adverse selection in asset markets theory and evidence from the indian market for cows dairy cows cycle through periods where their quality is more observable the milking phase and where their quality is less observable the dry phase this variation in quality observability creates the potential for an adverse selection problem i develop a theoretical model of trade in dry and milking cows and find empirical evidence consistent with the adverse selection theory in particular dry animal prices fall less in response to negative shocks relative to milking animal prices which is consistent with the model s prediction that negative shocks actually help the dry animal market by pushing more high quality owners to sell

tax collection with agency costs private contracting or government bureaucrats historically governments contracted with private agents known as tax farmers to collect taxes this paper develops a theoretical framework for determining when a welfare maximizing government should choose tax farmers over bureaucratic tax collectors while bureaucratic collectors have an incentive to shirk and raise collection costs above least costs profit maximizing private collectors tend to reduce tax evasion below the optimal level generally the choice of collection methods depends on a comparison of the welfare loss associated with monitoring in the bureaucratic setting and the welfare loss associated with overdetection of evasion in the private setting copyright 1992 by the london school of economics and political science

optimal redistribution and monitoring of labor supply this paper extends the mirrlees 1971 model of optimal non linear income taxation with a monitoring technology that allows the government to verify labor supply at a positive but non infinite cost we analyze the joint determination of the non linear monitoring and tax schedules and the conditions under which these can be implemented monitoring of labor supply reduces the distortions created by income taxation and raises optimal marginal tax rates possibly above 100 the optimal intensity of monitoring increases with the marginal tax rate and the labor supply elasticity our simulations demonstrate that monitoring strongly alleviates the trade off between equity and efficiency welfare gains of monitoring are around 2 8 of total output the optimal intensity of monitoring follows a u shaped pattern similar to that of optimal marginal tax rates our paper can explain why large welfare states optimally rely on work dependent tax credits active labor market policies benefit sanctions and work bonuses in welfare programs

contractibility and the design of research agreements we analyze how contractibility affects contract design a major concern when designing research agreements is that researchers may use their funding to subsidize other projects we show that when research activities are not contractible an option contract is optimal the financing firm obtains the option to terminate the agreement and in case of termination broad property rights the threat of termination deters researchers from cross subsidization and the cost of exercising the termination option deters the financing firm from opportunistic termination we test this prediction using 580 biotechnology research agreements contracts with termination options are more common when research is non contractible

inflation and tax evasion an empirical analysis this paper contains an analysis of the effect of inflation on aggregate tax evasion in the united states over the period 1947 81 it is found that tax evasion in both absolute and relative terms is positively related to the inflation rate further the results indicate that aggregate evasion has risen in both absolute and relative terms with increases in the marginal tax rate but has fallen with increases in the detection probability the penalty rate and the wage share of income finally evasion has risen in absolute terms but has fallen in relative terms when real true income has risen

political representation and public contracting evidence from municipal legislatures abstract this study examines how partisan representation in multiparty legislatures affects direct expenditures contract allocation design and selection of politically connected firms as suppliers in public procurement for identification i exploit quasi random variation in partisan electoral outcomes near the effective representation thresholds in czech proportional municipal elections my regression discontinuity estimates suggest that partisan representation matters for public procurement for instance if local level political parties barely enter legislatures at the expense of the national parties municipalities decrease their direct procurement spending and allocate fewer contracts to the corporate donors of the national parties fewer contracts are awarded especially in pre election years and in auctions restricting competition among procurement suppliers the results are not associated with higher government fragmentation or selection of more competent candidates but rather with reduced political power of the national parties

what does reputation buy differentiation in a market for third party auditors we study differences in quality in the market for third party environmental auditors in gujarat india we find that despite the low overall quality auditors are heterogeneous and some perform well we posit that these high quality auditors survive by using their good name to insulate select client plants from regulatory scrutiny we find two pieces of evidence broadly consistent with this hypothesis i though estimates are not precise higher quality auditors appear to be paid more both in their work as third party auditors and in their complementary work as consultants and ii plants with high quality auditors incur fewer costly penalties from the regulator

taxation with costly administration the concept of a tax technology is used here as providing a unified framework for analyzing both administrative activity by tax authorities and tax resisting activity by taxpayers this framework provides a simple formalization of adam smith s four components of tax costs administration substitution active noncompliance and passive compliance the model is used to derive policy implications concerning the proper measurement of the cost of public funds and concerning the criterion for optimal administration

characteristics of households in the informal sector of an emerging economy using the case study of trinidad and tobago we investigate the socio economic demographic and attitudinal characteristics of households that participate in the informal sector of an emerging economy and their perception of the risk of detection by tax authorities while doing so data are gathered from a cross sectional field survey covering 570 households results using multinomial logit and ordered probit models suggest that households are motivated to participate in the informal sector when members spend little time in formal sector activity believe that taxes are too high and their incomes are too low have dependents to support and believe that the resulting tax evasion will go undetected their perception of the risk of detection by the tax authority is determined largely by the income they earn in the formal sector and the extent of government bureaucracy prevailing there

globalization and convergence in corporate governance evidence from infosys and the indian software industry in contrast to the much studied role of capital markets in fostering convergence in corporate governance practices worldwide we argue that the globalization of product and talent markets has affected corporate governance of firms in the indian software industry we model several possible reasons why a particular firm infosys has emerged as the exemplar of good corporate governance in india traditionally a backwater of corporate governance practices we further analyze the manner in which infosys has attempted to shape corporate governance practices in india more generally and why these attempts have had limited effects thus far

on partial contracting this paper investigates contracting situations where giving away some control rights enhances both the donor s and the receiver s incentives to cooperate in the future we define a partial contracting framework with nonverifiable actions for which either control is contractible contractible control actions or the right to transfer control ex post to another party is contractible transferable control actions under incomplete information when control over particular actions is transferable but not contractible it can be optimal to give one party the right to transfer control over a particular action to the other party in order for that party to build a reputation regarding her willingness to cooperate in the future c 2002 elsevier science b v all rights reserved

contracting between firms empirical evidence abstract we analyze contracts between a large buyer and her suppliers we find that contracts with critical product suppliers contain more clauses that address moral hazard primarily through monitoring if holdup concerns are larger there are more contractual protections against it over time contracts with the same supplier include additional provisions that address moral hazard through monitoring this dynamic effect is strongest for service contracts where observability and verifiability are initially lower our findings indicate that contracts become more complete over time and provide support to incomplete contracting models that argue that contracts become more complete as contracting costs decrease jel classification d86 k12 l24

government policies and graft in an economy with endogenous labor supply abstract this paper is an extension of marcouiller and young s am econ rev 85 1995 630 paper which shows that in a two good economy with constant labor supply the government can always increase graft by squeezing the formal sector out of existence in this paper we find that if individuals choose the amount of labor they supply the government can increase graft by eliminating formal production in relatively rare cases

globalization brain drain and development this paper reviews four decades of economics research on the brain drain with a focus on recent contributions and on development issues we first assess the magnitude intensity and determinants of the brain drain showing that brain drain or high skill migration is becoming a dominant pattern of international migration and a major aspect of globalization we then use a stylized growth model to analyze the various channels through which a brain drain affects the sending countries and review the evidence on these channels the recent empirical literature shows that high skill emigration need not deplete a country s human capital stock and can generate positive network externalities three case studies are also considered the african medical brain drain the exodus of european scientists to the united states and the role of the indian diaspora in the development of india s information technology sector we conclude with a discussion of the implications of the analysis for education immigration and international taxation policies in a global context

optimal taxation with costly enforcement and evasion abstract this paper analyzes the relationship between optimal taxation and optimal tax enforcement a central question concerns the extent to which revenue should be raised through higher tax rates which distort behavior or greater enforcement which distorts behavior and also entails direct resource costs in the models examined some expenditure on enforcement may be optimal despite its resource cost its distortionary effect and the availability of other revenue sources having no enforcement costs rules for optimal tax rates and enforcement expenditures are derived which also indicate the marginal cost of government funds and optimal enforcement priorities for a tax collection agency

tax arbitrage and labor supply we examine how tax avoidance in the form of trade in well functioning asset markets affects the basic labor supply model we show that tax arbitrage has dramatic implications for positive normative and econometric analysis of how taxes affect work incentives

heard it through the grapevine the direct and network effects of a tax enforcement field experiment on firms abstract tax enforcement may have deterrent effects that extend beyond directly treated taxpayers but evidence of such deterrent effects for major sources of revenue is limited this paper studies the effects of a large scale field experiment on employer deposits that make up most u s tax collections in person visits by revenue officers have a large direct effect on visited firms tax deposits the other clients of visited firms tax preparers also deposit more tax a network effect that suggests preparers disseminate information aggregating over all links this network effect accounts for 1 2 times as much revenue as the direct effect letters conveying the same message are found to have much smaller direct effects and no measurable network effects

on indirect tax evasion abstract this paper examines some aspects of the decision to evade indirect taxes in the context of a monopolistic firm in particular the degree of interdependence between the tax shifting and the tax evasion decisions is analyzed both in the case of a fixed and of a variable probability of being detected it is shown that in the first case the shifting and evasion decisions are separable while in the second case this is no longer true in this latter case a rule according to which the probability decreases with larger declarations can be said to be an efficient one the conditions for a firm s becoming a completely submerged one are derived and finally direct and indirect tax evasion are compared it is shown that for decreasing risk aversion an indirect tax is evaded as a percentage less than a profit tax of equal yield

contractual flexibility rent seeking and renegotiation design an empirical analysis of information technology outsourcing contracts this paper examines renegotiation design in contracts for outsourced information technology it services whereas prior literature in information systems has highlighted the likelihood of ex post rent seeking engendered by renegotiation we build upon literature on incomplete contracts to posit that renegotiation can be pareto improving by incorporating contingencies revealed ex post research on contract renegotiation has been hampered by two sets of challenges the lack of appropriate data and empirical challenges in identification we circumvent this problem both by appropriate data collection and by employing an identification strategy to address alternate causal explanations we propose a measure pareto improving amendments to assess renegotiation outcomes that enhance the value from outsourcing by hazard equilibration and by incorporating learning using a unique sample of 141 it outsourcing contracts we examine the role of decision rights delineated ex ante in enabling pareto improving amendments and in resolving the trade off between adaptation and rent seeking we find that flexibility provisions termination for convenience rights and contractual rights whereby vendors are granted rights to reuse know how are associated with pareto improving amendments the results are robust to potential endogeneity of contractual provisions when parties have feasible foresight and to the possibility of adverse selection in the sample we also examine alternate explanations from the literature on contractual breach implications for practitioners and researchers are discussed this paper was accepted by sandra slaughter information systems

income tax evasion labour supply and the equity efficiency tradeoff abstract this paper is an attempt to incorporate tax evasion into the analysis of optimum income taxation a model of variable labour supply with tax evasion is used to derive supply functions for labour in regular and irregular markets given taxpayer behaviour the government chooses tax rates penalties and the probability of detection to maximize a utilitarian social welfare function the results consist in the derivation of a formula for the optimum marginal tax rate and a characterization of the factors determining the choice between the penalty rate and the probability of detection as instruments for the control of tax evasion

the value of relationships evidence from a supply shock to kenyan rose exports this paper provides evidence on the importance of reputation in the context of the kenyan rose export sector a model of reputation and relational contracting is developed and tested a seller s reputation is defined by buyer s beliefs about seller s reliability we show that i due to lack of enforcement the volume of trade is constrained by the value of the relationship ii the value of the relationship increases with the age of the relationship and iii during an exogenous negative supply shock deliveries are an inverted u shaped function of relationship s age models exclusively focusing on enforcement or insurance considerations cannot account for the evidence jel d86 f14 l14 o13 o19 q17 imperfect contract enforcement is a pervasive feature of real life commercial transactions in the absence of formal contract enforcement trading parties rely on informal mechanisms to guarantee contractual performance e g johnson mcmillan and woodruff 2002 greif 2005 fafchamps 2010 among those mechanisms long term relationships based on trust or reputation are perhaps the most widely studied and have received substantial theoretical attention the theoretical literature has developed a variety of models that capture salient features of real life relationships e g enforcement problems e g macleod and malcomson 1989 baker gibbons and murphy 1994 baker gibbons and murphy 2002 levin

formal contracts in the presence of relational enforcement mechanisms evidence from technology development projects formal contracting addresses the moral hazard problems inherent in interfirm deals via explicit terms designed to achieve incentive alignment alternatively when firms expect to interact repeatedly relational mechanisms may achieve similar results without the associated costs however as we now know from a growing body of theoretical and empirical work the resulting intuition that relational mechanisms will be substituted for formal ones whenever possible does not generally hold the extent to which firms substitute relational mechanisms for formal ones in the presence of repeated interaction is an empirical question that forms the basis of this paper we study a sample of 52 joint technology development contracts in the telecommunications and microelectronics industries and devise a coding scheme to allow empirical comparison of contract terms counter to the above intuition but consistent with recent research we find that a firm s contracts are more detailed and more likely to include penalties when it engages in frequent deals whether with the same or different partners our results suggest complementarity between formal and relational contracts and have implications for optimal contracting particularly in high technology sectors

ex post adaptations and hybrid contracts in software development services we follow the recent literature on ex post adaptations in procurement and argue that highly volatile specifications result in multiple variations of fixed price fp and time and materials t m contracts specifically placing a cap on specification change in fp contracts prevents specification volatility similar to the way that placing a cap on the price in t m contracts prevents price escalation we argue that these hybrid mechanisms are particularly important in software development contracting a new critical business capability involving frequent and costly ex post adaptations to specification change the level of completeness in these contractual archetypes is hypothesized to be determined by contracting costs and benefits where costs are related to project uncertainty and benefits are related to the likelihood of vendor opportunism we test this hypothesis with a unique data set of 270 software development contracts entered into by a leading international bank the analysis confirms the existence of multiple hybrid contracts that mitigate both price escalation and specification volatility it also shows that contracting costs and benefits explain more variance in contract choice when these hybrids are included uncovering the detailed mechanisms used to curb opportunism when the vendor is less familiar to the client

fraudulent collection of unemployment benefits a theoretical analysis with reference to income tax evasion abstract the harshest abusers of the unemployment insurance program are those employed who collect benefits while working this paper analyzes fraudulent claiming behavior and optimal deterrence policy under two alternative penalty schemes commonly used in tax evasion analyses one relates punishment to the magnitude of the dishonesty whereas the other relates punishment to the amount of illegal returns two exclusive features of fraudulent benefit claiming are given special attention the requirement to report at a labor exchange to demonstrate availability for work and the need to serve a waiting period before benefits can be collected

interfirm relationships and informal credit in vietnam trading relations in vietnam s emerging private sector are shaped by two market frictions the difficulty of locating trading partners and the absence of legal enforcement of contracts examining relational contracting we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier a longer duration of trading relationship is associated with larger credit as is prior information gathering customers identified through business networks receive more credit these network effects are enduring suggesting that networks are used to sanction defaulting customers

tax evasion and the optimum general income tax abstract this paper incorporates tax evasion into an optimum general income tax problem with endogenous labor supply it posits a two group model with high and low wage individuals to investigate the properties of optimal audit and tax structures the following main results are obtained first high wage persons are never audited while low wage persons are audited with a probability strictly less than one secondly high wage persons should face a zero marginal tax rate thirdly low wage individuals who have been audited and found innocent should pay a lower tax than those who are not audited fourthly there are two possible tax regimes low wage persons face a positive marginal tax rate under one regime and a zero rate under the other fifthly even if honesty cannot be rewarded the other results of the paper continue to hold

labour supply tax evasion and the marginal cost of public funds an empirical investigation abstract in this paper we extend the concept of marginal cost of public funds itmcf to incorporate tax evasion in the labour market mcf values are also computed from various tax reforms applied to the province of quebec canada 1985 for this purpose a utility based labour supply model that allows for both regular and irregular work activities is used at the benchmark situation the mcf associated with an increase in marginal income tax rates ranges between 1 39 and 1 53 depending upon whether we consider rationing or not moreover the presence of the irregular sector accounts for between 0 02 and 0 05 of this mcf although small in magnitude the impact of the irregular sector increases rapidly with the level of marginal tax rates

tax evasion and the size of the underground economy abstract the theoretical literature on the relationship between the tax system and the underground economy is extended using a model similar to the one examined by watson journal of public economics 1985 27 231 246 in which tax evasion is possible in one sector of the economy but is impossible in the other we prove that a rise in the tax rate increases decreases the number of agents in the sector in which tax evasion is possible if preferences exhibit increasing decreasing relative risk aversion we also use our model to investigate the relationship between the tax rate and the total amount of tax evaded

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

characterization of intertemporal optimality in terms of decentralizable conditions the discounted case abstract the paper studies the problem of characterizing the optimality of competitive programs in terms of decentralizable conditions we show that when future utilities are discounted and the optimal stationary stock is proportionately expansible then optimality of competitive programs can be characterized by the condition that the scalar product of the difference of prices and quantities between those of the given competitive program and those of the optimal stationary program be non positive period by period

costly state verification with varying risk preferences and liability abstract in the scenario of loan contracts with costly state verification we examine how the properties of the set of states different risk preferences of debtors and varying liability of lenders affect the structure of optimal repayments in particular we show that with risk averse debtors a general set of states a constant observation cost and both unlimited and limited lender liability the debtor is strictly better off revealing the true state of nature when his realized revenue is low which implies that optimal debtor consumption has a downward jump around the single switch from observed to unobserved states if the debtor can destroy revenue or if the debtor is risk neutral this non monotonicity of consumption disappears moreover given the loan size there is more monitoring under debtor risk aversion than risk neutrality we present simulations showing that a contract with unlimited lender liability and debtor risk aversion has a higher expected observation cost but a lower variance of consumption than a contract with limited lender liability finally we discuss the problems of commitment to verification and contract renegotiation in this framework

optimal taxation capital mobility and tax evasion the problem of capital flight and tax evasion is of paramount concern to many countries the fear is that capital mobility may lead to capital flight from high to low tax countries in such large amounts that it deprives a nation of its tax base and as a consequence its welfare system today s international climate where bank secrecy laws protect foreign investors anonymity in addition to substantial differences in national tax rates makes this fear a reality capital flight and tax evasion are also of concern from an equity as well as an efficiency point of view to the extent that labor cannot evade taxation as easily as capital labor is subject to higher effective tax rates than capital the presence of capital flight therefore imposes a higher tax burden on immobile factors and creates inequality giovannini 1989 and razin and sadka 1991 have recently studied the welfare effects of capital flight both studies are undertaken from the extreme assumption that foreign savings cannot be taxed and hence that tax evasion is undetectable and costless although evidence suggests that governments have difficulties taxing foreign source income governments derive positive tax revenue from foreign source income this paper thus adopts a different perspective capital flight and tax evasion are viewed as problems of tax enforcement the purpose of the paper is to analyze the intertemporal savings decision of an individual who can allocate consumption between two periods by borrowing and lending abroad and domestically it is assumed that foreign savings can evade taxation with a certain probability depending on the amount of money the government allocates to tax enforcement within this setting we investigate how taxes on foreign and domestic savings should be set optimally and how much money if any the government should allocate to tax enforcement

the paradox of indian growth a comment on kochhar et al the paradox of india s current success we learn from kochhar et al 2006 is that it is rooted in what were once seen as some of its most egregious policy failures in particular in the 1980s and even the 1990s one always heard complaints about how india invested so much more in tertiary education compared to countries at similar levels of development and how primary education by comparison was under funded and not enough of a priority and it did look like the critics were right highly qualified engineers educated at great public expense worked as bank officers or sales representatives for large multinationals or cooled their heels as minor functionaries in the overfilled bureaucracies of large public companies if they were exceptionally brilliant or fortunate they won a scholarship to do an advanced degree somewhere in the west few came back if there was one thing that has worse press in the community of economists today than india s education policy it was its policy of self reliance this meant making everything at home often behind gargantuan walls of tariffs and quotas this created an industrial sector that was enormously diversified at least compared to other economies at the same level of development and probably in many ways quite inefficient yet according to kochar and company it was the combination of these two policy errors that were instrumental in shaping the indian economy of today the two things that distinguish india from any other economy at its level of development are the skillintensity of its exports and the diversity of what it produces indeed 15 years after liberalization began the indian economy seems to be even more diversified than it used to be

optimal taxation and optimal tax systems the theory of optimal taxation has for the pas two decades been the reigning normative approach of taxation this paper argues that in its current state optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy it is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist the coercive nature of collection taxes implies that the resource cost of implementing a tax system have been and will continue to be a critical determinant of appropriate tax policy the paper first presents the three cornerstone propositions of optimal tax theory and then it discusses the influence of these propositions on recent tax policy developments it concludes by sketching an alternative to optimal taxation called the theory of optimal tax systems which embraces the insights of optimal taxation but also considers the technology of raising taxes and the constraints placed upon tax policy by that technology the optimal tax systems perspective is shown to shed light on the choice of tax instruments the problem of tax evasion and the appropriate tax treatment of capital income this abstract was borrowed from another version of this item

halving global poverty the goal of central importance to this paper is to cut in half the proportion of people living below 1 a day from around 30 percent of the developing world s population in 1990 to 15 percent by 2015 based on population projections in 1990 this would correspond to around one billion people exiting poverty this paper begins by discussing poverty trends on a global scale where the poor are located in the world and how their numbers have been changing over time it then discusses the relationship of economic growth and income distribution to poverty reduction finally it suggests an evidence based agenda for poverty reduction in the developing world full text available at official url

does relationship specific investment depend on asset ownership evidence from a natural experiment in the housing market the classic hold up model grossman and hart 1986 predicts that allocations of asset ownership which expose a party to expropriation reduce relationship specific investments by this party in the empirical context of t he housing market i show that the hold up model predicts more relationship specific investments such as bathroom renovations in owner occupied housing than in rental housing i confirm this prediction for the german housing market to ob tain an exogenous variation of asset home ownership i use the natural experiment of the german reunification under the communist regime ownership exist ed but was economically meaningless it was a quasi random by product of dwelling choice yet after reunification ownership unexpectedly reacquired legal fo rce

irreversibility and uncertainty cause an intergenerational equity efficiency trade off abstract two important policy goals in intergenerational problems are pareto efficiency and sustainability i e intergenerational equity we demonstrate that the pursuit of these goals is subject to an intergenerational equity efficiency trade off our analysis highlights two salient characteristics of intergenerational problems and policy i temporal irreversibility i e the inability to revise one s past actions and ii uncertainty of future consequences of present actions in human environment systems we employ a two non overlapping generations model that combines an intragenerational production decision on the use of circulating capital and a non renewable resource with a negative intergenerational externality as an unforeseen contingency if initially unknown problems become apparent and policy is enacted after irreversible actions were taken policy making faces a fundamental trade off between ex post pareto efficiency and sustainability that is one can achieve either one of these two goals but not both

reputation effects and the limits of contracting a study of the indian software industry this paper examines evidence of the role that reputation plays in determining contractual outcomes we conduct an empirical analysis of the indian customized software industry using a data set we collected containing detailed information on 230 projects carried out by 125 software firms we propose a model ofthe industry where reputation determines contractual outcomes the evidence supports the view that reputation matters ex ante contracts as well as the outcome after ex post renegotiation vary with firms characteristics plausibly associated with reputation this holds after controlling for project client and firm characteristics

the economics of tax amnesties abstract this paper examines some of the economic implications of tax amnesties we present a model where individuals are initially uncertain about the disutility from tax evasion when they file their tax returns if they later learn that they would like to be more honest than they have been an amnesty gives them an opportunity to report additional income we also show that as the probability of an amnesty rises people report less income as a consequence an optimal collection policy requires the government to balance the cost of lost tax revenue against the gains from an amnesty

tax evasion and the allocation of capital abstract the efficiency cost of capital misallocations between the corporate sector and the noncorporate sector is typically measured using statutory tax differences corporate source income tax compliance is high because of third party reporting however while noncorporate rental income tax compliance is low differential evasion thus exacerbates statutory differences and enlarges the efficiency cost to measure this effect we build a numerical general equilibrium model where households simultaneously choose portfolios of risky assets and fractions of income to report

the effect of taxes on labor supply in the underground economy this paper uses micro data from a randomized survey carried out in the metropolitan area of quebec city canada to analyze the decision to evade taxes and work in the underground economy the results indicate that taxes distort labor market activities away from the regular sector to the underground sector but the distortion is small for the average worker the distortion is large however for particular groups of the population such as welfare claimants copyright 1994 by american economic association

subcontractors for tractors theory and evidence on flexible specialization supplier selection and contracting abstract buyer seller networks are pervasive in developing economies yet remain relatively understudied using primary data on contracts between the largest tractor assembler in pakistan and its suppliers we find large variations in prices and quantities across suppliers of the same product surprisingly tied suppliers those that choose higher levels of specific investments receive lower and more unstable orders and lower prices these results are explained by developing a simple model of flexible specialization under demand uncertainty a buyer faces multiple suppliers with heterogeneous types to supply customized parts specific investments raise surplus within the relationship but lower the seller s flexibility to cater to the outside market higher quality suppliers have a greater likelihood of selling outside and so this cost is greater for them therefore even if a buyer typically prefers high types some low type suppliers might be kept as marginal suppliers because of their greater willingness to invest more in buyer specific assets further empirical examination shows that the more tied suppliers are indeed of lower quality

on characterizing optimal competitive programs in terms of decentralizable conditions the paper considers a multisector model of intertemporal allocation with a primary factor of production and the overtaking criterion of optimality the optimal program is characterized in terms of i period by period conditions on intertemporal profit and utility maximization relative to a system of competitive prices and ii non positivity of appropriately computed values of differences of stocks from the golden rule stock the last condition replaces the usual transversality condition of malinvaud and throws new light on the possibility of dencentralization in an infinite horizon economy

hierarchical design and enforcement of income tax policies abstract a hierarchical model of tax compliance is studied in which the government selects a tax policy and then delegates the responsibility to collect taxes to the irs there is a fixed distribution of income in the economy individuals differ by their income which is known niether to the government nor to the irs we completely characterize the solution to the irs s revenue maximizing problem when taxpayers are risk neutral the optimal auditing policy divides the reported incomes into at most three groups we show that the government provides a smaller budget to the irs than the irs would wish

ostracism and forgiveness many communities rely upon ostracism to enforce cooperation if an individual shirks in one relationship her innocent neighbors share information about her guilt in order to shun her while continuing to cooperate among themselves however a strategic victim may herself prefer to shirk rather than report her victimization truthfully if guilty players are to be permanently ostracized then such deviations are so tempting that cooperation in any relationship is bounded by what the partners could obtain through bilateral enforcement ostracism can improve upon bilateral enforcement if tempered by forgiveness through which guilty players are eventually readmitted to cooperative society

randomness in tax enforcement abstract when there is tax evasion increased randomness about how much taxable income an auditor would assess generally leads to higher reported income and more revenue when reducing randomness is costly optimality requires some randomness in assessed taxable income even if reducing randomness is costless taxpayers may prefer some randomness when the increased revenue can be rebated so that the government s revenue stays fixed

endogenous verifiability and relational contracting for contracting parties it will often be uncertain whether a legal court is able to enforce the real intents of their contract the strict requirements of verifiability make it costly if not impos sible for parties to arrange their transactions and design their contract in a way that makes it completely protected by the court a way out is then to rely on self enforcing relational con tracts through repeated transactions the parties can make it costly for each other to breach the contract by letting breach ruin future trade but the self enforcing range of contracts is limited so the court s ability to enforce a contract is not without consequence for the contracting parties if possible the parties may thus have incentives to take costly actions that affect the ability of the court both ex ante preparations in terms of detailed contracting and ex post revelation of informa tion can increase the probability of fair court enforcement in this paper we focus on the former assuming that the parties are able to improve the verifiability of the contracted actions by care ful ex ante contract specifications we assume that careful contracting can improve the court s ability to verify whether an action conforms to the one described in the contract then we ask what happens to the self enforcing contract equilibrium if a party takes actions ex ante that affect the probability of verification in order to provide some answers we analyze a simple repeated principal agent game where the verifiability of the agent s actions is endogenously determined by the principal s investments in drafting an explicit contract pertaining to the quality of the agent s output the model makes it possible to identify some subtle effects of two key enforcement devices legal courts and repeated interaction note that by endogenizing verifiability we also endog enize the degree of contractual incompleteness and the equilibrium level of incompleteness will depend on the verification technology i e the resource costs that are necessary to achieve various verifiability levels this verification technology will be influenced in an essential way by the quality of courts in fact we can use the model to study relationships between two distinct aspects of courts namely their ability which influences the verification technology and their predictability which manifests itself in the equilibrium level of verifiability i e the probability with which the court in fact will verify the relevant action the repeated game approach formalizes an economic concept of trust and trustworthiness since a party honors trust if the present value of honoring exceeds the present value of abusing it the discount factor is then a proxy for the trust level in the relationship by studying the effect of variations in verification technology and the discount factor we can gain insight into the rela tionship between court ability explicit contracting trust and relational contracting below we summarize the results

decentralization in infinite horizon economies an introduction abstract the paper summarizes some issues involved in developing a theory of decentralized resource allocation mechanism in infinite horizon economies even in a classical environment a competitive mechanism may lead to an inefficient or nonoptimal allocation for an infinite horizon economy it remains however to explore whether the usual price quantity messages can be supplemented to design decentralized mechanisms generating optimal outcomes

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

experimental evidence on the relationship between tax evasion opportunities and labor supply abstract motivated by the observation that access to evasion opportunities is distributed heterogeneously across the labor market this paper examines the extent to which labor supply elasticities with respect to tax rates depend on such evasion opportunities we first discuss the channels through which access to evasion affects labor supply responses and then set up a laboratory experiment n 205 in which all participants undertake a real effort task over several rounds subjects face a tax rate that varies across rounds and are required to pay taxes on earned income the treatment group is given the opportunity to underreport income while the control group is not we find evidence that participants in the treatment group respond differently to changes in the net of tax rate than participants in the control group the effect is more prevalent when tax rates fall additionally the direction of the treatment effect is dependent on the evolution of tax rates across rounds

on the existence of a stationary optimal stock for a multi sector economy a primal approach abstract using a purely primal approach we show the existence of a non trivial stationary optimal stock for a multi sector economy our result generalizes earlier work by dropping the productivity assumption and by replacing the continuity hypothesis on the utility function by upper semicontinuity

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

cross border tax evasion under a unilateral fatca regime abstract cross border tax evasion has emerged in recent years as a central issue in tax enforcement traditionally the legal regime governing cross border tax enforcement was based on information exchange upon request in 2010 the us congress enacted the foreign account tax compliance act fatca which seeks to induce foreign financial institutions ffis to participate in a global regime of automatic information reporting of the income of us residents to the us government this paper presents a simple theoretical model of cross border investment that analyzes the consequences of this unilateral fatca regime the model emphasizes cross border investors heterogeneous intrinsic motivation to comply with tax law as well as the impact of information reporting requirements on the cost of providing financial services in fatca compliant equilibria in which ffis report information to the us government ffis face a higher cost of providing financial services increasing the fees charged to their accountholders consequently tax compliant behavior such as investing via their domestic financial sector becomes more costly for foreign residents under certain conditions a unilateral fatca regime causes increased cross border tax evasion among residents of foreign countries this result is robust to various extensions

development and the interaction of enforcement institutions we examine how formal and informal contract enforcing institutions interact in a competitive market with asymmetric information where consumers do not observe quality before purchase firm level incentives for producing high quality can be achieved with an informal enforcement mechanism reputation the efficacy of which is enhanced by consumers investing in connectedness or with a formal mechanism legal enforcement the effectiveness of which can be reduced by means of bribes we show that formal and informal enforcement mechanisms do not necessarily substitute each other while high levels of judicial efficiency decrease consumers incentives to connect higher consumers connectedness leads to higher levels of judicial efficiency we then look at how the equilibrium institutional mix evolves with the level of development in doing so we show the presence of a new physical channel that can affect institutions i e the frequency of bad productivity shocks that in less developed settings can impact on firms incentives to cheat c 2010 elsevier b v all rights reserved

governance and contract choice theory and evidence from groundwater irrigation markets abstract this paper examines the role governance institutions play in the adoption of contracts we develop a simple model of the contracting relationship in a setting where unverifiable outcomes exist and use it to interpret data on groundwater irrigation contracts in bangladesh a distinguishing feature of this market is the variety of village level institutions which impose different degrees of punishment for contract violation consistent with the model we find households adopt contracts that rely on unverifiable outcomes which are not formally contractible when punishment for contract violation is weak conversely households adopt contracts that rely on formally contractible and verifiable outcomes when punishment is severe this evidence is consistent with contract terms being chosen optimally given what is or is not formally contractible

an exact discount factor restriction for period three cycles in dynamic optimization models consider a standard aggregative dynamic optimization framework u where is the transition possibility technology set u is a reduced form utility function defined on this set and 0 1 a discount factor can an optimal program in this framework exhibit a period three cycle

contracts hold up and exports textiles and opium in colonial india trade and export it is argued spur economic growth this paper studies the microeco nomics of exporting we build a heuristic model of transactions between exporters and producers and relate it to east india company operations in colonial bengal our model and the historical record stress two difficulties the exporter and its agents might not uphold payment agreements and producers might not honor sales contracts the model shows when procurement succeeds or fails highlighting the tension between these two hold up problems we analyze several cases including the east india company s cotton textile venture the famous opium monopoly and present day contract farming

a general equilibrium model of crime commission and prevention abstract the model developed in this paper features a general equilibrium specification of the relationships among criminals victims of crime and a law enforcement agency these relationships are employed to endogenously derive an explicit intuitively appealing technology of crime commission and prevention the solution to the present model is therefore obtained with a set of more elementary assumptions than the previous literature where arbitrary curvature assumptions are invoked

the political economics of redistribution inequality and tax avoidance a central result in the political economy of taxation is that the degree of redistribution is positively linked to income inequality however empirical evidence supporting such a relationship turns out to be mixed this paper shows how the different empirical reactions can be rationalized within a simple model of tax avoidance and costly tax enforcement by focusing on structure induced equilibrium in which taxpayers vote over the size of the income tax and the level of tax enforcement we show that more inequality may well reduce the extent of redistribution depending on two opposing effects the standard political effect and a negative tax base effect working through increases in the average level of tax avoidance and the share of enforcement expenditures in total tax revenue

debt bargaining and credibility in firm supplier relationships abstract we examine optimal leverage for a downstream firm relying on implicit self enforcing contracts with a supplier performing a leveraged recapitalization prior to bargaining increases the firm s share of total surplus however the resulting debt overhang limits the range of credible bonuses resulting in low input quality optimal financial structure trades off bargaining benefits of debt with inefficiency resulting from overhang consistent with empirical evidence the model predicts that leverage increases with supplier bargaining power e g unionization rates and decreases with utilization of non verifiable inputs e g human capital

can foreign firms bond themselves effectively by renting u s securities laws abstract the study tests the functional convergence hypothesis which states that foreign firms can leapfrog their countries weak legal institutions by listing equities in new york and agreeing to follow u s securities law evidence shows that the sec and minority shareholders have not effectively enforced the law against cross listed foreign firms detailed evidence from mexico further shows that while some insiders exploited this weak legal enforcement with impunity others that issued a cross listing and passed through an economic downturn with a clean reputation went on to receive privileged long term access to outside finance as compared with legal bonding reputational bonding better explains the success of cross listings

a theory of collective reputations with applications to the persistence of corruption and to firm quality the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by his past behaviour and because his track record is observed only with noise by the group s past behaviour as well the paper thus studies the joint dynamics of individual and collective reputations and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality 1 collective reputations collective reputations play an important role in economics and the social sciences countries ethnic racial or religious groups are known to be hard working honest corrupt hospitable or belligerent some firms enjoy substantial rents from their reputations for producing high quality products some departments are reported to treat their faculty or students fairly the paper is a first attempt at modelling the idea of group reputation as an aggregate of individual reputations a member s current incentives are affected by her past behaviour and because her track record is observed only with noise by the group s past behaviour as well the paper studies the joint dynamics of individual and collective reputations in a model in which current generations are progressively replaced by new ones and derives the existence of stereotypes from history dependence rather than from a multiplicity of equilibria or from the existence of a common trait as is usually done in the literature see section 2 for a detailed comparison with the literature it shows that new members of an organization may suffer from an original sin of their elders long after the latter are gone and it derives necessary and sufficient conditions under which group reputations can be rebuilt last the paper applies the theory to analyse when a large firm can maintain a reputation for quality let us spell out the building blocks of our theory in more detail a a group s reputation is only as good as that of its members each member is characterized by individual traits such as talent diligence or honesty past individual behaviour conveys information about these traits and generates individual reputations

plea bargaining with the irs abstract the purpose of this paper is to propose a new evasion counteracting policy and to prove its welfare improving property the new fatota policy allows a target group of businesses to choose between the following two options paying a fixed amount of taxes thus exempting themselves from tax audits or paying only the amount they choose to pay and subject to possible tax audits it is shown that fatota is very similar to the plea bargaining system of the u s criminal proceedings and our results can be treated as an extension of the grossman katz analysis to the crime of tax evasion

personal income tax reforms a genetic algorithm approach given a settled reduction in the present level of tax revenue and by exploring a very large combinatorial space of tax structures in this paper we employ a genetic algorithm in order to determine the best structure of a real world personal income tax that allows for the maximisation of the redistributive effect of the tax while preventing all taxpayers being worse off than with the present tax structure we take italy as a case study

evading auditing and taxing the equity compliance tradeoff tax evasion and auditing are analyzed in a model of linear income taxation taxpayers minimize expected tax payments including penalty for underreporting while the tax administration sets its audit policy to maximize expected net revenue under the restriction of only two audit rates per class of taxpayers given the reaction of taxpayers and tax administration we derive the optimal income tax that the government should adopt to maximize social welfare there are several classes of taxpayers each characterized by a given distribution of pretax income and specific audit policy parameters

labor market institutions taxation and the underground economy abstract the paper aims at qualifying the links between labor market institutions taxation tax monitoring and underground economic activity the proposed model is a continuous time matching model with one commodity roduced either overground or underground underground economic activity arises because of partial compliance with regulations and tax contributions imposed by the government vacancies and workers search are directed at a specific labor market workers are heterogenous in the subjective cost they face when operating in the irregular sector analytical and numerical investigations suggest that interactions between regular and irregular activities can affect standard results of policy interventions in that respect the paper supports the view that policies aiming at increasing individuals benefits of participating in the regular sector are more desirable than a deterrence policy

honesty is sometimes the best policy this paper examines two central points in the economics of tax evasion if the taxation authorities have reason to believe that tax is being illegally evaded how far should they go in pursuit of the missing income and what roles should thoroughness of investigation and severity of penalties play in the pursuit of that income previous contributions have examined the positive economics of various control instruments on tax payers behaviouri the degree of threat or the level of policing required to enforce truthful reporting and the desirability of different types of policy in terms of tax payers expected utility some writers have investigated the design of sophisticated investigation schemes to maximise expected government receipts or to enforce truthful reporting at low resource cost the approach adopted here is to examine the desirability of various combinations of policy instruments in the context of an explicit model of social welfare it is not self evident that honesty is desirable from the point of view of the government if honesty is desirable it is not obvious that people should be forced to be completely honest and it is not obvious how they ought to be forced the desirability of an economic policy depends on two major issues which are sometimes left submerged the objectives of the government or its agents and the constraints under which such objectives must be pursued the objective is often assumed to be a simple form of ex ante expected utility this is surprising since value systems other than utilitarianism are frequently invoked in the design of tax systems and so it seems reasonable to

strategic fit in industrial alliances an empirical test of governance value analysis abstract the exclusion of firm specific considerations in the standard economizing calculus approach to buyer supplier ties makes the large variations in the types of contracts used within the same industry unexplainable this article tests ghosh and john s 1999 strategizing calculus model that purports to close this gap the core organizing principle of this model is a three way fit among firm resources investments and governance that yields the highest net receipts from this principle the authors derive predictions and test them using data from 193 original equipment manufacturers that engage independent component suppliers the data show that investments must be aligned with more complete contract terms e g fixed prices hard designs to yield cost reduction outcomes for all firms however investments must be aligned with more incomplete contracts e g cost plus prices soft designs to yield end product enhancement outcomes but only for firms with relatively small downstream market

competition and relational contracts in the rwanda coffee chain how does competition affect market outcomes when formal contracts are not enforceable and parties resort to relational contracts difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question we make progress by studying relational contracts between upstream farmers and downstream mills in rwanda s coffee industry first we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers second we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition conditional on the suitability for mills placement within the catchment area we find that mills surrounded by more suitable areas i face more competition from other mills ii use fewer relational contracts with farmers and iii exhibit worse performance an additional competing mill also iv reduces the aggregate quantity of coffee supplied to mills by farmers and v makes farmers worse off competition hampers relational contracts directly by increasing farmers temptation to default on the relational contract and indirectly by reducing mill s profits

taxation and labour supply with risky activities consider the following three phenomena a in recent years dramatic shifts in the types of contract between london cabbies and the taxi owners have been observed b if one tries to hire a housepainter in the uk one is often quoted two rates one for official work during regular hours and for unofficial weekend and evening work c in two unrelated discussions with economics professors about the textbook model of taxation and labour supply each revealed to me that marginal hours released from his regular employment were spent not in the form of leisure but in participating in stock market speculation

tax enforcement a public choice perspective federal income tax inforcement varies greatly across individual states while it is not known if this interstate variation enhances efficiency anecdotal evidence suggests it does not in this paper we apply the weingast moran model to the treasury and explore the relationship between the legislature and the irs specifically we model irs audit rates by state as a function of both political and efficiency considerations we find that the interstate differences in enforcement is influenced by efficiency considerations but also the irs shifts enforcement away from states represented by legislators who sit on committees with oversight responsibility for the irs

information processing moderators of the effectiveness of trust based governance in interfirm r d collaboration it is generally assumed that improved outcomes accompany the use of trust as a governance mechanism in an interfirm relationship briefly trust is a social lubricant that reduces the friction costs of existing trade and or serves to increase the scope of trade in contrast to this universalistic view we posit that the performance of trust based governance is contingent on the ability of trading partners to read each other and learn about counterpart behavior these information processing abilities allow firms to assess partner trustworthiness better which reduces the risk of misplaced trust the increased efficacy of communication and learning from one another also enables them to better capitalize from the adaptation and revision possibilities uncovered through trust based governance during the task execution phase given the central role of these cognitive requirements we assess these contingent effects with data from a knowledge intensive task setting using a sample of 129 firms that have engaged outside contractors on client sponsored r d projects we find strong support for our thesis specifically we find that trust based governance has a larger positive impact on task performance when the client is more skilled at understanding the outsourced tasks at hand the task itself requires skills that are relatively more readily taught less tacit and the task itself is organized in parallel with work being done at the contractor as well as the client as a corollary we also find that firms adopt trust based governance to a greater extent as these information processing abilities increase as well as with the colocation of the contractor and client suggestions for engineering trust based governance are offered

a unique informationally efficient and decentralized mechanism with fair outcomes it is shown that any informationally decentralized mechanism that realizes fair allocations over the class of classical pure exchange environments has a message space of dimension no smaller than the number of agents times the number of commodities since the equal income walrasian mechanism in which all agents take prices parametrically and maximize utility subject to the average income constraint realizes fair outcomes over the class of classical pure exchange environments and has a message space of that dimension it is informationally efficient further it is shown that it is the unique informationally efficient mechanism realizing fair allocations

dynamics of social trust and human capital in the learning process the case of the japan garment cluster in the period 1968 2005 abstract this paper examined the ways and the extent to which human capital and social trust are associated with the learning process of a manager in making operations decisions through experience to this end using a data set originally and purposively constructed by the author i investigated the development and transformation of the garment industry cluster region of kojima japan the major findings through statistical estimations are as follows 1 in the cluster development stage the social trust of an enterprise and its manager s experiences in firm operations could be regarded as forming a complementary association 2 in the stage following cluster development however a manager s human capital as accumulated through schooling and personal experience instead of social trust become complementary

smuggling trade and price disparity a crime theoretic approach abstract we provide a simple but fairly general model of smuggling capable of handling both the bhagwati hansen type of illegal trade through illegal entry points and the pitt type of illegal trade through legal entry points the paper focuses on the latter type of trade we take explicit account of the risk and uncertainty associated with illegal activity and moreover treat the real costs of smuggling as a choice variable of the firm it is shown that smuggling legal trade and price disparity may coexist as in pitt the economy s response to increased enforcement of laws against smuggling is explicitly analyzed it is shown that increased enforcement raises real per unit costs of smuggling and the domestic price of importables but lowers both the absolute quantity and the share of illegal imports in total imports the effect on welfare is ambiguous

utilitarianism and horizontal equity the case for random taxation this paper establishes that far from being able to derive the principle of horizontal equity from utilitarianism the principle is actually in consistent with utilitarianism in a variety of circumstances we derive conditions under which a it is optimal to impose random tax schedules ex post randomization and b it is optimal to randomize the tax schedules imposed on a set of otherwise identical individuals ex ante randomization the implications for optimal tax theory are discussed more generally it is shown that there are a number of potentially important economic situations with which the principle of horizontal equity may be inconsistent not only with utilitarianism but even with pareto optimality this abstract was borrowed from another version of this item

complementarity and evolution of contractual provisions an empirical study of it services contracts an increasing volume of business activity appears to be occurring via alliances or other interfirm arrangements in which complex contracts are featured yet there has been relatively little study of contract design in the strategy or management literatures the economics literature on contracting has been extensive but it has been less concerned with learning and evolution phenomena in which strategy and organization scholars are deeply interested in this paper we investigate the relationship between two types of contractual provisions that are important in high technology contracts or contracts for which environmental uncertainty or technological complexity are significant namely contingency planning and task description previous research suggests that contracts can vary significantly in the degree of detail with which such key provisions are written and that they are each subject to learning in this paper we find evidence from a sample of 386 contracts that contingency planning and task description behave as complements in contractual design we argue that this complementarity reflects patterns of learning to contract we also find that repeated exchange between two firms leads to greater effort at contingency planning in subsequent contracts a finding that is also consistent with learning effects but not with frequently made claims that contracts and trust are substitutes

a fairness approach to income tax evasion abstract the tax that a taxpayer wishes to evade is determined on the basis of his perception of the fairness of his fiscal treatment with respect to both governmental supply of public goods and the perceived behaviour of other taxpayers the coercive powers of the state and the taxpayer s attitude toward risk determine the extent to which this desired level is undertaken in practice this approach is able to produce implications for the relationship between public expenditure tax rates and tax evasion which are more consistent with empirical evidence than the results of the conventional portfolio choice approach