ABSTRACT
This chapter discusses about the substitution of cash grants for tax allowances in respect of manufacturing investment in plant and equipment between 1966 and 1970. Clay-Clay specification is the only formulation which permits an assessment of the effects of the temporarily higher grants to be based on all the available information, for the period after as well as before the fiscal experiment. The descriptive content of the putty-putty hypothesis has never been at issue, but it has remained a popular 'as if' model for the analysis of investment behaviour. The interpretation of the putty-clay model, however, becomes more flexible: specifically, it is possible to treat replacement as determined, like net investment, by output and relative prices rather than by purely physical considerations. The most robust result of the enquiry is that cash grants were a relatively efficient method of stimulating investment, and provided a bargain in the form of greater investment at negligible cost in terms of foregone revenue.
