Business capital accumulation and the user cost: Is there a heterogeneity bias?

Using data from 23 sectors in 10 OECD countries over the period 1984-2007 we show that the homogeneity assumption underlying empirical models of capital accumulation may lead to mis-specification. Thus, we adopt a fully disaggregated approach - by asset types and sectors - to estimate the responsiveness of investment to the tax-adjusted user cost of capital. Once all the sources of heterogeneity are accounted for, we find that capital accumulation is significantly affected by changes in the user cost, although the size of the impact is smaller than the unit benchmark. We do not find robust evidence that the long run substitution elasticities are statistically different across asset types.