Department of Economics2024-11-1020090164-070410.1016/j.jmacro.2009.01.0012-s2.0-70350350179http://dx.doi.org/10.1016/j.jmacro.2009.01.001https://hdl.handle.net/20.500.14288/15779We examine the impact of random changes in investment tax credit (ITC) policy on the irreversible investment decisions of a monopolistically competitive firm facing demand uncertainty. We examine the impact of increases in risk and changes in persistence in the ITC policy on investment behavior. Our results indicate that a temporary ITC (lower policy persistence) generally increases the variability of investment both in the short and the long-run. It lowers investment in the short-run and raises it in the long-run. Thus, perhaps surprisingly, a temporary ITC does not always lead to higher investment but always leads to more volatile investment. Policy-makers may thus face a long-run trade-off between the level and the volatility of investment. We also find that increases in risk defined in terms of mean-preserving spreads may lead to lower investment. (C) 2009 Elsevier Inc. All rights reserved.EconomicsJournal Article272262600001Q311064