| Sumario: | This article presents views of authors on tax policy and investment behavior policy on investment expenditures. According to them, the basic principles of the investment function underlying their work are the familiar ones. Starting from a hypothesis about the form of the production function, they derived the profit-maximizing demand for capital input as a function of output and the relative price of capital services. They then estimated parameters of the lagged adjustment of actual capital to this desired level. One property of the demand function, namely its elasticity with respect to the price of capital services, obviously has a crucial role in the application of such an investment function to the measurement of effects of tax policy. They chose the relatively simple Cobb-Douglas parametrization for the production function. This choice implied the particular numerical value of unity for the own-price elasticity of demand for capital, or elasticity of substitution. At the time they made the choice, they believed that it was a reasonable one in the light of evidence from studies of production functions and factor demand. Evidence accumulated since then has strongly confirmed their hypothesis.
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