USC Marshall

Do investment tax incentives improve job prospects for workers? We explore states’ adoption of a major federal tax incentive that accelerates the depreciation of equipment investments for eligible firms but not for ineligible ones. Analyzing massive establishment-level datasets on occupational employment and computer investment, we find that when states expand investment incentives, eligible firms immediately increase their equipment and skilled employees; however, they reduce their routine-task employees after a delay of up to two years. These opposing effects constitute an overall insignificant effect on the firms’ total employment and shed light on the nuances of job creation through investment incentives.

There are many federal, state, and local laws that distort housing decisions and prices. However, it is often difficult to tease out the quantitative impact of such policies. In this paper, we examine the implications of one of the most significant tax changes initiated by voters in the United States on house prices, housing turnover, and household welfare. In 1978 California passed Proposition 13, which lowered property tax rates and restricted future property tax increases. We find that, the introduction of Proposition 13 leads to a 15% increase in house prices and a 3.3% decrease in the moving rates. The elimination of Proposition 13, however, leads to modest changes in house prices and mobility but sizable welfare gains.

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely, high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which are part of firm assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry-adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production-based equilibrium model explains these empirical findings.

We examine the relation between inventory investment and the cost of capital in the time series and the cross section. We find consistent evidence that risk premia, rather than real interest rates, are strongly negatively related to future inventory growth at the aggregate, industry, and firm levels. The effect is stronger for firms in industries that produce durables rather than nondurables, exhibit greater cyclicality in sales, require longer lead times, and are subject to more technological innovation. We then construct a production-based asset pricing model with two types of capital, fixed capital and inventories, to explain these empirical findings. Convex adjustment costs and a countercyclical price of risk lead to negative time series and cross sectional relations between expected returns and inventory growth.

This paper investigates the asset pricing and macroeconomic implications of the ratio of new orders (NO) to shipments (S) of durable goods. NO/S is a measure of investment commitments by firms, and high values of NO/S are associated with a business cycle peak. High NO/S predicts a short-run increase in output, mainly from equipment and inventory investment, but a dramatic long-run decline in fixed investment, inventories, and GDP growth. We find that NO/S proxies for a short-horizon component of risk premia that is not captured by the predictive variables identified in prior work. Higher levels of NO/S forecast lower excess returns on a broad set of assets, including equities, long- and intermediate-term Treasury bonds, and highand low-grade corporate bonds, at horizons from one month to one year. For stocks, and to some extent for bonds, these effects are robust to the inclusion of common return predictors. For all assets, predictability is significant on an out-of-sample basis as well. We also address the term structure of risk premia. To measure longer term investment commitment, we construct a similar ratio based on construction starts and show that it proxies for long term risk premia, predicting stock and bond returns primarily at longer horizons.