Perspectives, Vol 1, 11-28.
Poterba, James M. (1984), “Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach,” The Quarterly Journal of Economics, November 1984, 729-52.
Poterba, James M. (1990 ) “Taxation and Housing Markets: Preliminary Evidence on the Effects of Recent Tax reform,” in Joel Slemrod eds., Do Taxes Matter? The Impact of the Tax Reform Act of 1986, MIT Press, 1990. 141-60.
Pulvino, Todd C. (1998), “Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions,” The Journal of Finance, June 1998, 939-78.
Rojas, Christian (2008), “Price competition in US brewing,” Journal of Industrial Economics, March 2008, 1-31.
Smith, Loren K. (2010), "Dynamics and Equilibrium in a Structural Model of Wide-Body Commercial Aircraft Markets," Journal of Applied Econometrics. DOI: 10.1002/jae.1151
Tirole, Jean (1988), The Theory of Industrial Organization, MIT Press, Cambridge, MA
Tyson, Laura D’Andrea (1992), Who’s Bashing Whom? Trade Conflict in High Technology Industries. Washington, DC: Institute for International Economics.
Verboven, F. (1996) “International Price Discrimination in the European Car Market,” RAND Journal of Economics 27, 240–268.
Willens, Robert , Andrea J. Phillips (1993), “President Clinton's Tax Proposal: A Fiscal Balancing Act,” Journal of Accountancy, Vol. 175