what explains household stock holdings abstract this is an empirical study of the determinants of stock holdings using data from the us survey of consumer finances from 1992 to 2001 there is a great heterogeneity in the way households form their portfolios stock ownership is positively correlated with various measures of wealth age retirement savings and having sought financial advice it is negatively correlated with holdings of alternative risky investments such as investments in private businesses and with the willingness to undertake non financial investments in the future while we can predict reasonably well who holds stocks we have less predictive power about the share of stocks owned by those who hold positive amounts

longevity risk subjective survival expectations and individual saving behavior abstract we provide evidence of individuals awareness of longevity risk the uncertainty about future survival probabilities based on subjective survival expectations elicited in the survey of health ageing and retirement in europe share and matching data on longevity risk from the human mortality database we find a positive relationship between the forecast dispersion in subjective survival estimates and longevity risk which indicates that individuals are to some extent aware of longevity risk our analysis of savings behavior shows that the dispersion in survival estimates is primarily explained by individuals disagreeing on the survival probability and not by their true awareness of the underlying uncertainty individuals do not save more on average when faced with longevity risk although theory suggests they should

taxation of outbound direct investment economic principles and tax policy considerations this paper reviews economic principles for optimality of the taxation of international profit from both a global and national perspective it argues that for traditional systems based on the residence of the investor or the source of the income nothing less than full harmonisation across countries can achieve global optimality the conditions for national optimality are more difficult to identify but are most likely to imply source based taxation however source based taxation requires an allocation of the profits of multinational companies to individual jurisdictions this is not only very difficult in practice but in some cases is without any conceptual foundation the taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country

time inconsistent preferences and the annuitization decision good news can involve difficult decisions for example winning a lottery jackpot can go along with the decision whether to have the jackpot paid out immediately as a lump sum or as periodic annual payments also when entering retirement most people face the decision whether they want their defined contribution account balance paid as a lump sum or to annuitize that amount the fact that people tend to choose the lump sum even if economic reasons suggest that they should choose the annuity is called the annuity paradox in a large online survey we find that people behave time inconsistent older people have a stronger tendency to choose the lump sum than younger people when they are asked to predict today what to choose when they retire this effect is considerably stronger for participants that answer simple time preference questions inconsistently our findings suggest to think about precommitment devices for the annuitization decision in the retirement case already at the time when the defined benefit plan is started

asset allocation and asset location household evidence from the survey of consumer finances abstract the rapid growth of assets in self directed tax deferred retirement accounts has generated a new set of financial decisions for many households in addition to deciding which assets to hold the traditional choice among bonds stocks and other investment classes households with substantial assets in both taxable and tax deferred accounts tda must now decide where to hold them this paper uses data from the survey of consumer finances to assess how many households have enough assets in both taxable and tax deferred accounts to face significant asset location choices it also investigates the asset location decisions these households make in 2001 49 of households had at least some assets in a tax deferred account and more than 11 million households had at least us 25 000 in both a taxable and a tax deferred account asset allocation inside and outside tax deferred accounts is quite similar with about 70 of assets in each location invested in equity securities roughly two thirds of households with financial assets in both taxable and tax deferred accounts hold portfolios that are tax efficient most of the other third could reduce their taxes by relocating heavily taxed fixed income assets to their tax deferred account for more than half of the households that hold apparently tax inefficient portfolios however a shift of less than us 10 000 in financial assets would eliminate tax inefficiency

the floor leverage rule for retirement the floor leverage rule is a spending and investment strategy designed for retirees who can tolerate investment risk but insist on sustainable spending the rule calls for purchasing a spending guarantee with 85 of wealth and investing the remaining 15 in equities with 3 leverage surprisingly this leverage is a tool for managing risk the authors compare the rule with some popular strategies illustrate it for a variety of retiree preferences and evaluate its historical performance

on production efficiency in federal systems abstract this paper emphasises the role of the allocation of rents between the levels of government within a federal economy in the achievement of production efficiency it is shown that in a federal economy in the absence of vertical transfers production efficiency dictates rents should be allocated to the upper federal level of government

pension regulation and the market value of pension liabilities a contingent claims analysis using parisian options abstract we analyze the market consistent valuation of pension liabilities in a contingent claim framework whereby a knock out barrier feature is applied to capture early regulatory closure of a pension plan we investigate two cases which we call immediate closure procedure and delayed closure procedure in an immediate closure procedure when the assets value hits the regulatory boundary the pension plan is terminated immediately whereas in a delayed closure procedure a grace period is given to the pension fund for reorganization and recovery before premature closure is executed the framework is then used to construct fair pension deals furthermore we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability

individual risk in an investment based social security system this paper examines the risk aspects of an investment based defined contribution social security plan we focus on the risk after the plan is fully phased in individuals deposit a fraction of wages to a personal retirement account pra invest these funds in a 60 40 equity debt mix and in a similarly invested annuity at age 67 the value of the assets follows a random walk with mean and variance of a 60 40 equity debt portfolio over the period 1946 95 a mean log return of 5 5 percent net of administrative costs of 0 4 percent and a standard deviation of 12 5 percent we study he stochastic distributions of this process by doing 10 000 simulations of the 80 year experience of the cohort that reached age 21 in 1998 the resulting annuities are compared to the future defined benefits specified in current law the benchmark benefits with no uncertainty a 5 5 percent log return would permit the benchmark benefits to be purchased with pra deposits of 3 1 percent of payroll only one sixth of the pay as you go tax needed for the benchmark benefits saving a higher share of wages provides a cushion that protects the individual from the risk of an unacceptably low level of benefits for example pra deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0 17 and the probability that they are less than 61 percent of the benchmark to 0 05 pra deposits of 9 percent of wages half of the tax rate required in a pay as you go system would substantially reduce these risks this pure investment based plan is an extreme case the investment risk can be reduced further by using a mixed system that combines pay as you go and investment based components or that makes intergenerational transfers conditional on the performance of stock and bond prices this abstract was borrowed from another version of this item

the longevity annuity an annuity for everyone as of 2005 u s individuals had an estimated 7 4 trillion invested in iras and employer sponsored retirement accounts many retirees will thus face the difficult problem of turning a pool of assets into a stream of retirement income purchasing an immediate annuity is a common recommendation for retirees trying to maximize retirement spending the vast majority of retirees however are unwilling to annuitize all their assets this research demonstrates that a longevity annuity which is distinct from an immediate annuity in that payouts begin late in retirement is optimal for retirees unwilling to fully annuitize for a typical retiree allocating 10 15 percent of wealth to a longevity annuity creates spending benefits comparable to an allocation to an immediate annuity of 60 percent or more

the comparison between destination and origin principles under imperfect competition abstract especially but not only in the european union closer economic integration is putting increasing pressure on the destination principle under which goods entering international trade are normally taxed this has raised the possibility of switching to the origin principle which dispenses with problematic border tax adjustments this paper compares destination and origin principles under conditions of imperfect competition previous analyses which have considered only the competitive case have led to a qualified presumption in favour of the destination principle a series of results are established here for both cooperative and non cooperative tax setting which challenge that presumption under imperfect competition

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

the strategic bequest motive although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation our understanding of bequest motives remains incomplete we develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries actions the model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers we present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries

cognitive constraints on valuing annuities this paper documents consumers difficulty valuing life annuities using a purpose built experiment in the american life panel we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them we also find that buy values are negatively correlated with sell values and that the sell buy valuation spread is negatively correlated with cognition this spread is larger for those with less education weaker numerical abilities and lower levels of financial literacy our evidence contributes to the emerging literature on heterogeneity in financial decision making abilities particularly regarding retirement payouts jel d14 d91 g11 h55

making retirement income last a lifetime to enable investors to spend down the assets in their defined contribution accounts more easily the authors propose a decumulation benchmark comprising a laddered portfolio of tips for the first 20 years consuming 88 percent of available capital and a deferred life annuity purchased with the remaining 12 percent this portfolio can be used directly by the investor akin to indexing or as a benchmark for evaluating the performance of a more aggressive strategy

asset allocation and location over the life cycle with investment linked survival contingent payouts abstract this paper shows how survival contingent investment linked payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations in exchange for illiquidity these products provide the consumer with access to mutual fund style portfolio choice as well as the survival credit generated from pooling mortality risk our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival contingent payouts over the lifetime and also asset allocation paths showing how to invest in stocks versus bonds we show that the investor who moves her money out of liquid saving into survival contingent assets gradually from middle age to retirement and beyond will enhance her welfare by as much as 50 the results are robust to the introduction of uninsurable consumption shocks in housing expenses income flows during the worklife and retirement sudden changes in health status and medical expenses

the theory of taxation for developing countries tax policy has far reaching implications for economic development and public administration this book which presents a modern theory of public finance brings together many of the most distinguished economists who have written on the subject they provide coherent principles for tax design and a systematic framework for the analysis of practical questions of tax reform and pricing policy in developing countries the book is especially timely as countries experience increasing shortages of government revenue and the distortions brought about by poorly designed tax systems it pays particular attention to the special problems of developing countries such as the taxation of agriculture the aim throughout is to develop techniques that can be quantitatively applied given the data available and empirical case studies illustrate the methods in action the authors analyze the links between tax theory social cost benefit analysis and the pricing of publicly supplied goods and services they also explore the empirical and econometric problems of identifying the tradeoffs between equity and efficiency other topics treated include the analysis of labor markets the taxation of foreign private investment and of fuel and the pricing of education although the models used concentrate on developing countries most of the methods and discussion apply as well to the problems of more affluent countries

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

simple solutions to the initial conditions problem in dynamic nonlinear panel data models with unobserved heterogeneity i study a simple widely applicable approach to handling the initial conditions problem in dynamic nonlinear unobserved effects models rather than attempting to obtain the joint distribution of all outcomes of the endogenous variables i propose finding the distribution conditional on the initial value and the observed history of strictly exogenous explanatory variables the approach is flexible and results in simple estimation strategies for at least three leading dynamic nonlinear models probit tobit and poisson regression i treat the general problem of estimating average partial effects and show that simple estimators exist for important special cases copyright 2005 john wiley sons ltd

coordinating climate and trade policies pareto efficiency and the role of border tax adjustments abstract this paper explores the role of trade instruments in globally efficient climate policies focusing on whether or not some form of border tax adjustment bta is warranted when carbon prices differ internationally the analysis shows that while there is no case for bta when all instruments can be freely deployed pareto efficiency does require a form of bta when carbon taxes in some countries are constrained its purpose then is to partly counteract the impact on emissions of inappropriate carbon pricing there or equivalently to undo the trade distortions such pricing creates the required form of bta is generally complex but a special case is identified in which it optimally has the simple structure envisaged in practical policy discussions it is also shown that the efficiency case for bta depends critically on whether climate policies are pursued by carbon taxation or by cap and trade

capital income and profit taxation with foreign ownership of firms abstract this paper establishes optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of domestic firms we show that if there are constraints on the feasibility of profits taxation both saving and investment taxes generally enter the optimal tax package if instead profits can be fully taxed then source based investment taxes vanish if domestic firms are in part owned by foreigners then source based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents

simple rules for the optimal taxation of international capital income in this paper we reconcile and extend previous results on the collectively optimal taxation of international investment income the weighted average rule of horst 1980 for example is shown to rest on unattractive assumptions on the set of instruments available ruling out any need for distorting taxes the principal contribution is to establish a new and strikingly simple weighted average rule encompassing the other key result in this area for the general case in which lump sum taxes are unavailable the ability to tax pure profits is perhaps restricted and distorting taxes on both domestic and border crossing capital income are optimally deployed

international oligopoly and the taxation of commerce with revenue constrained governments we evaluate the incentives for strategic commodity tax setting under destination and origin regimes when competition is imperfect and commodity taxes must be used to finance the government budget different cases of international duopoly are compared where firms compete over quantities or prices and markets are segmented or integrated in each setting the international spillovers of tax policy are isolated and evaluated at the pareto efficient tax rate we find that origin based commodity taxation leads to a downward competition of tax rates in each of the models analysed whereas no similarly broad based incentives for beggar thy neighbour policies exist under the destination principle

trade conflict and political integration explaining the heterogeneity of regional trade agreements many historians argue that the main goal of european trade integration was the preservation of peace this paper investigates whether this reasoning is relevant for the eu and other regional trade agreements rtas i provide empirical evidence that customs unions and common markets deep rtas do reduce the probability of war between members partial scope and free trade agreements shallow rtas however have no effect on war probabilities accordingly international insecurity has a differential impact on incentives to create rtas deep rtas are signed between countries that are involved in many interstate disputes and that have low trade costs with the rest of the world whereas the opposite is true for shallow rtas

health and mortality delta assessing the welfare cost of household insurance choice we develop a pair of risk measures health and mortality delta for the universe of life and health insurance products a life cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products we estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance annuities including private pensions and long term care insurance in the health and retirement study for the median household aged 51 to 57 the lifetime welfare cost of market incompleteness and suboptimal choice is 3 2 of total wealth

production efficiency and optimal pricing in intermediate good regulated industries abstract this paper reconsiders the relationship that exists between the production efficiency result of diamond and mirrlees and the ramsey rule specifically the paper considers a general equilibrium hierarchical structure of production one industry sells at least some of its output to another regulated industry a single regulatory agency must balance the budgets of all regulated industries in the aggregate so as to maximize the utility of a representative individual the ramsey rule always holds pricing rules however are far more complex the optimum may have some negative price cost margins and may not involve production efficiency

cohort and target age effects on subjective survival probabilities implications for models of the retirement phase abstract subjective survival scaling factors are often estimated from one observation of life expectancy and treated as constant to any target age using new survey data on subjective survival probabilities we estimate a model incorporating cohort and target age varying beliefs in scaling factors both cohort age and target age matter respondents are pessimistic about overall life expectancy but optimistic about survival at advanced ages and older respondents are more optimistic than younger we propose a new theoretical model incorporating cohort and target age varying beliefs and illustrate their effects on the perceived value of annuities and on retirement phase consumption plans

valuation of mortality risk via the instantaneous sharpe ratio applications to life annuities we develop a theory for valuing non diversifiable mortality risk in an incomplete market by assuming that the company issuing a mortality contingent claim requires compensation for this risk in the form of a pre specified instantaneous sharpe ratio we apply our method to value life annuities one result of our paper is that the value of the life annuity is identical to the upper good deal bound of cochrane and saa requejo 2000 beyond arbitrage good deal asset price bounds in incomplete markets journal of political economy 108 79 119 and of bjork and slinko 2006 towards a general theory of good deal bounds review of finance 10 221 260 applied to our setting a second result of our paper is that the value per contract solves a linear partial differential equation as the number of contracts approaches infinity one can represent the limiting value as an expectation with respect to an equivalent martingale measure and from this representation one can interpret the instantaneous sharpe ratio as an annuity market s price of mortality risk

portfolio choice and mortality contingent claims the general hara case abstract we solve a portfolio choice problem that includes mortality contingent claims and labor income under general hara preferences our contribution beyond existing literature is to i focus on the covariance between shocks to human capital and financial capital to ii model the utility of a family with basic needs and iii include life insurance and pension annuity claims in one unified life cycle model our solution employs a similarity reduction mapping which reduces the two dimensional hjb equation into one dimension this allows for the implementation of a quick numerical scheme and when shocks to human capital and financial capital are perfectly correlated a closed form expression is obtained as a special case

life cycle asset allocation with annuity markets abstract this paper derives the optimal consumption and portfolio choice pattern over the life cycle for households facing uninsurable labor income risk ruin risk stochastic capital markets and uncertain lifetime our model posits a dynamic utility maximizer with crra and epstein zin preferences who has access to liquid stocks bonds and illiquid life annuities we show that a considerable fraction of wealth is gradually annuitized until retirement and beyond to skim the mortality credit the remaining liquid wealth is mainly invested in stocks to compensate for riskless investment in life annuities the model allows us to assess the economic importance of common explanations for the empirically low annuity demand by analyzing participations rates annuitization fractions and welfare effects

uncertainty resolution and the timing of annuity purchases abstract this paper considers the question of why the annuity market is thin a model is presented in which consumers have the option of purchasing annuities before discovering their survival probability they can then recontract the initial choice after the resolution of this form of uncertainty it is shown that consumers purchase insurance against their own survival probability type at a very young age and do not undertake further transactions this characterization is then used to analze the effects of introducing future income uncertainty and to investigate the trade off between old age insurance motive and portfilio flexibility

the future of value added tax in the european union the current vat regime in the eu introduced with the removal of fiscal frontiers in 1993 is explicitly transitional we consider the issues that arise in designing a definitive regime the two most widely canvassed options adoption of a clearing house or a shift to origin taxation are found wanting the paper develops an alternative strategy combining a harmonized rate of vat on transactions between firms both between and within member states with national discretion over rates applied to final sales this offers the prospect of a real improvement on current arrangements

behavioral obstacles in the annuity market as baby boomers enter retirement they will look to the investment industry for ways to generate income from accumulated savings why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long standing puzzle mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains moreover behavioral anomalies can explain the prevalence of period certain annuities which guarantee a minimum number of payouts finally investors may prefer longevity annuities purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts

efficient portfolios when housing needs change over the life cycle abstract we address the issue of the efficiency of household portfolios in the presence of housing risk we treat housing stock as an asset and rents as a stochastic liability stream over the life cycle households can be short or long in their net housing position efficient financial portfolios are the sum of a standard markowitz portfolio and a housing risk hedge term that multiplies net housing wealth our empirical results show that net housing plays a key role in determining which household portfolios are inefficient the largest proportion of inefficient portfolios obtains among those with positive net housing who should invest more in stocks

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

rationalist explanations for war realist and other scholars commonly hold that rationally led states can and sometimes do fight when no peaceful bargains exist that both would prefer to war against this view i show that under very broad conditions there will exist negotiated settlements that genuinely rational states would mutually prefer to a risky and costly fight popular rationalist and realist explanations for war fail either to address or to explain adequately what would prevent leaders from locating a less costly bargain essentially just two mechanisms can resolve this puzzle on strictly rationalist terms the first turns on the fact that states have both private information about capabilities and resolve and the incentive to misrepresent it the second turns on the fact that in specific strategic contexts states may be unable credibly to commit to uphold a mutually preferable bargain historical examples suggest that both mechanisms are empirically plausible

time is money rational life cycle inertia and the delegation of investment management abstract many households display inertia in investment management over their life cycles our calibrated dynamic life cycle portfolio choice model can account for such an apparently irrational outcome by incorporating the fact that investors must forgo acquiring job specific skills when they spend time managing their money and their efficiency in financial decision making varies with age resulting inertia patterns mesh well with findings from prior studies and our own empirical results from panel study of income dynamics psid data we also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors delegation proves valuable to both the young and the old our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting

annuities and individual welfare advancing annuity demand theory we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by yaari 1965 we examine demand with market incompleteness finding that positive annuitization remains optimal widely but complete annuitization does not how uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk a new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases

optimal dynamic carbon taxes in a climate economy model with distortionary fiscal policy how should carbon be taxed as a part of fiscal policy the literature on optimal carbon pricing often abstracts from other taxes however when governments raise revenues with distortionary taxes carbon levies have fiscal impacts while they raise revenues directly they may shrink the bases of other taxes e g by decreasing employment this article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate economy model with distortionary fiscal policy first this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income this link arises because carbon emissions destroy natural capital they accumulate in the atmosphere and decrease future output consequently this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments second this article characterizes optimal climate policy in sub optimal fiscal settings where income taxes are constrained to remain at their observed levels third this article presents a detailed calibration that builds on the seminal dice approach but adds features essential for a setting with distortionary taxes such as a differentiation between climate change production impacts e g on agriculture and direct utility impacts e g on biodiversity existence value the central quantitative finding is that optimal carbon tax schedules are 8 24 lower when there are distortionary taxes compared to the setting with lump sum taxes considered in the literature

on the desirability of input taxes abstract if it is not possible to tax all final goods and it is considered desirable to impose positive taxes on currently untaxed goods then it is desirable to tax inputs and intermediate goods at positive rates

most people need longevity insurance rather than an immediate annuity an immediate annuity is precisely the sum of two parts one is a deferred annuity commencing at a specified date with no death benefit before that date the remainder before the deferred annuity commences is a reverse whole life insurance policy with limited premiums that reverse policy is effectively one underwritten by the annuitant with the insurance company as beneficiary a policy that benefits few retirees however the deferred annuity called longevity insurance in the literature is a valuable component of a retirement portfolio that supplements components that focus on safety and growth

make trade not war this paper analyses theoretically and empirically the relationship between military conflicts and trade we show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial military conflicts reduce trade and leaders are rational when war can occur because of the presence of asymmetric information the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains however countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict we test our predictions on a large data set of military conflicts on the 1950 2000 period using different strategies to solve the endogeneity issues including instrumental variables we find robust evidence for the contrasting effects of bilateral and multilateral trade openness for proximate countries we find that trade has had a surprisingly large effect on their probability of military conflict

the annuity puzzle remains a puzzle abstract we examine incomplete annuity menus background risk bequest motives and default risk as possible drivers of divergence from full annuitization contrary to what is often suggested in the literature we find that full annuitization remains optimal if saving is possible after retirement this holds irrespective of whether real or only nominal annuities are available whenever liquidity is desired individuals save sizeable amounts out of their annuity income to smooth consumption shocks similarly adding equity linked annuities to the menu does not increase welfare significantly since individuals can invest in stocks in order to get the desired equity exposure

dynamic portfolio choice with deferred annuities abstract we derive the optimal life cycle portfolio choice and consumption pattern for households facing uncertain labor income risky capital market and mortality risk in addition to stocks and bonds the households have access to deferred annuities deferred payout life annuities are financial contracts providing life long income to the annuitant after a specified period of time conditional on survival we find that deferred annuities play an important role in household portfolios and generate significant welfare gains households with high benefits from state pensions moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share at retirement deferred annuities account for 78 of total financial wealth households with low state pensions and high labor income risk purchase more annuities and earlier uncertainty with respect to future mortality rates has the same effect i e household hedge against longevity risks using deferred annuities

the origin principle tax harmonization and public goods abstract this paper takes up two tasks firstly it shows that the conclusion drawn in lucas 2001 lucas v 2001 tax harmonisation and the origin principle economic letters 71 111 115 regarding potential pareto improvement in small open economies needs to be amended secondly in large open economies it verifies that some reasonable conjectures concerning the welfare effects of a particular tax harmonizing reform hold under the origin based tax system when public goods are present

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

guns butter and openness on the relationship between security and trade sovereign states arm to defend real or hypothetical interests presumably because they cannot engage in complete long term contracting that would prevent such arming international trade therefore takes place within an essentially anarchic context and we can expect trade regimes and security policies to be related indeed many embargoes sanctions and various other forms of trade restrictions that have been used throughout history and continue to be used today can be considered extensions of security policies whereas some security policies can be attributed to trade policy the relationship between trade and security however has been barely explored within economics we could fairly characterize the prevailing view within the discipline as the classical liberal view according to which the expansion of international trade does not just increase the welfare of the trading partners but can also patch up any differences they might have over other contentious issues solomon polachek 1980 represents a rare articulation of this widely held perspective more boldly it could be argued that the expansion of trade always alleviates conflict by forcing the adoption of measures that manage conflict nevertheless one does not need to dig much into history to show that while trade and economic interdependence can contribute to the peaceful resolution of disputes they are not sufficient by themselves to guarantee the absence of war and the reduction of arming many observers before world war i for example considered that the hitherto unprecedented expansion of trade and interdependence between britain and germany made war unthinkable and impossible yet war occurred and with much ferocity and destruction furthermore as donald kagan 1995 pp 373 80 has argued the british policy of appeasement toward germany during the 1930 s was based on similar arguments about the use of economic caltots to avoid war what can inter

commodity tax competition under destination and origin principles abstract this paper studies the effect of switching from the destination to the origin principle of taxation on non cooperative commodity tax equilibrium when taxes are constrained to be uniform across commodities the switch has no effect when differentiated taxes are allowed the effects of the switch depend on whether countries are small or large in both cases the switch imposes the requirement that taxes must be uniform across commodities within each country in the second case there are two further effects of the switch i negative spillover effects from tax policy are introduced ii incentives to manipulate the terms of trade are changed the switch does not necessarily lead to a fall in all tax rates

regionalism and conflict peace creation and peace diversion abstract we investigate the implications of preferential trade agreements ptas for interstate conflict we set up a two stage game with three competing importers where first two of the countries decide on whether to initiate war against each other and subsequently all three countries select their import tariffs we show that ptas produce both a peace creation effect and a peace diversion effect whereby they reduce the likelihood of conflict between member countries peace creation but render the eruption of war between member and non member countries more likely peace diversion this paper is the first to identify and explicitly model the peace diversion effect of ptas and is also the only one in this literature to endogenize countries terms of trade we use data from the correlates of war project to empirically test these predictions and after controlling for endogeneity we find robust evidence of both peace creation and peace diversion in relation to pta establishment

destination based vs origin based commodity taxation in large open economies with unemployment we construct a perfectly competitive model of two symmetric countries producing tradable commodities and a public consumption good destination or origin based taxes are levied on the consumption of the tradable goods in both countries a fixed wage leads to involuntary unemployment we derive the nash equilibrium consumption taxes under the two taxation principles with endogenous world prices and compare them to i the cooperative rates and ii the rates when world prices are fixed we demonstrate that with endogenous world prices the induced terms of trade effects cancel out under the destination principle but they prevail under the origin principle of taxation nash equilibrium destination based taxes are inefficiently low when the exporting sector in each country is non labour intensive the nash equilibrium origin based taxes can be either higher or lower than the corresponding cooperative rates

will destination based taxes be fully exploited when available an application to the u s commodity tax system abstract we develop a tax competition model that allows for the setting of both an origin based and a destination based commodity tax rate in the presence of avoidance and evasion in the presence of evasion jurisdictions will give cross border shoppers tax preferential treatment thus not fully exploiting the potential of destination based taxation moreover the divergence between origin based and destination based taxes is stronger when the incentives for consumers tax arbitrage opportunities increase the united states is one example of many such systems while sales taxes are due at the point of sale use taxes are due on goods purchased out of state we document that when able to set both rates a majority of jurisdictions levy destination based use taxes at a lower rate than origin based sales taxes in response to changes in state level policies that increase tax avoidance opportunities the results of the empirical model broadly confirm our theory

regional integration as diplomacy regional integration agreements rias are examples of second best and have an ambiguous impact on welfare contend the authors they build a model in which rias unambiguously raise welfare by correcting for externalities it assumes that trade between neighboring countries increases trust between them and reduces the likelihood of conflict the optimum intervention in that case is a subsidy on imports from the neighbor the authors show that an equivalent solution is for the neighboring countries to tax imports from the rest of the world that is to form an ria together with imposing some domestic taxes in fact security threats have moved neighboring countries to form rias examples include the creation of the european coal and steel community 1951 and the european economic community 1957 to reduce the threat of war in europe as well as various rias among developing countries the authors show among other things that 1 the optimum tariffs on imports from the rest of the world are likely to decline over time 2 deep integration implies lower optimum external tariffs if it is exogenous 3 but if deep integration is endogenous it implies higher optimum external tariffs before it occurs and lower ones thereafter and 4 enlargement of a bloc in terms of symmetric countries has an ambiguous impact on external tariffs but improves welfare and some form of domino effect exists in the sense that enlargement increases the incentive for nonmembers to seek accession although externalities associated with security matters imply that an ria may maximize welfare this model suggests that the ria is a transitory arrangement in the sense that optimum trade preferences are highest at the time the ria is formed when security is low and tend to decline over time in other words the ria s external trade policy becomes increasingly open over time as well as following deep integration

recent developments in multilateral policy reform theoretical work on the reform of tariffs and quantity restrictions on trade has been focused on deriving recommendations for pareto improving changes in policy as in the optimal closed economy tax reform literature e g diewert 1978 there has been an emphasis on coming up with simple answers to practical policy questions which way is up and checkable evaluation criteria for policy reform proposals the literature on tariff and quota reform can be divided into two subsets the first deals with policy reform in a single usually small country unilateral policy reform and the second considers reforms in a many country world multilateral policy reform on unilateral policy reform concerning tariffs we refer the reader to foster and sonnenschein 1970 bertrand and vanek 1971 hatta 1977 smith 1980 diewert turunenred and woodland 1989 1991 and vousden 1990 ch 9 and concerning quotas to falvey 1988 anderson and neary 1992 neary 1995 and vousden 1990 ch 9 two broad policy conclusions emerge from this literature under various assumptions proportional reductions of all tariffs and reductions of extreme ad valorem tariffs can be welfare improving also for unilateral changes relaxations of binding quotas with no tariffs and relaxations of quotas with extreme quota premia when tariffs are present and goods are net substitutes can produce welfare gains the second and smaller subset of the international trade literature deals with multilateral changes early contributions extend the broad policy conclusions of the unilateral literature to a many country world but suffer from stringent assumptions such as requirements that all commodities should be net substitutes or that all goods should be normal turunen red and woodland 1991 offer a generalization of the unilateral rule for proportional tariff reforms i e that in each country tariffs should be altered proportionally to a vector of suitably defined shadow prices and

pareto efficient international taxation this paper analyzes pareto efficient international tax regimes because every country faces its own national budget constraint the diamond mirrlees production efficiency theorem which underlies key tenets of policy advice in international taxation the desirability of destination basis for commodity taxation of the residence principle for capital income taxation and of free trade does not apply the paper establishes conditions relating to the availability of explicit or implicit devices for reallocating tax revenues across countries under which production efficiency is nevertheless desirable and characterizes the precise ways in which pareto efficient international taxation may require violation of established tenets

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

trade blocs trade flows and international conflict the relationship between foreign trade and political conflict has been a persistent source of controversy among scholars of international relations existing empirical studies of this topic have focused on the effects of trade flows on conflict but they have largely ignored the institutional context in which trade is conducted in this article we present some initial quantitative results pertaining to the influence on military disputes of preferential trading arrangements ptas a broad class of commercial institutions that includes free trade areas common markets and customs unions we argue that parties to the same pta are less prone to disputes than other states and that hostilities between pta members are less likely to occur as trade flows rise between them moreover we maintain that heightened commerce is more likely to inhibit conflict between states that belong to the same preferential grouping than between states that do not our results accord with this argument based on an analysis of the period since world war ii we find that trade flows have relatively little effect on the likelihood of disputes between states that do not participate in the same pta within ptas however there is a strong inverse relationship between commerce and conflict parties to such an arrangement are less likely to engage in hostilities than other states and the likelihood of a military dispute dips markedly as trade increases between them

national tax systems versus the european capital market capital taxation alberto giovannini the current structure of taxes on capital income across ec countries can be exploited by corporations to reduce tax burdens skilled individuals can indulge in tax avoidance too the liberalization of capital movements stands to turn tax avoidance into a cottage industry this article provides a primer on capital income taxes and describes strategies which reduce the tax burden from a policy perspective the question is how to avoid massive tax evasion after 1992 there is no need to harmonize if the right taxation principle is adopted two principles are contrasted the territorial principle according to which taxes are levied on domestic investment irrespective of the country of residence of the beneficiary and the worldwide principle according to which taxes are levied on domestic savings irrespective of where they are invested it is shown that the worldwide principle involves much fewer distortions than the territorial principle a strict application of this principle would effectively solve the problem of tat evasion in europe without requiring full harmonization of the tax systems its full implementation would require the abolition of withholding taxes the elimination of tax deferrals which are quite pervasive throughout europe and an in depth review of blocking and secrecy laws

health status and portfolio choice causality or heterogeneity abstract this paper explores the role of unobserved individual characteristics in the health assets and health portfolio correlations we apply various econometrics models to a unique longitudinal dataset with rich information that allows for the exploitation of four different health indices our findings show strong cross sectional correlations between health and both financial and non financial assets but these correlations seem to be mainly driven by heterogeneity as the correlations largely disappear in the fixed effects model adverse health shocks however are found to motivate a safer portfolio choice even after individual fixed effects are controlled for a result consistent with the prediction made by the background risk theory our findings suggest that health shocks shift investment from risky assets toward other financial assets but keep the total financial assets unchanged

longevity risk retirement savings and financial innovation abstract over the last couple of decades unprecedented increases in life expectancy have raised important concerns for retirement savings we solve a life cycle model with longevity risk which can be hedged through endogenous saving and retirement decisions we investigate the benefits of financial assets designed to hedge the shocks to survival probabilities when longevity risk is calibrated to match forward looking projections those benefits are substantial this lends support to the idea that such hedging should be pursued by defined benefit pension plans on behalf of their beneficiaries finally we draw implications for optimal security design

new evidence on the money s worth of individual annuities this paper presents new information on the expected present discounted value of payouts on individual life annuities the annuity we examine is the single premium immediate life annuity an insurance product that pays out a nominal level sum as long as the covered person lives in exchange for an initial lump sum premium this annuity offers protection against the risk of someone outliving his saving given uncertainty about longevity for reasonable estimates of behavioral parameters we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption we also find that the expected present discounted value of payouts relative to the initial cost of the annuity has increased over the last decade these findings bear on the policy debate regarding the role of individual choice and self reliance in retirement planning this abstract was borrowed from another version of this item

public good provision and the comparative statics of optimal nonlinear income taxation comparative static properties of the solution to an optimal nonlinear income tax problem are provided for a model in which the government both designs an income tax schedule for redistributive purposes and provides a public good optimally there are two types of individuals distinguished by their skill levels who have the same quasilinear preferences for labor supply and the consumption of a private and a public good comparative statics are obtained for the weights in a weighted utilitarian social welfare function the prices of the two goods a taste parameter that measures the onerousness of working and the skill levels

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic