incentive incompatibility and starting point bias in iterative valuation questions comment in a recent study whitehead 2002 proposes incentive incompatibility and startingpoint bias tests for iterative willingness to pay questions we show that if restrictions associated with the nature of starting point bias are not imposed on the estimation one obtains inconsistent estimates of the structural parameters and may draw inaccurate conclusions regarding the extent of incentive incompatibility and starting point bias in contingent valuation survey data jel q26 c35

the allocational effects of the precision of accounting estimates this paper studies the allocational effects associated with the precision of accounting estimates when the precision of estimates is a choice variable for firms one part of the paper considers the effects of the observability of precision choices we show that generally making precision choices private increases firms equilibrium precision choices and also as a by product their equilibrium investment choices we further show that when firms precision choices are private there may be a disclosure trap in which unless investors conjecture the owner has chosen an estimate with the highest possible precision the owner will respond to investors conjecture by choosing an estimate whose precision is higher than investors conjecture in a multifirm version of the model with endogenous investment we show that the equilibrium investment by the firm increases in the precision of the firm s own estimate and decreases in the precisions of other firms estimates finally we show that in a setting where the firm s initial owner sells his stake in the firm over the course of two periods with disclosures of estimates of the firm s value occurring prior to each sale of shares if the precisions of the estimates are public the equilibrium precisions of the estimates increase over time when the owner sells a sufficiently large fraction of the firm in the first period and otherwise the equilibrium precisions of estimates remain constant over time

estimation using contingent valuation data from a dichotomous choice with follow up questionnaire reply abstract our original article proposed that the two yes no willingness to pay wtp responses produced by this survey format should be viewed as a pair of jointly distributed correlated discrete random variables the comparison model the conventional approach to estimation using these types of data contained a programming error correction alters the results from the comparison model but our original claim that estimation by conventional methods can produce misleading inferences if ours is the appropriate specification still stands this is especially true if negative wtp is precluded when e wtp is calculated

strategic pricing signalling and costly information acquisition abstract consider a market where an informed monopolist sets the price for a good or asset with a value unknown to potential buyers upon observing the price buyers may pay some cost for information about the value before deciding on purchases under a belief restriction which generalizes the idea of the cho kreps intuitive criterion we establish a version of the grossman stiglitz paradox there is no separating equilibrium with fully revealing prices yet we also resolve the paradox there is a unique equilibrium and as the cost of information becomes small the equilibrium approaches the full information outcome and prices become perfectly revealing

incentive incompatibility and starting point bias in iterative valuation questions we test for incentive incompatibility and starting point bias to describe the effects of iterative valuation questions on willingness to pay we compare double triple and multiplebounded models with data from two surveys with similar designs of the valuation questions we find that incentive incompatibility is present in both sets of data and starting point bias is present in one the efficiency of the willingness to pay estimate is improved in only one set of data the potential loss from using iterative questions without controlling for both incentive incompatibility and starting point bias is biased willingness topay estimates

equilibrium price formation and the value of private information an economy is analyzed in which agents first choose whether to acquire costly information about the return to a risky asset and then choose demand functions that determine the allocation of assets it is a well known paradox that if agents are price takers and prices are fully revealing then an equilibrium with costly information acquisition does not exist it is shown that if the price formation process is modeled explicitly and agnets are not price takers then it is possible to have an equilibrium with fully revealing prices and costly information acquisition article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

an econometric analysis of income tax evasion and its detection this article presents an econometric analysis of income tax evasion and its detection based on individual level data drawn from the internal revenue service 1982 and 1985 taxpayer compliance measurement programs i specify a model consisting of two equations the first measures the extent of evasion the second the fraction of evasion detected the empirical analysis explores the effects of income the marginal tax rate and various socioeconomic characteristics on filer evasion behavior and it assesses the variability in detection rates among irs examiners finally i use the empirical estimates to construct new estimates of the income tax gap the new estimates are very close to the previous irs estimates

tax base erosion in developing countries it is widely believed that the tax base in most developing countries has been severely eroded by legal tax avoidance and illegal tax evasion brought about largely by poor tax administration 1 this erosion it is thought has had a variety of fiscal effects tax revenues are lost and the growth of the tax base is dampened the progressivity implied by the statutory rate structure is not achieved the costs of tax administration are increased and horizontal and vertical equity suffer because the effective tax rates faced by individuals depend largely upon their success in playing the tax compliance game it is not surprising therefore that virtually all fiscal reform programs in developing countries start with the promise to improve administration better administration is a discretionary government action that at once can lower the tax rate increase revenues slow capital flight and improve the fairness of the system yet tax base erosion in developing countries is something about which precious little is known and in particular the empirical evidence about the severity and the nature of the problem is all but nonexistent 2 why do we know so little about the dimensions of the evasionavoidance problem one reason is conceptual problems in measuring erosion of the tax base for example how does one estimate the substitution of nontaxable for taxable compensation in response to the tax structure or the extent to which a higher marginal tax rate has induced individuals to report less of their taxable income another reason is the problem of comparability across countries the many legal and

the optimal size of a tax collection agency the condition that characterizes the optimal size of a tax collection agency is derived and then given a simple interpretation in terms of excess burden the paper clarifies an earlier finding of sandmo which suggests that the optimal degree of enforcement is higher than a simple cost benefit calculation would indicate the appropriate condition is that at the margin the resource cost of increasing enforcement should equal the saving of excess burden due to the decline in exposure to risk the increased revenue gained from stricter enforcement does not enter the expression because it merely represents a transfer among the economy s identical agents

controlling starting point bias in double bounded contingent valuation surveys in this paper we study starting point bias in double bounded contingent valuation surveys this phenomenon arise in applications that use multiple valuation questions indeed response to follow up valuation questions may be influenced by the bid proposed in the initial valuation question previous research have been conducted in order to control for such an effect however they find that efficiency gains are lost when we control for undesirable response effects relative to a single dichotomous choice question contrary to these results we propose a way to control for starting point bias in double bounded questions with gains in efficiency

efficient committed budget for implementing target audit probability for many inspectees strategic models of auditor inspectee interaction have neglected implementation details in multiple inspectee settings with multiple inspectees the target audit probability derived from the standard analysis can be implemented with sampling plans differing in the budgets committed to support them overly committed audit budgets tie up unneeded resources that could have been allocated for better uses this paper studies the minimum committed budget required to implement a target audit probability when i the audit sample can be contingent on red flags due to signals of inspectees private information e g from self reporting and ii the number of inspectees is large it proposes an audit rule called bounded simple random sampling srs which is shown to require no more committed budget to support than two other rules naturally generalized from the one to one analysis when the number of inspectees is large enough bounded srs is nearly as good as any efficient audit rule which demands the lowest committed budget necessary to implement the target audit probability the results offer insights on how audit sampling plans may be formulated to reduce inefficiency and what budget usage ratios should be expected accordingly

institutional ownership differential predisclosure precision and trading volume at announcement dates abstract this study examines the relation between ownership structure as revealed by the percentage of outstanding shares held by institutional investors and trading volume at earnings announcement dates we find that volume response as a function of institutional ownership is quadratic with the quadratic curve that reaches a maximum at around 50 institutional ownership when risk tolerances are identical across investor types such a relation is consistent with kim and verrecchia s 1991a proposition that trading volume response to public announcements increases with the level of cross investor variation in precision of private predisclosure information

honesty and evasion in the tax compliance game conventional models of tax compliance emphasize that taxpayers make strategic tax reports underreporting income to the extent that this behavior is functionally rewarded in contrast to this view considerable empirical evidence suggests that many taxpayers are inherently honest reporting truthfully regardless of the incentive to cheat in this article we build a game theoretic model of tax compliance that includes both honest and potentially dishonest taxpayers we show that including honest taxpayers significantly alters the model leading to much improved empirical predictions and somewhat different and novel policy implications

starting point bias in dichotomous choice valuation with follow up questioning abstract follow up questions are frequently used to improve the efficiency of dichotomous choice contingent valuation questionnaires however a number of authors e g 12 16 have noted a significant difference between the wtp distributions implied by initial and follow up question responses this paper investigates starting point bias as one explanation for the phenomenon we develop a model of starting point bias in the context of dichotomous choice questioning with follow up using a monte carlo simulation to illustrate the potential bias imparted to wtp estimates an application is provided based on data from a cv study in northcentral iowa

income tax compliance in a principal agent framework previous analyses have modeled income tax evasion as a portfolio problem deriving the optimal consumption of the risky asset unreported income under the assumption of a fixed probability of detection the purpose of this paper is to examine some of these issues in tax compliance starting from a different set of assumptions in particular we compare alternative audit policies to the standard random audit policy we focus on an audit cutoff policy in which an agent triggers an audit if his or her reported income is too low and is not audited if reported income is sufficiently high this paper establishes two major results first random audit rules are weakly dominated by audit cutoff rules it can be shown given lump sum taxes and fines that these audit cutoff rules are the least cost policies which induce truthful reporting of income second the dominance of audit cutoff rules over random audit rules holds for lump sum as well as proportional taxation in fact the equilibrium consequences of the two are equivalent

modeling starting point bias as unobserved heterogeneity in contingent valuation surveys an application to air pollution up to now the starting point bias has generally been considered to be a homogeneous phenomenon in this article we treat anchoring as an unobserved heterogeneous phenomenon our contribution is twofold first we show analytically and by way of simulations that assuming homogeneous anchoring can be hazardous and lead to misspecifications second we propose an econometric model that starts with a dichotomous question and then uses an open ended question we finally apply our model to a contingent valuation survey on air quality our results suggest that how anchoring is modeled in empirical studies deserves more attention

labor force participation and earnings determinants for women in the special conditions of developing countries abstract little systematic analysis exists regarding hypothesized special labor market conditions for women in developing countries this study explores such conditions in nicaragua major results are i small children affect participation less than in developed countries due to child care from extended families or while on informal sector jobs and the necessity for poor mothers to work ii schooling and experience have major roles affecting work sector and earnings but the primary school return is half that cited by the world bank iii other human capital variables particularly nutrition have some impact

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

procedural invariance testing of the one and one half bound dichotomous choice elicitation method the contingent valuation method for estimating willingness to pay for public goods typically adopts a single referendum question format which is relatively statistically inefficient as an alternative cooper hanemann and signorello 2002 propose the one and one half bound oohb format allowing researchers to question respondents about both a lower and higher limit on project costs thereby securing substantial gains in statistical efficiency using an experimental design we find that responses to oohb valuation questions fail crucial tests of procedural invariance we test various competing models of observed response patterns including strategic misrepresentation of standard preferences and nonstandard models of preference formation

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

audit selection and income tax underreporting in the tax compliance game abstract this paper uses a game theoretic model of the tax compliance game to estimate a model of audit selection and income tax underreporting in jamaica the empirical analysis make use of audited tax returns for individual taxpayers and a random sample of tax returns for the population from which the audited returns are selected the estimation results strongly indicate a nonrandom audit strategy and thus provide support for the game theoretic approach the results also indicate that the probability of underreporting and the level of underreporting are positively related to the marginal tax rate and to income and negatively related to marginal payroll tax benefits in general the underreporting elasticities are small

a theory of fed watching in a macroeconomic policy game this paper examines the phenomenon of fed watching within the context of a macroeconomic policy game following a cukierman and a h meltzer s 1986 article the policymaker s preferences are private information and noisy monetary control causes past observations of money growth to be a noisy signal of the monetary authority s future intentions individuals are allowed to acquire additional information about the monetary authority s preferences thus both past observations of money growth and costly information about the policymaker s preferences are used by agents in forming expectations about policy the public s acquisition of information alters the monetary authority s strategic calculus making noisy monetary control less desirable copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

is environmental income reporting evasive in household surveys evidence from rural poor in laos abstract literature has consistently reiterated that the self employed non poor underreport their business income to tax authorities and in household surveys in this work we measure the extent to which poor households engaging in illegal environmental activities underreport income in laos we use a two year panel data and apply the engel curve to detect and estimate the reporting gap we further use a switching probit regression to identify the factors of income underreporting and its impact on income poverty outcomes results show that on an average rural households who earn at least a quarter of their income from the environment underreport by over 50 in household surveys resulting in overestimation of income poverty moreover we find that a perceived threat to food security drives rural poor to engage in illegal environmental extraction

tax evasion and social interactions the paper extends the standard tax evasion model by allowing for social interactions in manski s manski c f 1993 identification of endogenous social effects the reflection problem review of economic studies 60 3 531 542 nomenclature our model takes into account endogenous interactions i e social conformity effects exogenous interactions i e fairness effects and correlated effects our model is tested using experimental data participants must decide how much income to report given individual and group tax rates and audit probabilities and given a feedback on the other members reporting behavior myopic and self consistent expectations are considered in the analysis in the latter case the estimation is based on a two limit simultaneous tobit with fixed group effects a unique social equilibrium exists when the model satisfies coherency conditions in line with brock and durlauf brock w a durlauf s n 2001b interactions based models in j heckman and e leamer eds handbook of econometrics 5 elsevier science b v 3297 380 the intrinsic nonlinearity between individual and group responses helps identify the model our results provide evidence of fairness effects but reject social conformity

the more we know about the fundamental the less we agree on the price i allow trading horizon heterogeneity across groups in a standard differential information model of a financial market this approach can explain the well established phenomenon that after a public announcement trading volume increases more private information is incorporated into prices and volatility increases in such environments public information has the important secondary role of helping agents learn about the information of other agents therefore whenever the correlation between the private information of different groups is sufficiently low a public announcement increases disagreement among short horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset additional testable implications are also suggested

policy design and conservation compliance on highly erodible lands we develop a game theoretic model of heterogeneous producers in order to identify the economic determinants of producer noncompliance with the conservation provisions of the united states department of agriculture usda policy on highly erodible lands we evaluate the policy effectiveness in inducing compliance and adoption of conservation practices the current policy design creates economic incentives for all noncompliant producers to masquerade as adopters and to claim government payments for which they are not entitled both theoretical and empirical results indicate that the increased income transfers to agriculture enacted under the latest farm bill will increase producer compliance and conservation activity on highly erodible lands

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed