Cost of capital to Irish industry

Abstract

This study reviews the theoretical background to recent discussions of the measurement of the cost of capital. Particular attention is paid to the correct specification of tax variables (including depreciation, allowances, and reliefs). There is a discussion of the alternative ways of treating the effects of price changes (capital gains or losses) on the cost of capital. A number of alternative measures of the cost of capital to Irish industry are presented. It is shown that the ratio of labour to capital costs has risen steeply over the period 1953-69, no matter which definition of the cost of capital is accepted. Estimates of the elasticity of substitution are presented on the basis of data for capital, labour, wages and the cost of capital for the period 1953-69. In conclusion the appropriateness of an industrialisation policy based on capital subsidies is questioned in the light of the evidence presented on the behaviour of the cost of capital in the post-war period.