Finance and Economics Discussion Series

Estimating Machinery Supply Elasticities Using Output Price Booms

Jesse Edgerton
2011-03

Abstract: Recent years have seen large increases in the prices of houses, farm products, and oil, often with little clear connection to economic fundamentals. These price increases created plausibly exogenous shifts in demand for construction, farm, and mining machinery. This paper uses these demand shifts to estimate the elasticity of machinery supply. Graphical evidence, OLS, and IV estimates all indicate that the quantity of machinery supplied increased rapidly during the booms, with only modest increases in prices. Pooled sample estimates of the supply elasticity are around 5, much larger than the estimate of 1 from Goolsbee (1998). Results thus suggest that public policies that stimulate investment demand will have only modest effects on the prices of investment goods.

Keywords: Investment, capital supply elasticity, bonus depreciation, expensing