basket cases tax incentives and international joint venture participation by american multinational firms abstract this paper examines the impact of the u s tax reform act of 1986 tra on international joint ventures by american firms the tra mandates the use of separate baskets in calculating foreign tax credits on dividends received from each foreign corporation owned 50 or less by americans which greatly reduces the attractiveness of joint ventures especially those in low tax foreign countries since the effect of the tra on joint ventures varies with foreign tax rates the country level pattern of subsequent joint venture activity illustrates the sensitivity of organizational form to tax considerations the evidence indicates that american participation in international joint ventures fell sharply after 1986 particularly in low tax countries moreover joint ventures in low tax countries use more debt and pay greater royalties to their american parents after 1986 reflecting their incentives to economize on dividend payments

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

limited rationality and strategic interaction the impact of the strategic environment on nominal inertia much evidence suggests that people are heterogeneous with regard to their abilities to make rational forward looking decisions this raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results we examine this question in the context of a long standing and important economic problem the adjustment of nominal prices after an anticipated monetary shock our experiments suggest that two types of bounded rationality money illusion and anchoring are important behavioral forces behind nominal inertia however depending on the strategic environment bounded rationality has vastly different effects on aggregate price adjustment if agents actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment is both very slow and associated with relatively large real effects this adjustment difference is driven by price expectations which are very flexible and forward looking under substitutability but adaptive and sticky under complementarity moreover subjects expectations are also considerably more rational under substitutability

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

how much is a dollar worth tipping versus equilibrium coexistence on competing online auction sites theory models of platform competition predict that prices and buyer seller ratios should be approximately equal on coexisting auction sites using field experiments on ebay and yahoo auctions we find evidence that is inconsistent with equilibrium hypotheses and suggest that the market is tipping prices on ebay are consistently 20 70 percent higher than those on yahoo and ebay attracts two additional buyers per seller on yahoo prices and bidders counts are unaffected by the auction ending rule various differences between the sites cannot account for the magnitude of these disparities however a model of imitation dynamics can rationalize our findings

guessing with negative feedback an experiment we investigate experimentally a new variant of the beauty contest game bcg in which players actions are strategic substitutes a negative feedback bcg our results show that chosen numbers are closer to the rational expectation equilibrium than in a strategic complements environment a positive feedback bcg we also find that the estimated average depth of reasoning from the cognitive hierarchy model does not differ between the two environments we show that the difference may be attributed to the fact that additional information is more valuable when players actions are strategic substitutes rather than strategic complements in line with other recent experimental findings

knowing what others know coordination motives in information acquisition we explore how optimal information choices change the predictions of strategic models when a large number of agents play a game with strategic complementarity information choices exhibit complementarity as well if an agent wants to do what others do they want to know what others know this makes heterogeneous beliefs di cult to sustain and may generate multiple equilibria in models with substitutability agents prefer to difierentiate their information choices we use these theoretical results to examine the role of information choice in recent price setting models and to propose modeling techniques that ensure equilibrium uniqueness

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

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

the impact of u s tax reform on foreign direct investment in the united states abstract this study empirically examines how taxes shape foreign direct investment and finds that increased taxes spur inward foreign investment this finding conforms with theories that recognize that foreign investor response is critically shaped by the tax provisions faced by the foreign investor in his home country and by the effects of tax reform on pre tax asset returns we demonstrate that average tax rates may better proxy tax effects than do effective tax rates our findings are more robust than previous results since we utilize the entire 1980s tax history consider a fuller set of industry distinctions and estimate the tax responsiveness in the context of exchange rate fluctuations

are two heads better than one monetary policy by committee two experiments were conducted to test the common hypothesis that groups make decisions more slowly than individuals one of these experiments imitates real life monetary policy decisions in both cases the hypothesis is found wanting groups are not slower than individuals in both experiments we also find that group decisions are on average better than individual decisions this holds regardless of whether the groups make decisions by unanimity or majority rule simple mechanical theories of group decisionmaking that the group follows its average player median player or best player do not explain the results group interactions seem to matter

geographic income shifting by multinational corporations in response to tax rate changes we investigate geographic income shifting by 191 u s multinational corporations in response to worldwide changes in tax rates during 1984 90 between 1984 and 1986 the united kingdom reduced corporate tax rates from a maximum of 45 to 35 and in 1985 france reduced rates from 50 to 45 following these reductions in european rates the united states reduced top corporate tax rates from 46 to 34 between 1986 and 1988 canadian rates increased between 1984 and 1986 and then decreased through 1989 beginning in 1988 numerous countries enacted tax cuts apparently in response to those that occurred earlier in other countries as discussed in section 3 differential changes in tax rates provide incentives for geographic income shifting by multinational firms we identify two subperiods during 1984 90 in which relative tax rate changes

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

new evidence on inflation persistence and price stickiness in the euro area implications for macro modeling this paper evaluates new evidence on price setting practices and inflation persistence in the euro area with respect to its implications for macro modeling it argues that several of the most commonly used assumptions in micro founded macro models are seriously challenged by the new findings jel e31 e52

nominal shocks in monopolistically competitive markets an experiment abstract a market experiment examines the capacity of price and information frictions to explain real responses to nominal price shocks results indicate that both price and information frictions impede the response to a nominal shock as predicted by the standard dynamic adjustment models observed adjustment delays however far exceed predicted levels results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers rather than publicly and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia

on the role of heuristics experimental evidence on inflation dynamics we run an experiment where groups of six subjects must set prices in a non stationary macroeconomic environment where prices are complements the exogenous variable a business indicator is common knowledge and prices are flexible disregarding sticky prices or sticky information in a first treatment subjects insignificantly corrected for past errors which implies that history plays a role for determining current prices by reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices this option was widely taken bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run in a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead contrary to theoretical predictions our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning the failure or unwillingness to iteratively delete dominated strategies 2013 elsevier b v all rights reserved

foreign direct investment in a world of multiple taxes abstract governments impose multiple taxes on foreign investors though studies of the effect of tax policy on the location of foreign direct investment fdi focus almost exclusively on corporate income taxes this paper examines the impact of indirect non income taxes on fdi by american multinational firms using affiliate level data that permit the introduction of controls for parent companies and affiliate industries indirect tax burdens significantly exceed the foreign income tax obligations of foreign affiliates of american companies estimates imply that 10 higher local indirect tax rates are associated with 7 1 lower affiliate assets which is similar to the effect of 10 higher income tax rates affiliate output falls by 2 9 as indirect taxes rise by 10 while higher income taxes have more modest output effects high corporate income tax rates depress capital labor ratios and profit rates of foreign affiliates whereas high indirect tax rates do not these patterns reveal the impact of indirect taxes and suggest the mechanisms by which direct and indirect taxes affect fdi

limited rationality and strategic complements the implications for macroeconomics this paper considers the implications of heterogeneity in information processing abilities for macroeconomic models that exhibit strategic complements the latter is the same concept that has received much attention in the recent macro literature under the headings keynesian coordination problems and positive trading externalities we consider environments in which agents vary in terms of their ability to form expectations and ask whether it is the sophisticated agents or the naive agents who have a disproportionately large effect on macroeconomic equilibrium we find that if macroeconomic interaction exhibits strategic complementarity then it is the naive agents who have a disproportionate impact

the effectiveness of corporate tax incentives for foreign investment in the presence of tax crediting abstract the value of corporate tax holiday incentives provided by central eastern europe cee countries to attract foreign investment depends on whether a multinational company must pay corporate income taxes to its home government on income remitted from abroad i e the multinational is said to be in a deficient credit position if foreign taxes paid are less than the home country tax owing on foreign source income this paper examines the value of corporate tax incentives given to manufacturing companies investing in cee countries taking into account both the host country tax regime and the u s tax treatment of foreign source investment

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8