financial integration in europe through the lens of composite indicators abstract this paper develops price and quantity based composite indicators of financial integration for the euro area we develop a novel method that homogenises information from different market segments and benchmarks them to a state of perfect integration the time series development of both indicators shows that the global financial crisis and the ensuing sovereign debt crisis in the euro area led to considerable financial fragmentation from which the monetary union has not yet fully recovered in a set of panel regressions for 19 member states we find a significant positive association between financial integration and economic growth

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

investor protection and equity markets we present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders the model incorporates elements of becker s j political econ 106 1968 172 crime and punishment framework into a corporate finance environment of jensen and meckling j financial econ 3 1976 305 we examine the entrepreneur s decision and the market equilibrium the model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance it also sheds light on the patterns of capital flows between rich and poor countries and on the politics of reform of investor protection r 2002 elsevier science b v all rights reserved

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

stock markets and development this paper asks if financial development especially stock market development affects the level and or the growth rate of economic activity it finds a substantial effect on both current wisdom suggests that the growth effects of financial intermediation could be either permanent or transitory for instance the greenwood jovanovic 1990 henceforth gj model has an ak stucture with no diminishing returns to the reproducible factor and a permanent exogenous improvement in financial structure would cause a permanent increase in the rate of growth on the other hand if the returns to the reproducible factor did diminish better intermediation could lead only to level effects since one should not a priori exclude either growth effects or level effects we shall look for both our search for growth effects will use the gj model our search for level effects will rely on an amended version of the mankiw romer and weil 1992 henceforth mrw structure

debt overhang global growth opportunities and investment abstract using a pan european data set of 8 5 million firms we find that firms with high debt financing invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities the positive impact of a marginal increase in debt on investment in good global growth opportunities sectors disappears if firm debt is already excessive if it is dominated by short maturities and during systemic banking crises our results are consistent with theories of the disciplining role of debt as well as with models highlighting the negative link between firm and bank related agency problems and corporate investment

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

financial development and intersectoral allocation a new approach this paper uses a new methodology based on industry comovement to examine the role of financial market development in intersectoral allocation based on the assumption that there exist common global shocks to growth opportunities we hypothesize that country pairs should have correlated patterns of sectoral growth if they are able to respond to these shocks consistent with financial markets promoting responsiveness to shocks countries have more highly correlated growth rates across sectors when both countries have well developed financial markets this effect is stronger between country pairs at similar levels of economic development which are more likely to experience similar growth shocks copyright 2004 by the american finance association

does corporate transparency contribute to efficient resource allocation this paper examines whether a country s corporate transparency environment which includes the quality of accounting information contributes to efficient resource allocation based on a cross country study of 37 manufacturing industries in 37 countries we provide three pieces of related evidence first we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs after controlling for country level economic and financial development second we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development gdp finally when we control for the level of transparency explained by a country s institutions in place we find that residual transparency unexplained by country level factors is associated with industry specific growth rates taken together the results are consistent with corporate transparency facilitating the allocation of resources across industry sectors

competition and operating volatilities around the world numerous papers have shown that developing economies are more volatile we show that despite greater aggregate and industry stability performance and size of individual firms in developed countries are more volatile in developing countries market imperfections insulate incumbent firms from competition consistent with this firms in developing countries have higher profit higher market concentration and less capital raising cross country differences in operating risk and competition intensity are greater in industries that are dependent on external finance where we expect higher impacts of capital market imperfections we show the inverse relation between aggregate and firm level volatilities has important implications for international studies of cash holding

international diversification with frontier markets abstract we provide an analysis of frontier market equities with respect to world market integration and diversification principal component results reveal that frontier markets exhibit low levels of integration in contrast with developed and emerging markets frontier markets offer no indication of increasing integration through time furthermore individual frontier market countries do not exhibit consistent rates of changing integration structural break tests identify breakpoints in integration as well as integration dynamics across countries we show that frontier markets have low integration with the world market and thereby offer significant diversification benefits

linking local business with global growth opportunities the role of infrastructure infrastructure is instrumental when it comes to linking local businesses with their global growth opportunities this paper shows that by making this link the transport network can act as a catalyst for regional economic growth using a novel approach we find that firms in regions with a more developed transport infrastructure are better placed to benefit from positive growth opportunities than those in regions with a less well developed transport network this advantage is most pronounced in times of economic slack making a better transport network a key ingredient for economic recovery it is against this background that the recent slowdown in infrastructure investment in europe is worrisome but it is through this channel among others that the substantial ramp up of activity by the european investment bank is expected to foster growth and enhance competitiveness in europe

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

the politics of m a antitrust antitrust regulators play a critical role in protecting market competition we examine whether the political process affects antitrust reviews of merger transactions we find that acquirers and targets located in the political districts of powerful u s congressional members who serve on committees with antitrust regulatory oversight receive relatively favorable antitrust review outcomes to establish causality we use plausibly exogenous shocks to firm politician links and a falsification test additional findings suggest congressional members incentives to influence antitrust reviews are affected by three channels special interests voter and constituent interests and ideology in aggregate our findings suggest that the political process adversely interferes with the ability of antitrust regulators to provide independent recommendations about anticompetitive mergers

sovereign credit ratings growth volatility and the global financial crisis using monthly data from january 1996 to may 2010 for a panel of 76 developed and emerging economies and adopting an instrumental variable iv estimation technique by correcting for both heterogeneity and endogeneity with the generalized two stage least squares g2sls ec2sls procedure method suggested by balestra and varadharajan krishnakumar 1987 and baltagi and li 1995 this article provides empirical evidence that volatility of per capita gdp growth is reduced when there are positive changes in credit ratings in other words when sovereign credit risk improves to deal with potential simultaneity between sovereign credit ratings and output volatility a system 3sls approach is undertaken and our findings remain robust by weakening the volatility dampening effects of ratings changes it is found that the global financial crisis gfc has enhanced macroeconomic volatility one of the channels via which sovereign rating changes affect growth volatility is the financial markets repricing of sove

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

estimating mark ups from plant level data typical plant level data sets do not report quantities this paper shows that estimating mark ups price cost ratio in product differentiated industries using deflated sales to proxy quantity is not appropriate due to unobserved price heterogeneity this paper presents an econometric model for estimating mark ups that controls for unobserved prices the model shows that ignoring price heterogeneity results in mark up estimates that converge to one whatever the value of the true price cost ratio estimates obtained using real data are consistent with this result as they reveal that ignoring price heterogeneity leads to spurious evidence of firms with little or no market power

credit constraints equity market liberalization and growth rate asymmetry abstract this paper provides evidence that financial openness is an important determinant of growth rate asymmetry in emerging markets i exploit exogenous shocks to financial flows and examine the impact of equity market liberalization on the skewness of output growth for 93 countries during the 1973 2009 period i show that opening the economy to foreign portfolio investment results in a substantially higher negative skewness of output growth this result obtains with equal strength in the aggregate data and in the sectoral data and it is disproportionately stronger in sectors that require more external finance the skewness effect of financial openness is stronger in countries which experienced a banking crisis after liberalization

market power productivity and the eu single market program evidence from a panel of italian firms abstract this paper provides empirical evidence on the impact the eu single market program has exerted on market power and total factor productivity in a large sample of italian firms both market power and total factor productivity are estimated by applying several extensions of the methodology developed by hall main findings can be summarised as follows firstly for the sample of 1992 most sensitive firms market power decreases by 50 in the smp implementation period compared to previous years whereas no clear pattern emerges for the other sub samples of firms secondly and less conclusively only for the sub sample of 1992 most sensitive firms a positive transitory shock to productivity growth rates is observed immediately after the announcement of the reform project overall these results are consistent with the long standing view that economic integration reduces firms market power and increases productivity via the removal of non tariff barriers

convergence of real capital market interest rates evidence from inflation indexed bonds this paper investigates the convergence of long term ex ante real interest rates rirs obtained from canadian french uk and u s inflation indexed government bonds in contrast to previous research our evidence suggests full convergence in the long run and hence capital market integration for the same sample period global convergence is rejected for rirs measured in conventional terms from these results we conclude that previous tests of the long run real interest rate parity might have suffered from weak measurement of real capital market interest rates

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

global growth opportunities and market integration we propose an exogenous measure of a country s growth opportunities by interacting the country s local industry mix with global price to earnings pe ratios we find that these exogenous growth opportunities predict future changes in real gdp and investment in a large panel of countries this relation is strongest in countries that have liberalized their capital accounts equity markets and banking systems we also find that financial development external finance dependence and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness finally we formulate new tests of market integration and segmentation by linking local and global pe ratios to relative economic growth in a perfectly integrated world economy capital should be invested where it

bureaucratic discretion or congressional control regulatory policymaking by the federal trade commission this paper extends stigler and peltzman s approach to regulation by incorporating a legislature the model yields comparative statics results and hence testable implications the paper then tests between two opposing approaches about regulatory agency behavior the first assumes agencies operate independently of the legislature and hence exercise discretion the second assumes that congress controls agency decisions the recent behavior of the federal trade commission provides the empirical setting substantial evidence is found for the specific predictions of the model including the hypothesis of systematic congressional influence over ftc decisions

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

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

net foreign asset com position does financial development matter abstract we investigate the relationship between a country s domestic financial development and the composition of its net foreign asset position using a pooled mean group estimator and data for 50 countries for the 1970 2007 period the results show that financial development reduces a country s long run net foreign asset position in addition financial development leads to higher net equity and lower net debt positions these findings confirm the theoretical predictions of mendoza et al 2009 the results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship

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

technological progress and change in market concentration in the u s 1963 77 what effect does r d induced technological progress have on market structure do the concentration ratios the most used indices of market structure increase or decrease in an industry that is faced with a high level of technological opportunity and exploits it through a high rate of r d this paper focusses on a model by nelson and winter as a theoretical starting point to deal with this question in the nelson and winter model concentration increases as a result of dynamic competition in the technologically progressive industries but their model does not allow entry and the effect on concentration may be reversed if the possibility of entry is considered empirically this paper shows that concentration ratios in the high r d industries have decreased in the united states during 1963 77

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

the limits of independence and the policy of the ecb it is argued that the european central bank s independence is not as secure as it seems and that as a result it has appreciable institutional incentives to protect and enhance its position it follows that its behaviour should not be understood as being solely determined by the pursuit of price stability one consequence is that certain points on which it has been criticised on the basis that its approach makes for ineffective monetary policy might be better understood as often effective attempts to protect its position another is that making a central bank or any other institution completely independent may be much harder than it seems and failed attempts which come close are not necessarily to be preferred even by the advocates of independence to less ambitious designs

financial development and corporate growth in the eu single market the establishment of the eu 15 single market in 1993 brought about a high degree of similarity in firms growth opportunities across countries while substantial diversity existed in the development of national financial markets we compare within industry growth rates of similar single market firms facing financial systems of different depth and institutional quality as of 1993 moving from the least to the most developed financial market within the eu 15 boosts firms annual value added growth by about three percentage points our results also suggest that the growth gap due to initially underdeveloped financial systems was closed by 2003

real effects of bank capital regulations global evidence we examine the effect of the full set of bank capital regulations capital stringency on loan growth using bank level data for a maximum of 125 countries over the period 1998 2011 contrary to standard theoretical considerations we find that overall capital stringency only has a weak negative effect on loan growth in fact this effect is completely offset if banks hold moderately high levels of capital interestingly the components of capital stringency that have the strongest negative effect on loan growth are those related to the prevention of banks to use as capital borrowed funds and assets other than cash or government securities in contrast compliance with basel guidelines in using basel and credit risk weights has a much less potent effect on loan growth

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

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

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

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

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

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

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

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

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

capital market liberalization economic growth and instability summary this paper reviews briefly the arguments for capital market liberalization and identifies their theoretical and empirical weaknesses this provides the foundations for the argument for intervention in short term capital flows the paper concludes with a brief discussion of the various ways in which such interventions may be implemented 2000 elsevier science ltd all rights reserved

a political theory of regulation with some observations on railway abandonments one of the main themes of partisan dispute in the recent past and doubtless in the foreseeable future is whether or not the value of detailed governmental regulation of the economy exceeds the cost this is exactly the kind of dispute that might be resolved by raising it from the level of mere partisan interest to the level of economic and political science unfortunately however it has not been raised because we do not have the necessary intellectual apparatus namely a theory about the motivation for the operation of and the consequences of regulation as a result most of the discussion consists of biased ad hoc explanations of particular cases with little effort to formulate and test alternative generalizations we have therefore nothing but unresolved and unresolvable disputes about a more or less random collection of stories and some contradictory recipes about cause and effect

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

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

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

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

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

why do firms evade taxes the role of information sharing and financial sector outreach tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis we show that firms in countries with better credit information sharing systems and higher branch penetration evade taxes to a lesser degree this effect is stronger for smaller firms firms in smaller cities and towns firms in industries relying more on external financing and firms in industries and countries with greater growth potential this effect is robust to instrumental variable analysis controlling for firm fixed effects in a smaller panel data set of countries and many other robustness tests

financial integration specialization and systemic risk this paper studies the implications of cross border financial integration for financial stability when banks loan portfolios adjust endogenously banks can be subject to sectoral and aggregate domestic shocks after integration they can share these risks in a complete interbank market when banks have a comparative advantage in providing credit to certain industries financial integration may induce banks to specialize in lending an enhanced concentration in lending does not necessarily increase risk because a well functioning interbank market allows to achieve the necessary diversification this greater need for risk sharing though increases the risk of cross border contagion and the likelihood of widespread banking crises however even though integration increases the risk of contagion it improves welfare if it permits banks to realize specialization benefits

international financial integration and economic growth abstract this paper uses new data and new econometric techniques to investigate the impact of international financial integration on economic growth and also to assess whether this relationship depends on the level of economic development financial development legal system development government corruption and macroeconomic policies using a wide array of measures of international financial integration for 57 countries and an assortment of statistical methodologies we are unable to reject the null hypothesis that international financial integration does not accelerate economic growth even when controlling for particular economic financial institutional and policy characteristics

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

interest group demand for taxation researchers have typically ignored the determinants of the tax structure of the public sector political scientists have concentrated their analyses on the expenditure side of the public ledgers while economists have avoided the issue by assuming that taxes are exogenously determined in this paper we have shown that a behavioral model of political interest groups can be employed to gain insights into the political selection of taxes the theory provides a general complement to the well documented analysis of special interest demand for public expenditures our analysis raises several important policy questions first is the influence of interest groups on the determination of tax systems desirable from a public policy perspective for example special interest groups dominated by high and middle income individuals may prefer regressive tax systems which reduce their own tax burden certainly the impact of interest groups on the well known regressivity of state and local tax systems is an area worthy of additional investigation second does the influence of interest groups lead to tax systems that unduly hamper economic efficiency and retard economic growth for example governments with economies dominated by a single industry may forsake diversity and economic development by selecting a tax system favorable to the major industry interest group demand for taxes may be a factor in explaining long run regional cycles such as the rise and fall of heavy manufacturing states such as the upper midwest this research has established that a link exists between special interest group demand for taxation and the structure of local tax systems however the extent to which these groups influence tax systems and the exact nature of this influence requires further research additional research may also provide insights into the control e g constitutional or legislative of interest group influence on taxes should it be determined that such control is necessary

does trade globalization induce or inhibit corporate transparency unbundling the growth potential and product market competition channels abstract trade globalization may affect corporate transparency via multiple channels with potentially opposite signs we aim to empirically disentangle these channels by tracking evolution of corporate transparency for 4061 listed firms in tradable sectors in 49 countries during 1992 2005 by using detailed tariff schedules we measure changes in growth opportunities and product market competition enabled by foreign and domestic trade liberalizations respectively on the one hand higher growth opportunities engendered by foreign trade reforms are disproportionately associated with better corporate transparency in industries that depend more heavily on external financing on the other hand greater product market competition engendered by domestic tariff reductions has no significant impact on corporate transparency

why does the law matter investor protection and its effects on investment finance and growth investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow finance plays a role in causing these effects in countries with strong investor protection external finance increases more strongly with q and declines more strongly with cash flow we further find that q and cash flow sensitivities are associated with ex post investment efficiency investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities the paper s findings are broadly consistent with investor protection promoting accurate share prices reducing financial constraints and encouraging efficient investment in this paper we study how investor protection affects firm level resource allocations our analyses center on two hypotheses our first hypothesis is that stock prices more strongly predict both investment and external finance in countries with stronger investor protection laws tobin 1969 shows in a frictionless setting that marginal q predicts real investment in this framework high marginal q firms should all else equal also raise the most capital as these firms invest more we use average q q as a proxy for marginal q and test whether investment and external finance are more sensitive to q in countries with stronger investor protection laws

legal institutions and fragile financial markets abstract this study investigates equity liquidity variation with a funding constraint across 38 countries and examines whether the effectiveness of a country s legal institutions is systematically related to cross country differences in fragile equity liquidity our results show that firms from countries with more extensive disclosure requirements tend to have lower liquidity shocks due to funding constraints leading to higher firm value this effect is stronger for ex ante disclosures especially for countries with a high level of openness and market volatility our empirical results are robust to the 2sls regression model the random effect regression model the alternative measure of fragile equity liquidity and the alternative measure of disclosure and enforcement variables our study provides a better understanding of the effect of information environments amidst periods of funding constraint

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

does home bias affect firm value evidence from holdings of mutual funds worldwide this study finds strong evidence that home bias affects firm valuation at both country and firm levels at the country level increasing the bias of domestic investors toward home equity lowers the market valuation of home equity at the firm level firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms global market capitalization weights but decreases as their weights deviate from global weights overall the evidence is consistent with the optimal global risk sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation

heterogeneous borrowers in quantitative models of sovereign default we extend the model used in recent quantitative studies of sovereign default allowing policymakers of different types to stochastically alternate in power we show that a default episode may be triggered by a change in the type of policymaker in office and that such a default is likely to occur only if there is enough political stability and if policymakers encounter poor economic conditions under high political stability political turnover enables the model to generate a weaker correlation between economic conditions and default decisions a higher and more volatile spread and lower borrowing levels after a default episode

the impact of financial crises and tolerance for uncertainty abstract financial crises can have severe negative effects on investment one reason for this is that financial crises increase uncertainty increasing the real option value of delaying investment in this paper we show that the negative effect of crises on investment differs significantly across countries in countries with low tolerance for uncertainty the negative effect is strong the negative effect is absent in countries that are more tolerant of uncertainty these findings are similar across different types of financial crisis they vary as predicted across type of investor asset and industry and they are not driven by uncertainty averse countries adopting more rigid institutions

international financial integration through equity markets which firms from which countries go global the authors study international financial integration analyzing firms from various countries raising capital trading equity and cross listing in major world stock markets using a large sample of 39 517 firms from 111 countries covering the period 1989 2000 they find that although international financial integration increases substantially over this period only relatively few countries and firms actively participate in international markets firms more likely to internationalize are from larger and more open economies with higher income better macroeconomic policies and worse institutional environments these firms tend to be larger grow faster and have higher returns and more foreign sales while changes occur with internationalization these firm attributes are present before internationalization takes place the results suggest that international financial integration will likely remain constrained by country and firm characteristics

bond market evidence of time variation in exposures to global risk factors and the role of us monetary policy abstract this paper empirically shows that us monetary policy influences present and future exposures of developed markets government bond returns to measures of global systematic risk and thus affects the time variation of these returns this finding highlights spillovers from us monetary policy to us dollar denominated foreign assets and to foreign assets denominated in other currencies than the us dollar from an asset pricing perspective the evidence reveals that exchange rate risk and time variation in sensitivities to global bond market and exchange rate risk are important to describe time variation in developed markets government bond returns

the political economy of the essential air service program we find that congressional influences affect the amount of airport subsidies that a congressional district receives through the essential air service eas program the eas program was passed with the goal of helping to continue commercial air service to rural communities following deregulation in the 1970s using data from 1998 2014 we find strong and consistent evidence that subsidies are higher in districts having congressional representation on the house transportation and ways and means committees our empirical results when combined with news reports of members claiming credit for securing eas funding are consistent with the eas serving private and public interests

the allocation of death in the vietnam war a public choice perspective in this paper we explore a political aspect of military choices in time of war we do not question the political origin of a military draft we assume a draft exists our interest centers on the following issue what is the probability that an individual will become a casualty in the war we model this problem as being influenced by politics in the sense that assignment to combat or non combat positions can be influenced by political considerations simply put casualties across u s states will be a function of the political influence especially in military affairs of a state s house and senate delegations ceteris paribus to test this hypothesis we develop an empirical model of casualties by state over the zenith of the vietnam war period 1965 1971 the model includes both political influence and relevant demographic variables

reassessing the law finance and growth nexus after the recent great recession abstract the paper provides a reassessment of the relationship between financial structure financial development and economic growth conducting cross section and panel econometric analyses for a sample of 62 countries over 1980 2016 in line with the traditional literature we confirm the existence of a positive cross country relationship between the legal system financial development and growth even including the experience of the recent great recession in addition when jointly assessing the effect of financial structure and financial development on growth it emerges that a more bank oriented economy enjoys higher benefits in terms of long run real gdp per capita growth than a market oriented one when we consider variations across countries and over time we find that both financial structure and financial development affect growth but in an opposite way as the cross section analysis in particular when we control for their joint effect on growth we observe a positive impact of market based financial systems and a negative impact of the overall financial development we also provide evidence of the existence of a positive and significant relationship between economic growth and shadow banking during the 2002 2016 period highlighting the crucial role played by non bank financial intermediation in complementing traditional banking and in affecting the real economy

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