ABSTRACT
It is commonly held that tax policy influences innovation both through its contribution to the general macroeconomic climate and through direct effects on specific kinds of innovation, and that tax incentives can have a positive effect on the level of RampentityD expenditures (Mansfield, 1981, 1984; Eisner, Albert, and Sullivan, 1983; Nadiri, 1980, 1981). However, these otherwise valuable studies do not provide an all-encompassing model in which policy simulations can be utilized. In part, this defect stems from the dual nature of such studies: they either focus exclusively on the cost of capital (e.g., Hulten and Robertson, 1983; Auerbach, 1983) or upon the impact of tax policy changes on cash flow (Mansfield, 1984). The present model can account for the effects of various tax policies upon both the cost of capital and cash flow (the financial constraint). Moreover, unlike other models, the indirect effect upon RampentityD from general tax policies influencing total investment through changes in the cost of capital and cash flow can be considered.
