Motivated by the Jobs and Growth Tax Relief Reconciliation Act of 2003, we study the effects of capital income tax cuts in a framework where firms make investment decisions to maximize their market value and households are subject to uninsurable labor income risk. We find that the effects of capital gains tax cuts are qualitatively similar to those found in the absence of household heterogeneity. However, dividend tax cuts surprisingly lead to a reduction in aggregate investment. This is because they increase the market value of the existing capital. In equilibrium, households then require a higher return to hold this additional wealth, leading to a lower capital stock.This also implies that dividend tax cuts are welfare reducing in the long run, not only because of the traditional reasons of redistribution from poor to rich, but also because of a fall in long run aggregate output and consumption. Taking into account the transition mitigates the losses but the JGTRRA tax cuts still lead to a welfare reduction equivalent to a 0.5% drop in consumption. In line with empirical evidence, the model also predicts substantial increases in dividends and stock prices following the tax cuts.

Motivated by the Jobs and Growth Tax Relief Reconciliation Act of 2003, we study the effects of capital income tax cuts in a framework where firms make investment decisions to maximize their market value and households are subject to uninsurable labor income risk. We find that the effects of capital gains tax cuts are qualitatively similar to those found in the absence of household heterogeneity. However, dividend tax cuts surprisingly lead to a reduction in aggregate investment. This is because they increase the market value of the existing capital. In equilibrium, households then require a higher return to hold this additional wealth, leading to a lower capital stock.This also implies that dividend tax cuts are welfare reducing in the long run, not only because of the traditional reasons of redistribution from poor to rich, but also because of a fall in long run aggregate output and consumption. Taking into account the transition mitigates the losses but the JGTRRA tax cuts still lead to a welfare reduction equivalent to a 0.5% drop in consumption. In line with empirical evidence, the model also predicts substantial increases in dividends and stock prices following the tax cuts.

I develop a continuous-time model to examine how the interaction between competition and financial constraints affects firms’ research and development (R&D) strategies. The model integrates two key characteristics of R&D investment: accelerability (i.e., higher R&D intensity leads to faster discovery) and scalability (i.e., higher R&D intensity leads to higher project payoff). I find that firms react strategically to their rivals’ financial constraints when making investment decisions in a duopoly R&D race. In particular, firms respond positively to the R&D intensity of an unconstrained rival, while they respond in a hump-shaped fashion to the R&D intensity of a constrained rival. As a result, a constrained firm can pre-empt an unconstrained competitor in market equilibrium. Accelerability is necessary for such pre-emption to occur, and scalability generally reduces its likelihood. Comparison with a monopoly benchmark shows that the economic mechanism differs from over-investment induced by financial constraints alone. The model also generates new implications regarding how project characteristics and cash flow risks impact R&D decisions. This paper was accepted by Gustavo Manso, finance.

H u , Xiaoy u a n, Lin, D a n m o a n d Tos u n, O n u r Ke m al 2 0 2 3. T h e effe c t of b o a r d in d e p e n d e n c e o n fir m p e rfo r m a n c e -n e w e vi d e n c e fro m p r o d u c t m a r k e t c o n di tio n s. E u r o p e a n Jou r n al of Fi n a n c e 2 9 (4) ,

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