Do Financial Frictions Amplify Fiscal Policy? Evidence from Business Investment Stimulus

Abstract

We estimate the effect of temporary tax incentives on equipment investment usingshifts in accelerated depreciation. Analyzing data for over 120,000 firms, we present threefindings. First, bonus depreciation raised investment 17.3 percent on average between2001 and 2004 and 29.5 percent between 2008 and 2010. Second, financially constrainedfirms respond more than unconstrained firms. Third, firms respond strongly when thepolicy generates immediate cash flows but not when benefits only come in the future.Implied discount rates are too high to match a frictionless model and cannot be explainedentirely by costly finance, unless firms neglect future financial constraints.