rational mean variance decisions for subsistence farmers this paper explores the issue of approximating expected utility in applying portfolio theory it has been demonstrated that expected utility is very closely approximated by an appropriate quadratic function recent studies have again questioned the empirical validity of mean variance analysis these efforts disregard the importance of the differences among various approximations and historically have focused on domestic financial securities we re examine the problem in the context of determining risk efficient portfolios of production activities for subsistence farmers the risks faced by these farmers are large and probably actuarially nonneutral thus recommendations based on an inappropriate quadratic approximation could result in substantial losses in welfare

designing economic instruments for the environment in a decentralized fiscal system designing economic instruments for the environment when external effects are important markets will be inefficient and economists have considered several broad classes of economic instruments to correct these inefficiencies however the standard economic analysis has tended to neglect important distinctions and interactions between the geographic scope of pollutants the enforcement authority of various levels of government and the fiscal responsibilities of the levels of government for example externalities generated in a particular local area may be confined to the local area or may spill over to other jurisdictions also local governments may be well informed about how best to regulate or enforce pollution control within their jurisdiction but they may not consider the effects of their actions on other jurisdictions finally the existence of locally generated waste emissions affects the appropriate assignment of both expenditure and tax responsibilities among levels of government the standard analysis therefore focuses mainly upon an aggregate or national perspective it typically ignores the possibility that the externality may be created and addressed by local governments and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems this paper examines the implications of decentralization for the design of corrective policies that is how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services as well as to choose tax instruments that can both finance these expenditures and correct the market failures of externalities

taxes tariffs and transfer pricing in multinational corporate decision making three interrelated aspects of u s multinational corporation activity are analyzed here the ability to shift profits from high tax countries to low tax countries the impact of host country taxes and tariffs on the distribution of real capital and the influence of these policies on international trade patterns of the united states and host countries the cross sectional empirical analysis indicates that the observed pattern of reported profits in high and low tax countries is consistent with income shifting behavior and that real investment responds to host country effective tax rates and tariffs the united states appears both to import more from and export more to low tax countries where mnc investment is greater but this bilateral focus must be amplified to consider multilateral effects if trade benefits are to be projected copyright 1991 by mit press

the effect of taxes on investment and income shifting to puerto rico the income of puerto rican affiliates of u s corporations is essentially untaxed by either puerto rico or the united states this lowers the tax penalty on investment there and also makes it attractive to shift reported taxable income from the u s parent corporation to the puerto rican affiliate this paper investigates these two interrelated impacts of taxation by developing a structural econometric model of the joint decisions regarding investment and income shifting and estimating the model using firm level data on the activity u s corporations in puerto rico the results suggest that the income shifting advantages are the predominant reason for u s investment in puerto rico

normality solvency and portfolio choice this paper examines whether investors with power utility functions choose mean vari ance mv efficient portfolios when returns are approximately normally distributed and there is borrowing or lending at a riskless interest rate the results show that the unlevered portfolios of power utility investors plot very closely to the mv efficient frontier how ever there are marked differences in the mix of risky assets regardless of whether the portfolios are highly concentrated or widely diversified such differences allow power investors to remain solvent even when they lever their optimal portfolios to a greater ex tent than less risk averse mv investors who risk bankruptcy it is concluded that the investment policies of power utility and mv investors with similar risk aversion measures are not as similar as is commonly believed this is particularly true for high power inves tors unless explicit solvency constraints are imposed on the mv problem and for low power investors when quadratic utility approximations are made to the power utility func tions these differences in the investment policies of power utility and mv investors lead us to question the widely accepted assertion that the assumptions of homogeneous beliefs normality a riskless asset and risk averse investors imply the simple mv capm where all investors including power utility investors hold combinations ofthe market portfolio and the riskless asset

taxes and the division of foreign operating income among royalties interest dividends and retained earnings abstract how do taxes influence the way u s corporations divide foreign affiliate operating income among royalties dividends interest and retained earnings the paper goes beyond previous work that focused largely on dividend repatriation behavior and provides a comprehensive analysis of the disposition of foreign subsidiary operating income the empirical results show that taxes have a large and statistically significant effect on the composition of payments own tax prices discourage the payment of dividends royalties and interest but dividend and other repatriation taxes do not increase retained earnings they only alter the composition of payments the results are therefore consistent with a generalized hartman sinn model of the mature controlled foreign corporation that has various alternative repatriation vehicles finally this paper integrates the choice of payments with income shifting among countries because the latter may be part of a low tax strategy for repatriations in this general framework conventional composite tax prices are not appropriate because the response to a change in a composite tax price depends on which components changed

credit and deferral as international investment incentives abstract many governments tax the foreign income of their firms using a system that grants credits for foreign taxes paid and permits tax deferral for unrepatriated income this paper shows that such tax systems encourage firms to restrict their equity stakes in new foreign investments and to finance their new investments with considerable debt these incentives exist even when transfer price regulation effectively limits the profit rates foreign subsidiaries can earn the behavior of the foreign subsidiaries of us multinationals in 1984 appears to be consistent with these incentives

on the taxation of multinational corporate investment when the deferral method is used by the capital exporting country abstract the user cost of capital for a subsidiary is derived when the capital exporter uses the deferral method for the taxation of the parent s foreign source income the hartman sinn result implying that the capital exporter s tax on remitted dividends is irrelevant to a subsidiary using retentions to finance investment is shown to be correct only when host and home countries have similar corporate income tax bases otherwise both the home and host country corporate tax provisions influence the cost of capital it is also shown that a cash flow tax by the capital importer is not neutral owing to interactions with the capital exporter s tax regime

a critical exploration of sponsorship infrastructure and new organizations this research focuses on the effects of public sponsorship and regional infrastructure on the emergence and survival of new organizations propositions are tested regarding the joint effects of sponsorship and infrastructure on industrial development in a randomly selected sample of fourteen regions the data include six measures of infrastructure sponsorship as measured by the total dollars spent for economic development and their individual and joint effects on the number of firms and employees in high technology industries for the years 1965 1970 1975 1980 and 1984 this preliminary analysis suggests that variation in the infrastructure and level of sponsorship within a region is related to the birth and survival of new organizations

a homogeneous industry model of resource allocation to basic research and its policy implications in a recent paper we showed that unaided industry allocation to basic inappropriable research is suboptimal and that in stimulating this allocation provision of government seed money is generally counterproductive while the provision of matching subsidies is not cost efficient here we consider a special case of the model developed in the earlier paper i e we now consider a homogeneous industry and investigate the effects of several relevant factors upon an industry s allocation of resources to basic research an extensive numerical example is presented that helps to verify and to interpret the model in realistic terms our findings question the validity of a number of popular beliefs about the need for government support of basic research in various types of industries for example contrary to popular belief the greater the risk aversion displayed by member firms in an industry the lesser may be the need for government support of its basic research also the larger the number of firms in an industry the greater may be the need for government support of that industry s basic research

state and provincial corporate tax planning income shifting and sales apportionment factor management abstract we empirically document a strategy through which corporations avoid state income taxes examining aggregated american state and canadian provincial data from 1983 1991 we find corporate income tax revenues are concave in corporate tax rates consistent with firms shifting their tax bases to more favourably taxed jurisdictions additional tests exploit unique features of state formula apportionment systems and find manufacturing shipments from states that tax outside their borders throwback states are decreasing in corporate income tax rates on sales

a general unconstrained model for transfer pricing in multinational supply chains multinational supply chains operate in more than one country or tax jurisdiction and face decision problems concerned with trade flows of resources products and services transfer prices and allocation of transport costs between their divisions these decisions must consider for the sake of optimality corporate and governmental parameters such as the payment of dividends and royalties ownership of and control over subsidiaries income taxes differentials duties and quotas etc in this paper we generalize and extend the theory of the multinational firm to the case of multinational supply chains we propose a model that is more general and comprehensive than the previous ones proposed in the literature to be more specific our model integrates many of the previous research factors and includes new ones such as transport costs and duty drawbacks which are critical for supply chains that operate under international trade regulations under the maximization of the repatriated earnings objective we study the optimality conditions of the corporate decision variables to derive managerial guidelines and to determine how decisions regarding trade quantities transfer prices and transport cost allocations affect the amount of taxes to be paid to host governments as well as the total after tax repatriated earnings of the corporation

an evaluation of federal policy instruments to stimulate basic research in industry a model of the resource allocation behavior of a group of firms demonstrates that unaided industry allocation to basic inappropriable research is suboptimal furthermore provision of seed money is generally counterproductive while the provision of a matching subsidy is not very cost efficient in increasing the allocation innovative policy alternatives are proposed

conditions for government support of private research and development abstract in a recent paper brockhoff and warschkow 1993 attempt to extend joglekar and hamburg s work under alternative behavioral assumptions joglekar and hamburg 1986 brockhoff and warschkow mainly obtain results that are opposite to joglekar and hamburg s findings unfortunately as shown below brockhoff and warschkow s model is flawed because 1 it is inconsistent with joglekar and hamburg s assumption that firms are individually rational and 2 it misrepresents the concept of pareto optimality consequently brockhoff and warschkow s conclusions cannot be seen as valid

industry concentration and allocation of resources to basic research while the mainstream of western economic thought believes in competitive markets the schumpeterian school considers concentrated industry to be the ideal vehicle for the advancement of industrial technology empirical evidence on the schumpeterian hypothesis that a concentrated industry allocates relatively more resources to its research and development rd joglekar p m hamburg 1987 industry resource allocation to basic research under normally distributed benefits decision sci winter 1 24 who showed that industries consisting of smaller numbers of firms allocate relatively greater amounts of resources to their basic research than industries consisting of larger numbers of firms extending joglekar and hamburg s models here we find that when two industries consist of the same number of firms in most cases a heterogeneous industry falls as short of its pareto optimal investment in basic research as its comparable homogeneous counterpart numerical examples suggest that in some cases concentrated heterogeneous industries may do worse policy implications of the results as well as directions for further research are discussed

the demand for tax haven operations what types of firms establish tax haven operations and what purposes do these operations serve analysis of affiliate level data for american firms indicates that larger more international firms and those with extensive intrafirm trade and high r and d intensities are the most likely to use tax havens tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high tax jurisdictions and by reducing the burden of home country taxation of foreign income the evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of u s taxation of foreign income firms with sizeable foreign operations benefit the most from using tax havens an effect that can be evaluated by using foreign economic growth rates as instruments for firm level growth of foreign investment outside of tax havens one percent greater sales and investment growth in nearby non haven countries is associated with a 1 5 to 2 greater likelihood of establishing a tax haven operation

saving taxes through foreign plant ownership this paper analyzes to which extent foreign plant ownership involves lower tax payments than domestic plant ownership we employ a model of endogenous foreign subsidiary ownership to derive a set of empirically testable hypotheses about the differential taxation of foreign and domestically owned subsidiaries we assess these hypotheses in a data set of 33 577 european foreign and domestically owned manufacturing plants we identify a significant tax saving of endogenous foreign owner ship on average foreign owners pay 594 euros per employee or about 56 percent less than domestic owners of similar subsidiaries this effect is larger in thinner markets with fewer plants in markets with a greater relative presence of foreign owners and for foreign owners of larger plants

land allocation under uncertainty for alternative specifications of return distributions using the expected utility moment generating function approach a land allocation rule is derived which is both independent of the nature of the underlying distribution of each element in the choice set and accounts for all moments of that distribution this decision rule is applied to the choice between cotton and corn in the mississippi delta to demonstrate that consideration of just the first two moments of the distribution can often be unjustified and damaging empirically theoretically and in terms of the utility of the decision maker

proactive r d management and firm growth a punctuated equilibrium model the external environment is characterized by periods of relative stability interspersed with periods of extreme change implying that high performing firms must practice exploration and exploitation in order to survive and thrive in this paper we posit that r d expenditure volatility indicates the presence of proactive r d management and is evidence of a firm moving from exploitation to exploration over time this is consistent with a punctuated equilibrium model of r d investment where shocks are induced by reactions to external turbulence using an unbalanced panel of almost 11 000 firm years from 1997 to 2006 we show that greater fluctuations in the firm s r d expenditure over time are associated with higher firm growth developing a contextual view of the relationship between r d expenditure volatility and firm growth we find that this relationship is weaker among firms with higher levels of corporate diversification and negative among smaller firms and those in slow clockspeed industries

an evaluation of federal policies concerning joint ventures for applied research and development current federal policies toward interfirm cooperation in research and development are designed to maximize society s use of available technology models of industry resource allocation behavior demonstrate that these policies are detrimental to the formation of risk sharing consortia for the development of new technology the reason is that current policies often deprive applied research and development activities of their appropriability analytical results suggest that if appropriability is maintained an underinvestment in applied research and development can be corrected in most cases simply by permitting firms to share the benefits and costs of projects in proportion to firms investments a permissive governmental posture may be particularly effective for industries consisting of a large number of firms with some firms relatively larger than others industries consisting of small numbers of relatively equal size firms may require government as a participant in consortia for applied research and development appropriable but risky r d activities