DP1515 Business Formation and Aggregate Investment

Author(s): Christian Keuschnigg
Publication Date: November 1996
Keyword(s): Business Formation, Monopolistic Competition, Underaccumulation of Captial
JEL(s): E62, H23, L16
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1515

The paper proposes an intertemporal equilibrium model with monopolistic competition and start-up investment with variable capacity to explain the nexus between business formation and medium-run growth. An investment externality is identified that results in under-accumulation of capital in the decentralized market equilibrium and, thus, creates investment multipliers. Some form of investment promotion is called for. The paper compares the effectiveness of policies to promote small business formation with a general investment tax credit.