Tax Loss Carryovers in a Competitive Environment
34 Pages Posted: 8 Oct 2014 Last revised: 22 Jul 2017
Date Written: July 21, 2017
We examine operating and investment decisions in a duopolistic industry in which an initial investment in research yields an immediate tax benefit for one firm, but creates a net operating loss carryover for the other firm. We show that the conventional wisdom that suggests that the first firm is in a better position to make the research investment need not hold in a competitive environment. This occurs because if both firms invest in research, the firm with the net operating loss carryover makes more aggressive investment decisions following successful research.
Keywords: Net operating loss carryovers, R&D investments, capital expenditures
JEL Classification: H25, D21, H32
Suggested Citation: Suggested Citation