the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

underwriting by commercial banks incentive conflicts scope economies and project quality the authors study the issue of commercial bank underwriting of securities their analysis examines the incentive conflict faced by intermediaries that both lend and underwrite securities thereby imposing a cost on their customers seeking to raise capital despite this cost firms may choose to use such an intermediary if there are sufficiently large scope economies in combined lending and underwriting the authors demonstrate that the regulatory separation of such combined intermediation may be optimal if firms recognize the intermediary s subsequent incentive conflict when choosing projects to be funded and if there is a social cost to bank funding of poor quality projects they also examine the conditions for intermediaries reputation building to mitigate the incentive conflict without the need for regulation

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

on the benefits of concurrent lending and underwriting this paper examines whether there are efficiencies that benefit issuers and underwriters when a financial intermediary concurrently lends to an issuer while also underwriting its public securities offering we find issuers particularly noninvestmentgrade issuers for whom informational economies of scope are likely to be large benefit through lower underwriter fees and discounted loan yield spreads underwriters both commercial banks as well as investment banks engage in concurrent lending and provide price discounts albeit in different ways we find concurrent lending helps underwriters build relationships increasing the probability of receiving current and future business for many years the 1933 glass steagall act prevented commercial banks from underwriting corporate bonds and equities due to the relaxation and recent repeal of the act many commercial banks have acquired investment banks or developed investment banking capabilities internally to create universal banks that can offer an array of financial services the entry of commercial banks into underwriting markets has increased the potential for financial institutions to offer both lending and underwriting services in particular it has become increasingly common for financial intermediaries to provide loans to a firm while also underwriting the firm s public securities in fact concurrent lending and underwriting has increased substantially over time in 1994 only 1 of seasoned equity issuers received a loan from their underwriter at around the time of issuance but by 2001 over 20 of all deals were concurrent the movement toward concurrent lending and underwriting raises a host of interesting questions first why are deals concurrent

debt and taxes in the theory of public finance if a specified amount of government spending must be financed how should that finance be divided between taxes and government borrowing in the case of a temporary increase in government spending it has been argued that debt finance is optimal because the small increments in all future tax rates to finance interest payments involves a smaller excess burden than the single large tax rate increase that would be required to avoid an initial increase in the national debt this argument ignores the excess burden of debt finance that results if the initial capital stock is smaller than optimal e g because of taxes or capital income the first section of the present paper shows how the debt finance advantage of a small increase in tax rates can be explicitly balanced against the disadvantage of the excess burden that arises from additional debt the analysis shows that with plausible parameter values the excess burden of debt finance is likely to outweigh the advantage of avoiding a large single tax change and therefore that financing a temporary increase in government spending by an immediate tax increase is likely to be preferable to debt financing the second section examines the appropriate response to a permanent increase in government spending and shows that such spending cannot be financed by a permanent increase in government debt moreover whenever the golden rule level of capital intensity is an optimality condition independent of the level of government spending any increase in government spending should be matched by an equal increase in tax revenue this abstract was borrowed from another version of this item

on the simple economics of advertising marketing and product design we propose a framework for analyzing transformations of demand such transformations frequently stem from changes in the dispersion of consumers valuations which lead to rotations of the demand curve in many settings profits are a u shaped function of dispersion high dispersion is complemented by niche production and low dispersion is complemented by mass market supply we investigate numerous applications including product design advertising marketing and sales advice and the construction of quality differentiated product lines we also suggest a new taxonomy of advertising distinguishing between hype which shifts demand and real information which rotates demand

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

auditing and property rights third party auditprovides incentives to an agent whose actions affect the value of an asset when audit intensity and outcome are unverifiable we show that with interim participation constraints the optimal mechanism may use only the auditor s report disregarding the agent s information furthermore the auditor obtains the asset and the agent a monetary compensation when a high asset value is reported this suggests regulating renewable resources or utility networks by giving entrants the option to buy the right to use the asset at a predetermined price and financially rewarding incumbents for good performance

contracts with endogenous information abstract i study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition when posteriors satisfy two dimensional versions of the standard first order stochastic dominance and concavity convexity of the distribution function conditions a first order approach is justified under the same conditions informativeness and riskiness of reports are equivalent high powered contracts that make the agent s informational rents more risky are used to increase incentives for information acquisition insensitive contracts are used to reduce incentives for information gathering the value of information to the agent is always positive the value of information to the principal is ambiguous

on transparency in organizations when is it best for the principal to commit to not disclosing all that he she knows in moral hazard interactions i show that whenever the agent would choose the same action under complete information at several distinct states then full transparency can generically be improved upon this implies that full transparency is generically suboptimal whenever the dimension of the information held by the principal exceeds the dimension of the agent s action in a simple class of problems i make further progress on the best disclosure policy assuming the principal can either disclose fully the state or remain silent

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

fiscal forward guidance a case for selective transparency abstract should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents using dynamic general equilibrium models we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable announcing distortionary future policy shocks can be detrimental to ex ante social welfare whereas announcing non distortionary shocks generally improves welfare sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario however being secretive about distortionary shocks is time inconsistent and welfare loss from communication may be unavoidable

on the coexistence of banks and markets we examine the coexistence of banks and financial markets by studying a credit market where the qualities of investment projects are not observable and the investment decisions of entrepreneurs are not contractible standard banks can alleviate moral hazard problems while financial markets operated by investment banks can alleviate adverse selection problems in competition standard banks are forced to increase repayments since financial markets can attract the highest quality borrowers this in turn increases the share of shirkers and may make lending unprofitable for standard banks the coexistence of financial markets and standard banks is socially inefficient the same inefficiency may occur with the entrance of sophisticated banks operating with a combination of rating and ongoing monitoring technologies

transparency in agency the constant elasticity case and extensions this paper considers a hidden action agency problem where the principal has a single source of hidden information concerning the agent s utility the agent s effort productivity or the agent s cost of effort we examine whether the principal should precommit to disclosing these different single sources of information to the agent if the optimal contract is invariant over the hidden information and thus the disclosure rules constant elasticity case such disclosure increases the agent s utility it can raise or lower profit and total surplus depending on the source of hidden information and non disclosure can be optimal if disclosure affects the agent s motivation if the contract varies with the hidden information and thus disclosure rule disclosure or non disclosure can be optimal depending on whether the party s payoff is convex or concave in the information variable respectively

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

government deficits and aggregate demand abstract the evidence presented in this paper indicates that changes in government spending transfers and taxes can have substantial effects on aggregate demand the estimates also indicate that the promise of future social security benefits significantly reduces private saving each the basic implications of the so called ricardian equivalence theorem is contradicted by the data the results are consistent with the more general view of the effects of fiscal actions and fiscal expectations that is described in the paper

debt and tariffs an empirical investigation of the evolution of revenue systems abstract this paper presents a theoretical framework where government chooses fiscal structure so as to maximize political support and where the evolution of fiscal systems is determined by changing economic political and administrative factors estimating equations are derived and the model is used to explain the development of revenue structure in canada from 1871 to 1913 a period when major revenue sources consisted of the tariff debt and excises the empirical analysis distinguishes between government plans and ex post observations of public revenues and places particular emphasis on the derivation of hypotheses linking economic political and administrative variables to revenue structure

alternative forms of government expenditure financing a comparative welfare analysis this paper derives criteria for evaluating the impact of an increase in government expenditure on both the time path of instantaneous utility and overall welfare under alternative forms of tax financing these consist of three factors the first is the direct crowding out effect which reflects the utility differential between the government expenditure being undertaken and the private consumption it is displacing the second describes the intertemporal trade off between the effect on the short run rate of capital accumulation and the resulting change in the the long run capital stock the final term is due to the distortion arising from the pre existence of a tax on wage income copyright 1992 by the london school of economics and political science

public debt sustainability and alternative theories of interest this paper reappraises sustainable trajectories of public debt and fiscal balance with particular reference to the possible relations between the interest rate on debt and the growth rate of the economy from the standpoint of the approach to the theory of interest proposed by keynes and in a certain sense also by sraffa the analysis opens up the possibility of sustaining permanent primary budget deficits however the extent to which this standpoint enables one to revise the spectrum of feasible empirical magnitudes for sustainable fiscal balances appears rather modest copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

investment bank reputation information production and financial intermediation we model reputation acquisition by investment banks in the equity market entrepreneurs sell shares in an asymmetrically informed equity market either directly or using an investment bank investment banks who interact repeatedly with the equity market evaluate entrepreneurs projects and report to investors in return for a fee setting strict evaluation standards unobservable to investors is costly for investment banks inducing moral hazard investment banks credibility therefore depends on their equity marketing history investment banks evaluation standards their reputations underwriter compensation the market value of equity sold and entrepreneurs choice between underwritten and nonunderwritten equity issues emerge endogenously

the value of information in a principal agent model with moral hazard the ex post contracting case abstract in a principal agent model with moral hazard a signal about the principal s technology the stochastic mapping from the agent s action to the outcome is observed before the contract is offered the signal is either uninformative null information informative and observed only by the principal private information or also observed by the agent public information we show that from an ex ante standpoint before the signal is observed i the agent prefers private to both null and public information ii the principal sometimes prefers null to both private and public information and iii when the principal prefers public to null information she prefers public to private information whereas the agent prefers private to public information in this last situation we also show that iv for any separating equilibrium with private information there exists a contract with public information that both strictly prefer

the long term default performance of bank underwritten security issues abstract the glass steagall act of 1933 barred commercial banks and their affiliates from underwriting and dealing in securities activities amidst concerns that banks abused the trust of their depositors and clientele by systematically underwriting poor quality security issues this paper examines if these concerns were justified by studying the long term default performance of bank underwritten issues as compared to non bank underwritten issues the evidence shows that contrary to conventional wisdom bank underwritten issues defaulted less than non bank underwritten issues over a seven year period from the issue date and had a significantly lower mortality rate

informed principal moral hazard and the value of a more informative technology we analyze a principal agent model with moral hazard in which the principal has private information about the technology we characterize perfect bayesian equilibria of the contracting game that possess the following properties i a principal with a more informative technology ends up earning less profits than a principal with a less informative one does ii compared to the complete information case the actions implemented by the privately informed principal can be distorted iii the agent can end up being better off when the principal has private information

credit and efficiency in centralized and decentralized economies we study a credit model where because of adverse selection unprofitable projects may nevertheless be financed indeed they may continue to be financed even when shown to be low quality if sunk costs have already been incurred we show that credit decentralization offers a way for creditors to commit not to refinance such projects thereby discouraging entrepreneurs from undertaking them initially thus decentralization provides financial discipline nevertheless we argue that it puts too high a premium on short term returns the model seems pertinent to two issues soft budget constraint problems in centralized economies and differences between anglo saxon and german japanese financing practices

information reusability competition and bank asset quality this paper explains the recent decline in bank asset quality using the notion of information reusability banks are viewed as information processors they exist because of their advantage in extracting the surplus associated with the reusability of borrower specific information it is shown that a bank s incentive to screen loan applicants and hence maintain the quality of its assets depends on the surplus this screening can produce which in turn depends on information reusability two recent changes in banks operating environment are increased competitition and greater temporal volatility in borrower credit risks the former has directly reduced banks informational surplus while the latter has impaired information reusability hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets it is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality

on debt neutrality in life cycle models abstract a parallelism is established between pure life cycle models and those in which altruism is one sided in the discussion of the public debt neutrality it is argued that when indiduals behave as pure life cyclers the coercive transfers necessary to offset the effects of the debt have the same nature and take place under the same conditions as the voluntary intrafamily bequests and gifts which constitute the usual basis for the ricardian equivalence theorem

information control in the principal agent problem this paper compares the principal s payoff in agency models under different assumptions about the agent s access to information the agent may make decisions before is uninformed or after is informed learning the state of nature when there are two possible outcomes the principal typically prefers informed to uninformed agents whether the agent receives the information before or after contracting this result is false when there are more than two outcomes conditions under which a principal prefers one agent to another when the agents differ only in their disutility of effort are also given copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

corporate financial policy and the theory of financial intermediation this paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard multiple information problems are shown to generate a role for multiple classes of financial claimants we then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets consequlently our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions the purpose of this paper is to provide an analysis of the complementary roles of direct financial contract markets and intermediated financial contract markets in the modern theory of corporate finance the need to formulate such a model has been emphasized elsewhere by stiglitz 1985 and fama 1985 among others however an adequate explanation of this phenomenon has yet to be formulated the model described in this paper focuses on the role of multiple information problems in a theory of complex financial structure specifically in an environment with private action i e unobservable investment allocations and private information i e partially unobservable project cash flows multiple claimant classes arise to resolve the separate inefficiencies induced by moral hazard in our model the interaction of project risk and observability creates investment distortions which can be mitigated by increasing the number of outside claimant classes our results demonstrate explicitly the way in which a firm s optimal financial structure depends on the assumed configuration of an investment project s risk and observability characteristics under certain conditions we show that the optimal contractuai allocation in an economy with only direct financial contract markets consists of a debt contract and an outside equity claim this contractual configuration restores the efficient investment allocation decision we then consider the feasibility of an intermediated financial contract market in this setting we show that the existence of an intermediated financial contract market improves economic efficiency due to the reduced aggregate costs of

monitoring cross subsidies and universal banking abstract we formalize the idea that a financial conglomerate may utilize commercial banking activities to cross subsidize investment banking through bundled offers the investment banking sector entails supra normal profits due to incentive problems with security underwriting universal banks may aim to capture some of those profits by providing discounts on commercial loans this practice has an adverse effect on commercial banks monitoring incentives encouraging the pursuit of private rents by entrepreneurs it also leads to lower underwriting fees and a lower probability of successful public offerings the social welfare effects of universal banking can be either positive or negative

balanced government budgets versus deficit finance in a growth economy this paper analyses the effects of balanced budgets and deficit finance policies on the resulting steady state capital stock in a simple neoclassical growth model it is shown that the steady state capital stock may be higher or lower if the government is required to balance its budget in each period than if it uses deficit finance depending on the level of the initial capital stock and the curvature of the utility function of the representative agent