Journal of Political Economy Vol. 87 No. 3 1979
Inflation and the Choice of Asset Life
Abstract
This paper considers the choice of capital durability by competitive firms subject to a corporate income tax. We find that, with a positive rate of inflation, a historic cost depreciation rule biases the choice of asset life toward greater durability and lowers the market valuation of a firm's capital assets. Extending the familiar one-sector monetary growth model to incorporate this behavior, we explore the general equilibrium effects that the failure to index depreciation allowances for inflation may have on the long-run characteristics of the economy, including the capital-labor ratio and the rate of return received by investors.
- DOI
- 10.1086/260781
- Volume
- 87
- Issue
- 3
- Pages
- 621-638
- Language
- en
- Sources
- openalex crossref