nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

the economic growth effect of offshore banking in host territories evidence from the caribbean summary following the success of renowned caribbean offshore centers several small islands have enacted offshore banking policies as a strategy for increasing economic growth several empirical studies have assessed the growth effect of such policies but none accounts for sector size when estimating its growth impact this study contributes to this literature by estimating the magnitude of offshore activity in each territory and using this estimate as a continuous variable in an economic growth model the results provide support for the hypothesis that facilitating offshore banking stimulates economic growth in host islands and that the benefit is proportional to sector size

profit shifting and investment effects the implications of zero taxable profits abstract recent empirical research documents a tendency of multinational enterprise affiliates to bunch around zero reported profit we set up a theoretical model of multinational firm behavior in which we allow for corner solutions in the choice of the optimal transfer price due to insufficient profits or losses of affiliates such constraints in the choice of the transfer price induce bunching and generate investment effects in the low tax as well as the high tax country in equilibrium affiliates might overinvest and the investment effects generate a tendency for too high profit taxes the analysis provides a micro foundation for the investment effects that result from transfer pricing the finding stands in contrast to the existing literature where transfer pricing choices are unconstrained

governments as owners state owned multinational companies the globalization of state owned multinational companies somncs has become an important phenomenon in international business ib yet it has received scant attention in the literature we explain how the analysis of somncs can help advance the literature by extending our understanding of state owned firms soes and multinational companies mncs in at least two ways first we cross fertilize the ib and soes literatures in their analysis of foreign investment behavior and introduce two arguments the extraterritoriality argument which helps explain how the mnc dimension of somncs extends the soe literature and the non business internationalization argument which helps explain how the soe dimension of somncs extends the mnc literature second we analyze how the study of somncs can help develop new insights of theories of firm behavior in this respect we introduce five arguments the triple agency conflict argument in agency theory the owner risk argument in transaction costs economics the advantage and disadvantage of ownership argument in the resource based view rbv the power escape argument in resource dependence theory and the illegitimate ownership argument in neo institutional theory after our analysis we introduce the papers in the special issue that collectively reflect diverse and sophisticated research interest in the topic of somncs

a general equilibrium model of portfolio insurance this article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous time model portfolio insurers are modeled as expected utility maximizing agents martingale methods are employed in solving the individual agents dynamic consumption portfolio problems comparisons are made between the optimal consumption processes optimally invested wealth and portfolio strategies of the portfolio insurers and normal agents at a general equilibrium level comparisons across economies reveal that the market volatility and risk premium are decreased and the asset and market price levels increased by the presence of portfolio insurance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

should investors include commodities in their portfolios after all new evidence abstract this paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes first we revisit the posed question within an in sample setting by employing mean variance and non mean variance spanning tests then we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out of sample performance under the in sample setting we find that commodities are beneficial only to non mean variance investors however these benefits are not preserved out of sample our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures utility functions and datasets the results hold even when transaction costs are considered and across various sub periods not surprisingly the only exception appears over the 2005 2008 unprecedented commodity boom period

assimilation patterns in cities abstract do ethnic minority individuals assimilate to the majority s norm or reject it by trading off higher productivity and wages with a greater social distance to their culture of origin we develop a model in which oppositional ethnic minority individuals reside in more segregated areas have worse outcomes in terms of income but are not necessarily worse off in terms of welfare than assimilated ethnic minority individuals who live in less segregated areas a policy that reduces transportation cost decreases rather than increases assimilation in cities when there are more productivity spillovers between the two groups ethnic minority individuals are more likely not to assimilate and to reject the majority s norm finally we show that ethnic minority individuals tend to assimilate more in bigger and more expensive cities

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

pride and prejudice using ethnic sounding names and inter ethnic marriages to identify labour market discrimination labour markets discriminate against workers with particular ethnic sounding names we use non random sorting into interethnic marriage and salient differences between sephardic and ashkenazi surnames to evaluate the causal impact of sephardic affiliation on wages using the 1995 israeli census we estimate the effect of a sephardic sounding surname on wages we first compare the wages of israeli jewish males born to sephardic fathers and ashkenazi mothers sa who are more likely to carry a sephardic surname with the wages of israeli jewish males born to ashkenazi fathers and sephardic mothers as we find that israeli labor markets discriminate based on perceived ethnicity sa workers earn significantly less than their as counterparts we then exploit the custom of women to adopt their husbands surnames to disentangle actual ethnicity from the ethnicity perceived by the market consistent with ethnic discrimination based on surnames we find that it is father in law s ethnicity rather than father s ethnicity that shapes female wage rates finally we find that labor markets discriminate based on surname only when those names provide additional information about ethnicity when ethnicity can be discerned from skin tone surnames do not provide additional explanatory power with respect to wages

a behavioral explanation for the negative asymmetric return volatility relation abstract we examine the short term dynamic relation between the s p 500 nasdaq 100 index return and changes in implied volatility at both the daily and intraday level neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results alternatively we propose that the behavior of traders from the representativeness affect and extrapolation bias concepts of behavioral finance is consistent with our empirical results of a strong daily and intraday negative return implied volatility relation moreover both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns we also show that the strength of the relation is consistent with the implied volatility skew

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

bargaining and boldness abstract we study a multiperson bargaining problem with general risk preferences through the use of shaked s game of cycling offers with exogenous breakdown if preferences are smooth then as the risk of breakdown vanishes the limiting outcome is one in which bargainers are equally marginally bold where a bargainer s marginal boldness measures his willingness to risk disagreement in return for a marginal improvement in his position under smoothness any ordinal nash solution is an equally marginally bold outcome however unlike the concept of the ordinal nash solution a unique equally marginally bold outcome exists in natural cases in particular if all bargainers have risk averse preferences of the rank dependent expected utility type for these preferences the equally marginally bold outcome maximizes a bargaining power adjusted asymmetric nash product where the degree of asymmetry is determined by the disparity in the marginal valuation of certainty among bargainers journal of economic literature classification numbers c72 c78 d81

optimal portfolio choice under loss aversion this paper analyzes the optimal investment strategy for loss averse investors assuming a complete market and general ito processes for the asset prices the loss averse investor follows a partial portfolio insurance strategy when the investor s planning horizon is short less than 5 years he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility the empirical section of the paper estimates the level of loss aversion implied by historical u s stock market data using a representative agent model we find that loss aversion and risk aversion cannot be disentangled empirically

bargaining in the shadow of the law divorce laws and family distress this paper exploits the variation occurring from the different timing of divorce law reforms across the united states to evaluate how unilateral divorce changed family violence and whether the option provided by unilateral divorce reduced suicide and spousal homicide unilateral divorce both potentially increases the likelihood that a domestic violence relationship ends and acts to transfer bargaining power toward the abused thereby potentially stopping the abuse in extant relationships in states that introduced unilateral divorce we find a 8 16 percent decline in female suicide roughly a 30 percent decline in domestic violence for both men and women and a 10 percent decline in females murdered by their partners

the economic payoff of name americanization we provide the first evidence of the magnitude and consequences of the americanization of migrants names in the early twentieth century we construct a longitudinal data set of naturalization records tracking migrants and their naming choices over time we consistently find that migrants who americanized their names experienced larger occupational upgrading than those who did not name americanization embodies an intention to assimilate among low skilled migrants and reveals the existence of preferences for american names within the labor market we conclude that the trade off between individual identity and labor market success was present then as it is today

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

outward fdi and domestic investment in two industrialized countries abstract using cointegration techniques we find that in the us outward fdi has positive long run effects on domestic investment in germany this complementary relationship exists only in the short run in the long run outward fdi substitutes for german domestic investment

optimal pension insurance design abstract in this paper we analyze how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers welfare given that the contracts have to be priced correctly we use individuals preferences to find the preferred design assuming crra utility we cannot explain the existence of any form of guarantees through numerical solutions we quantify the difference measured in certainty equivalents to the preferred merton solution of direct investments in a fixed proportion of risky and risk free assets the largest welfare loss seems to come from the fact that guarantees are effective by the end of each year not only by the expiry of the contract however the demand for products with guarantees may be explained through behavioral models we use cumulative prospect theory as an example showing that the optimal design is a simple contract with a life time guarantee and no default option

cross border tax effects on affiliate investment evidence from european multinationals recent studies suggest that multinational firm activities at home and abroad are positively correlated which may be due to the use of common inputs like marketing patents etc then a cost shock at one location may lead to reduced activity in all other locations within the firm in this paper we theoretically and empirically analyze national corporate tax policy in such a setting our main hypothesis is that corporate taxation at the parent location not only reduces the parent s capital stock but also lowers capital stocks at affiliates abroad using micro data on european multinational firms we confirm the hypothesis showing that a 10 percentage point increase in corporate tax rates is associated with a 5 6 decrease in the affiliate s capital stock from a welfare point of view this cross border tax effect on the capital stock gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well known positive externality due to profit shifting

are emily and greg more employable than lakisha and jamal a field experiment on labor market discrimination we study race in the labor market by sending fictitious resumes to help wanted ads in boston and chicago newspapers to manipulate perceived race resumes are randomly assigned african american or white sounding names white names receive 50 percent more callbacks for interviews callbacks are also more responsive to resume quality for white names than for african american ones the racial gap is uniform across occupation industry and employer size we also find little evidence that employers are inferring social class from the names differential treatment by race still appears to still be prominent in the u s labor market jel j71 j64

portfolio choice and trading volume with loss averse investors this paper presents a model of portfolio choice and stock trading volume with lossaverse investors the demand function for risky assets is discontinuous and non monotonic as wealth rises beyond a threshold investors follow a generalized portfolio insurance strategy this behavior is consistent with the evidence in favor of the disposition effect in addition loss averse investors will not hold stocks unless the equity premium is quite high the elasticity of the aggregate demand curve changes substantially depending on the distribution of wealth across investors in an equilibrium setting the model generates positive correlation between trading volume and stock return volatility but suggests that this relationship should be non linear

asset pricing in a generalized mean lower partial moment framework theory and evidence a new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach by specifying risk as deviations below any arbitrary target rate of return the generalized mean lower partial moment mlpm model overcomes the limited appeal of earlier formulations and moreover a large class of extant pricing models using alternative risk measures variance semivariance semideviation probability of loss etc becomes special cases of the new framework empirical tests indicate that the new model cannot be rejected against an unspecified alternative for a large set of target rates of return the traditional capm on the other hand is rejected as a well specified alternative the mlpm target rates inferred from market data appear to be related to equity market mean returns rather than to the riskfree rate the target rate that is implicit in the capm and explicit in earlier downside risk formulations the attractiveness of downside risk measures for decision making purposes has been noted in the financial economic literature for over a quarter of a century 1 risk from this perspective is measured in terms of deviations below some exogenously prespecified target rate of return and a formal analysis of these risk measures for various utility functions has been presented by bawa 1975 in terms of the lower partial moment lpm of the asset distributions the appeal of these risk measures has been based in part on their consistency with the way individuals actually perceive risk notwithstanding its intuitive appeal this area of research has been virtually neglected in recent years we believe that this disaffection with downside risk models tends from two sources first earlier models of this genre exogenously specify the target rate to equal the risk free interest rate in the absence of a satisfactory theory for explaining how investors establish their target rates this assumption as argued herein has been motivated more by technical reasons than economic considerations second empirical tests

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

how loss averse are investors in financial markets abstract we investigate loss aversion in financial markets using a typical asset allocation problem our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature moreover loss aversion changes depending on market conditions investors become far more loss averse during bull markets than during bear markets indicating their more profound disutility for losses when others enjoy gains contrary to most previous results we find that investors are more sensitive to changes in losses than changes in gains

systemic risk and asymmetric responses in the financial industry abstract to date an operational measure of systemic risk capturing nonlinear tail comovements between system wide and individual bank returns has not yet been developed this paper proposes an extension of the covar methodology in adrian and brunnermeier 2011 to capture the asymmetric response of the banking system to positive and negative shocks to the market valued balance sheets of individual banks building on a comprehensive sample of u s banks in the period 1990 2010 the evidence in this paper shows that ignoring asymmetries that feature tail interdependences may lead to a severe underestimation of systemic risk on average the relative impact on the system of a fall in individual market value is sevenfold that of an increase moreover the downward bias in systemic risk measuring from ignoring this asymmetric pattern increases with bank size in particular the conditional tail comovement between the banking system and a bank that is losing market value belonging to the top size sorted decile is nearly 5 5 times larger than the unconditional tail comovement versus 3 3 times for banks in the bottom decile the asymmetric model also produces much better fitting with the restriction that gives rise to the standard symmetric model being rejected for most firms in the sample particularly in the segment of large scale banks this result is important from a regulatory and supervisory perspective since the asymmetric generalization enhances the capacity to monitor systemic interdependences

a theory of subjective compound lotteries abstract we develop a savage type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries our theory permits issue preference that is agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues hence we establish subjective foundations for the anscombe aumann framework and other models with two different types of probabilities we define second order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second order risk which implies issue preference and behavior consistent with the ellsberg paradox

revealing preferences graphically an old method gets a new tool kit because uncertainty is endemic in a wide variety of economic circumstances models of decision making under uncertainty play a key role in every field of economics the standard model of decisions under uncertainty is based on von neumann and morgenstern expected utility theory eut so it is natural that experimentalists should want to test the empirical validity of the savage axioms on which eut is based empirical violations of eut provoke intriguing questions about the rationality of individual behavior and at the same time raise criticisms about the status of the savage axioms as the touchstone of rationality these criticisms have generated the development of various theoretical alternatives to eut and the investigation of these theories has led to new empirical regularities for the most part these experimental investigations use several pairwise choices a la allais to test eut and its various alternatives such as weighted utility implicit expected utility and prospect theory among others each of these theories gives rise to indifference curves with distinctive shapes in some part of the marschak machina probability triangle so each theory can be tested against the others by choosing alternatives that the various theories rank differently in these studies the criterion used to evaluate a theory is the fraction of choices it predicts correctly generally speaking experimental work has on the one hand collected only a few decisions from each subject and on the other presented subjects with a serious of choices designed to compare the predictive abilities of competing theories or discover violations of specific axioms colin f camerer 1995 and chris starmer 2000 review the experimental and theoretical work that focuses on evaluating non eut theories although this practice is understandable given the purposes for which the experiments were designed critics say that it limits the usefulness of the data for other purposes first while these experiments reveal that violations exist they give us little sense of how important they are or how frequently they

consequences of offshoring to developing nations labor market outcomes welfare and corrective interventions our parsimonious two country developed country and developing country model of offshoring provides nuanced results these include cases where wages monotonically improve as well as where wages exhibit an inverted u relationship with offshoring cost reductions we identify conditions under which these relationships hold since global welfare always rises with improvements in offshoring technology we find that there is a role for a minimum wage alternatively wage tax in the developing country we derive such a policy s optimal level there is also the possibility of a developed country optimal offshoring tax for extracting terms of trade benefits we finally analyze the two country nash equilibrium in policies jel f11 f13 f16 f66 o19 o24

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

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

from boom til bust how loss aversion affects asset prices this article studies the impact of heterogeneous loss averse investors on asset prices in very good states loss averse investors become gradually less risk averse as wealth rises above their reference point pushing up equity prices when wealth drops below the reference point the investors become risk seeking and demand for stocks increases drastically eventually leading to a forced sell off and stock market bust in bad states heterogeneity in reference points and initial wealth of the loss averse investors does not change the salient features of the equilibrium price process such as a relatively high equity premium high volatility and counter cyclical changes in the equity premium

the causes and consequences of distinctively black names in the 1960s blacks and whites chose relatively similar first names for their children over a short period of time in the early 1970s that pattern changed dramatically with most blacks particularly those living in racially isolated neighborhoods adopting increasingly distinctive names but a subset of blacks actually moving toward more assimilating names the patterns in the data appear most consistent with a model in which the rise of the black power movement influenced how blacks perceived their identities among blacks born in the last two decades names provide a strong signal of socioeconomic status which was not previously the case we find however no negative relationship between having a distinctively black name and later life outcomes after controlling for a child s circumstances at birth

systemic risk and bank size abstract in this paper we analyse firm level systemic risk for us and european banks from 2004 to 2012 we observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for too big to fail institutions however smaller banks may still pose considerable systemic threats as exemplified by the northern rock debacle in 2007 by introducing a simple standardisation we obtain new risk measures that often prove to be superior predictors of financial distress during the 2007 2009 subprime crisis we conclude that the new measures could be a valuable addition to the existing indicators employed in basel iii to identify systemically important banks

the nash bargaining solution for decision weight utility functions abstract a simple derivation of the non expected utility nash outcome as defined in rubinstein et al 1992 rubinstein a safra z thomson w 1992 on the interpretation of the nash bargaining solution and its extension to non expected utility preferences econometrica 60 1171 1186 is given for the class of decision weight utility functions conditions for existence and uniqueness are provided

equilibrium analysis of portfolio insurance a martingale approach is used to characterize general equilibrium in the presence of portfolio insurance insurers sell to noninsurers in bad states and general equilibrium requires that the risk premium rises to induce noninsurers to increase their holdings we show that portfolio insurance increases price volatility causes mean reversion in asset returns raises the sharpe ratio and volatility in bad states and causes volatility to be correlated with volume we also explain why out of the money sp that is the demand for an absolute level of price protection is equivalent to a demand for put options 1 we show that a similar argument can be used in a

household portfolio diversification a case for rank dependent preferences the proliferation of novel preference theories in financial economics is hampered by a lack of non experimental evidence and by the theories additional complexity which has not been shown to be critical in applications in this article i present arguments in support of preferences with rank dependency using the survey of consumer finances data i document two widespread patterns inconsistent with expected utility i many households simultaneously invest in well deversified funds and in poorly diversified portfolios of stocks and ii some households with substantial savings do not invest anything in equities i show that portfolio choice models with rank dependent preferences plausibly parameterized and under fully rational assumptions are quantitatively consistent with the observed diversification these results call for further efforts to integrate the models of rank dependent preferences in portfolio theory and asset pricing the decision theoretic literature has long acknowledged the shortcomings of the expected utility theory of von neumann and morgenstern 1944 several generalizations of the theory are inspired by the experimental evidence and aimed at improving its descriptive accuracy however there are few applications of new models of preferences in finance and expected utility continues to dominate the field 1 two principal hurdles slow the proliferation of novel preferences in financial economics first the lack of empirical non experimental or field data confirming that the behavior motivating non expected utilities is widespread outside the laboratory settings second the additional and often significant complexity of the alternative preferences which has not been shown to be critical in applications where the models based on expected utility fall short of reasonable predictions this article presents empirical and theoretical this paper was previously circulated under the title household portfolio diversification the paper has benefited from the comments of shlomo benartzi luca benzoni markus brunnermeier john dickhaut maria perozek raj singh hersh shefrin and workshop participants at minnesota finance bag lunch 2003 wharton conference household financial decision making and portfolio choice and 2003 summer meetings of econometric society i would like to thank cam harvey the editor and an anonymous referee for many helpful comments and suggestions a special thanks to jack kareken for comments and editorial help on an earlier draft i am grateful to donna zerwitz for editorial assistance the views expressed herein are those of the author and not necessarily of the federal reserve bank of minneapolis or the federal reserve system all errors and omissions are the sole responsibility of the author address correspondence to valery polkovnichenko finance 3 122 csom 319 19 th

multinational firms mitigate tax competition an increase in the taxation of foreign affiliates reduces domestic investment as has recently been empirically shown in becker and riedel 2012 this paper investigates the implication of this finding for tax competition it is shown that an increase in the number of multinational firms in contrast to purely national firms may actually mitigate tax competition counter to the popular opinion that multinational firms undermine the national capacity to levy source based taxes

foreign direct investment and the domestic capital stock this paper evaluates evidence of the impact of outbound foreign direct investment fdi on domestic investment rates oecd countries with high rates of outbound fdi in the 1980s and 1990s exhibited lower domestic investment than other countries which suggests that fdi and domestic investment are substitutes u s time series data tell a very different story however years in which american multinational firms have greater foreign capital expenditures coincide with greater domestic capital spending by the same firms one dollar of additional foreign capital spending is associated with 3 5 dollars of additional domestic capital spending in the time series implying that foreign and domestic capital are complements in production by multinational firms this effect is consistent with cross sectional evidence that firms whose foreign operations expand simultaneously expand their domestic operations and suggests that interpretation of the oecd cross sectional evidence may be confounded by omitted variables this abstract was borrowed from another version of this item

portfolio insurance and prospect theory investors popularity and optimal design of capital protected financial products abstract portfolio insurance strategies are used on both the institutional and the retail side of the asset management industry while standard utility theory struggles to provide an explanation this study justifies the popularity of portfolio insurance strategies in a behavioral finance context we run monte carlo simulations as well as historical simulations for popular portfolio insurance strategies and benchmark strategies in order to evaluate the outcomes using cumulative prospect theory our simulation results indicate that most portfolio insurance strategies are the preferred investment strategy for a prospect theory investor moreover the analysis provides insights into how portfolio insurance products should be designed and structured to meet the preferences of prospect theory investors as accurately as possible

the long run relationship between outward fdi and domestic output evidence from panel data abstract we find for 14 industrialized countries over the period 1971 2005 that outward fdi has positive long run effects on domestic output our results suggest that increased outward fdi is both a cause and a consequence of increased domestic output

consumption and portfolio choice under internal multiplicative habit formation this paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit we obtain closed form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint this enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock bond investments we also show that in a setting that combines habit formation with epstein zin utility consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease

change in domestic network centrality uncertainty and the foreign divestment decisions of firms abstract we investigate the role of domestic interfirm networks for the foreign divestment decisions of firms we argue that firms foreign operations risk being divested when a firm becomes more central in its domestic network positive changes in firm centrality at home facilitate access to information about new business opportunities but they may also lead firms to consider reconfiguring their value chain activities and resources across locations the resulting opportunity costs of maintaining foreign operations could subsequently lead to their divestment moreover we argue that the positive association between an increase in firm centrality in the domestic network and foreign divestment is stronger under higher uncertainty as pursuing new business opportunities at home becomes more appealing we distinguish between firm specific uncertainty and domestic market uncertainty we test and get support for our hypotheses using foreign subsidiary data from u s firms in the ict industry

expectation based loss aversion and strategic interaction abstract by extending the equilibrium concepts of k szegi and rabin 2006 k szegi and rabin 2007 this paper analyzes the strategic interaction of expectation based loss averse players for loss averse players with choice acclimating expectations the utility from playing a mixed strategy is not linear but convex in the probabilities they assign to their pure strategies as a consequence they are generally unwilling to randomize and an equilibrium may fail to exist for players with choice unacclimating expectations by contrast randomizing over their pure strategies may indeed constitute a credible best response and an equilibrium always exists building upon these insights we delineate how expectation based loss averse players differ in their strategic behavior from their counterparts with standard expected utility preferences derive novel strategic effects discuss equilibrium selection and derive equilibrium play for some simple games

renouncing personal names an empirical examination of surname change and earnings we study the effects of surname change to swedish sounding or neutral names on earnings for immigrants from asian african slavic countries to estimate this effect we exploit the variation resulting from different timing of name changes across individuals during the 1990s the results imply that there is a substantial increase in annual earnings after a name change no effects on earnings prior to a name change and no positive general effects of a new name for other groups that renounced a foreign name based on these findings we argue that these effects are due to name change as a response to discrimination

optimal asset allocation under linear loss aversion abstract we study the asset allocation of a linear loss averse la investor and compare it to the more traditional mean variance mv and conditional value at risk cvar investors first we derive conditions under which the la problem is equivalent to the mv and cvar problems and solve analytically the two asset problem of the la investor for a risk free and a risky asset then we run simulation experiments to study properties of the optimal la and mv portfolios under more realistic assumptions we find that under asymmetric dependence la portfolios outperform mv portfolios provided investors are sufficiently loss averse and dependence is large finally using 13 eu and us assets we implement the trading strategy of a linear la investor who reallocates his her portfolio on a monthly basis we find that la portfolios clearly outperform mv and cvar portfolios and that incorporating a dynamic update of the la parameters significantly improves the performance of la portfolios

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

redistributive income taxation under outsourcing and foreign direct investment this paper deals with optimal income taxation under international outsourcing and fdi we show how the joint effect of outsourcing and fdi on the optimal marginal income tax rates depends on whethe

the 45 years of foreign direct investment research approaches advances and analytical areas what are the main tenets associated with foreign direct investment fdi what research has been performed in the area of fdi to date which direction should research in this field proceed in the days to come as there is no article with comprehensive coverage of all the studies on fdi we review empirical research in this area between the years 1970 and 2014 as an attempt to answer these questions we identify the advances and analytical areas of fdi research list out the impactful research papers and authors theoretical and methodological approaches leading journals and variables of interest that exist in the area of fdi research as the research into the fdi has advanced significantly over the last two decades we have also tried to point out the gaps in the literature taken together our paper highlights the heterogeneous nature of fdi across countries and firms

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments