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The Importance of Measurement Error in the Cost of Capital

Author: Austan Goolsbee
Publisher: Cambridge, Mass. National Bureau of Economic Research 2000.
Series: Working paper series (National Bureau of Economic Research), no. w7558.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
Conventional estimates of the impact of taxes on investment may be seriously biased by measurement error in the cost of capital. The existence and size of such error, however, has not been documented. Using panel data on different types of capital equipment, this paper provides direct evidence of measurement error in the tax component of the cost of capital, accounting for about 20 percent of the tax term's  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Austan Goolsbee
OCLC Number: 1027373282
Notes: February 2000.
Description: 1 online resource.
Details: Mode of access: World Wide Web.
Series Title: Working paper series (National Bureau of Economic Research), no. w7558.
Responsibility: Austan Goolsbee.

Abstract:

Conventional estimates of the impact of taxes on investment may be seriously biased by measurement error in the cost of capital. The existence and size of such error, however, has not been documented. Using panel data on different types of capital equipment, this paper provides direct evidence of measurement error in the tax component of the cost of capital, accounting for about 20 percent of the tax term's variance. Correcting for the error with IV estimation shows that taxes significantly affect both prices and investment and that conventional results may be off by as much as a factor of four.

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