Capital Costs, Industrial Mix, and the Composition of Business Investment
by Yolanda K. Henderson with Jeffrey B. Liebman
January/Februrary 1992
The composition of business investment in the United States changed dramatically during the 1980s. Workplaces were transformed as a result of investments in information processing equipment such as computers, fax machines, copiers, and sophisticated telephones. Businesses built new office towers and shopping malls, but few industrial facilities.
This article considers the extent to which changes in the cost of capital can account for these shifts. A number of developments occurred in the 1980s that affected the cost of capital more for some industries and assets than others. It is well known, for example, that computer prices fell sharply. Also, policymakers enacted significant revisions to the tax laws in efforts to alter the allocation of investment. The article concludes that the changes are due in large part to movements in real capital goods prices across industries and across assets.
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