Chirinko presents an interesting study on the effect of fiscal policy on firms’ decision to invest. The economist concludes the capital-labour elasticity of substitution determines whether tax incentives are effective in increasing capital intensity.
Specifically, the research finds fiscal incentives to investment are more effective as capital replaces labour (elasticity above unit) and monetary policy is equally ineffective when capital and labour are complements.
More interestingly, the author identifies novel methods of estimating elasticity computed using capital intensity of output and user cost. In such model, tax reform could effectively influence whether firms invest in capital while creating jobs or instead chose to replace labour with capital.