taxation and the allocation of risk inside the multinational firm abstract this paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm theoretically we identify three mechanisms through which corporate taxes may shape the within firm allocation of risk 1 transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low tax jurisdictions as a means to shift profits 2 risk averse owners create incentives to allocate risk to high tax affiliates to maximize risk sharing with governments 3 limited loss offset creates incentives to shift risk to affiliates in other countries empirically we show that multinational firms disproportionately allocate risk to low tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules within firm differences in risk explain a significant fraction of the well established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non negligible channel for profit shifting

a review of wta wtp studies abstract willingness to accept wta is usually substantially higher than willingness to pay wtp these constructs have been studied for roughly 30 years and with a wide variety of goods this paper reviews those studies we find that the less the good is like an ordinary market good the higher is the ratio the ratio is highest for non market goods next highest for ordinary private goods and lowest for experiments involving forms of money a generalization of this pattern holds even when we account for differences in survey design ordinary goods have lower ratios than non ordinary ones we also find that ratios in real experiments are not significantly different from hypothetical experiments and that incentive compatible elicitation yields higher ratios

the effects of tax convexity on default and investment decisions the objective of this article is to examine how default and investment triggers change under different levels of tax asymmetry when firms face nonlinear tax schedules under a convex tax schedule profits are taxed at a higher rate while losses are taxed or rebated at a lower rate thus reducing the risk shared by the government this article presents a dynamic model based on the contingent claims framework to explore the impacts of tax convexity on the triggers and we find that the impacts vary significantly depending on several countervailing forces tax convexity has a nonmonotonic relationship with both the default and investment triggers because of the government s risk sharing role the default trigger is higher when tax convexity increases while the growth option exerts a counteracting effect that lowers this trigger creating an ambiguity in the investment trigger when changing the level of tax asymmetry

irreversible investment and endogenous financing abstract we evaluate the effects of corporate taxation on firms investment and financing choices we focus on how the asymmetry of the corporate tax imperfect loss carry overs endogenous financing with credit constraints and different degrees of investment irreversibility affect both incremental investment and entry decisions we find that as long as capital can be financed with debt at the margin the tax distortions on the marginal investment decision are small this is particularly so if the technology is flexible in contrast the tax distortions on the entry decision are substantial the ability of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions

the significance of tax law asymmetries an empirical investigation this study uses tax return data for u s nonfinancial corporations for the period 1971 1982 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses our results suggest that the incidence of such unused tax benefits increased substantially during the early 1980s though we do not find these increases attributable to increased investment incentives during that period we present estimates of the marginal tax rate on interest payments which take into account unused tax benefits and emphasize the importance of distinguishing current tax payments from marginal tax rates in estimating the incentive to invest

counteroffers and efficiency in labor markets with asymmetric information this article considers the effect of offer matching on labor market outcomes when the current employer has better information about his worker s productivity than potential employers previous research found that when current employers have better information than potential employers the latter use job assignment to infer an employed worker s qualifications as a result assignment of workers to jobs is inefficient i find that when current employers can match outside offers the equilibrium outcome may be efficient i analyze the effect of the asymmetric information on investment in human capital made by employers and workers and find these investment levels to be first best

learning from coarse information biased contests and career profiles an organization s promotion decision between two workers is modelled as a problem of boundedly rational learning about ability the decision maker can bias noisy rank order contests sequentially thereby changing the information they convey the optimal final period bias favours the leader reinforcing his likely ability advantage when optimally biased rank order information is a sufficient statistic for cardinal information the leader is favoured in every period in other environments bias in early periods may i favour the early loser ii be optimal even when the workers are equally rated and iii reduce the favoured worker s promotion chances this paper presents a model of boundedly rational learning by an organization the aims are to represent in a simple form the costs of gathering processing or transmitting information and to analyse their implications for the procedures selected to handle information as well as for the decisions actually made like other recent work on the internal organization of firms this work explores to what extent organizational structure and behaviour as well as organizational performance can be explained by adaptation to the costs associated with information in the learning model we formulate the decision maker not only selects a rule specifying what action to take as a function of his observations but also chooses sequentially the information partitions generating those observations this general problem is interpreted in the context of an organization which needs to make an important promotion decision and which attempts to maximize the value of the information generated during the observation periods that precede the decision one of the motivations for this analysis was the finding by organizational sociologists that earnings and promotions in the later stages of a worker s career are strongly correlated with earnings and promotions in the early stages kanter 1977 rosenbaum 1984 later success is positively associated with early success even when one controls for the effect of observable characteristics likely to affect performance such as education one obvious source of this correlation is differences in ability that persist over time and that are not captured by the observable covariates in this paper we focus on differences in ability which are initially unobservable by organizations and their workers as well as by researchers we present a simple model of an organization trying to learn about differences in ability and show

an empirical analysis of risk incentives and the delegation of worker authority the authors empirically test prendergast s 2002 theory that incorporates the delegation of worker authority into the principal agent model to explain the lack of consistent empirical support for a tradeoff between risk and incentives using data from the 1998 british wers the authors investigate whether there is 1 evidence of a risk incentives tradeoff as predicted by the principal agent model 2 evidence of a positive relationship between incentive pay and the delegation of worker authority 3 evidence of a positive relationship between risk and authority 4 support for the main testable implication of prendergast s model namely that the evidence favoring a risk incentives tradeoff should strengthen when authority controls are added to the empirical model the answers are affirmative for all four questions thereby providing evidence clarifying the relationship between risk and incentive pay and how managers optimally bundle incentive pay and the delegation of worker decision rights to cope with

pay performance sensitivity and production uncertainty abstract the pay performance sensitivity of linear incentive contracts can increase with increasing production uncertainty depending upon the timing and nature of this uncertainty this provides a possible explanation for the failure of empirical tests to yield convincing support for a negative relationship

ex ante versus ex post optimal promotion rules the case of internal promotion i introduction the literature on promotion practices within the firm identifies two distinct roles for a firm s promotion policies promotions serve both as a way for the firm to efficiently assign workers to tasks and as a way for the firm to reward prior performance 1 in this article i explore the time inconsistency problem that arises as a result of the dual nature of the promotion decision in particular i show that the common practice of favoring internal candidates for promotion can be understood as a response by firms to the problem of time inconsistency 2 consider a firm in which promotions serve as a reward for prior expenditures of effort and or prior investments in human capital the optimal promotion policy for this firm depends on the time frame from which we view the problem the ex ante optimal promotion rule is the optimal rule when the problem is viewed from a date prior to young workers deciding to work at this firm this rule takes into account both the assignment aspects of the promotion decision and that promotions serve as a reward for prior performance there is a second relevant rule however because at the date of the promotion decision the effects of promotion serving as a reward for prior performance are in the past for example in a world where the possibility of future promotion serves to increase the effort levels of young workers by the time of the promotion decision those effort choices have already been made hence the ex post optimal rule only takes into account the assignment aspects of the promotion decision the time inconsistency problem that arises is now clear total profits are maximized when the firm follows the ex ante optimal promotion rule but in the absence of commitment this is not how the firm behaves at the time of the promotion decision the firm has an incentive to ignore the effects of promotion serving as a reward for prior performance and instead follow the ex post optimal rule in other words the profits of the firm are decreased because at the time of the promotion decision the firm maximizes current profits and the anticipation of this behavior by workers has deleterious effects on behavior in prior periods in this article i explore a specific example of this time inconsistency problem consider a firm s decision concerning whether to fill a managerial position by promotion from within or by hiring an outsider i show that when confronted with this decision the firm faces the exact situation described that is the ex post optimal rule shows no preference for promotion from within over hiring from the outside whereas the ex ante optimal rule exhibits a preference for promoting from within the logic here is that the possibility of receiving the higher managerial wage in the future reduces the wage required to attract young workers into the firm but only the ex ante optimal rule takes this into account the result is that in the absence of commitment the firm hires from the outside too often the conclusion is that the establishment of an internal labor market in which the firm favors promotion from within can be understood as a way that the firm avoids this time inconsistency problem this result extends a finding in malcomson 1984 that article also shows that an internal labor market in which hiring from the outside is restricted can arise in a world where promotion serves as a reward for prior performance in that work however there is no time inconsistency problem the reason is that malcomson assumes workers are homogeneous and thus at the time of the promotion decision it is weakly optimal for the firm to have all promotions be from within in contrast i assume that workers are heterogeneous and find that if the firm maximizes ex post profits it lowers total profits the result is an internal labor market that not only limits hiring from the outside but also constrains the firm to behave in a manner different from that which maximizes profits at the time the promotion decision is made

entrepreneurial innovations and taxation stimulating entrepreneurship is high on the policy agenda of many countries we study the effects of tax policies on entrepreneurs choice of riskiness or quality of an innovation project and on their mode of commercializing the innovation market entry versus sale limited loss offset provisions in the tax system induce entrepreneurs innovating for entry to choose projects with inefficiently little risk the same distortion does not arise when entrepreneurs sell their innovation in a competitive bidding process to an incumbent before the uncertainty is revealed tax systems which systematically favor market entry of entrepreneurs can thus lead to welfare losses due to inefficient quality choices despite leading to more competition in the product market

investment ramifications of distortionary tax subsidies abstract this paper examines the investment effects of tax subsidies for which some assets and not others are eligible distortionary tax subsidies concentrate investments in tax favored assets thereby reducing the expected pre tax profitability of investment and reducing payoffs to bondholders in the event of default anticipation of asset substitution encourages lenders to require covenants in debt contracts which only imperfectly address asset substitution and distort investment the result is that borrowing is made more expensive which in turn discourages investment borrowing rates can react so strongly that aggregate investment may rise very little or even fall in response to higher tax subsidies debt issued by u s firms in risk of default after the 2002 introduction of bonus depreciation for u s equipment investment contained many more covenants than in other periods a pattern that reversed when bonus depreciation was discontinued after 2004 furthermore firms at risk of default borrowed less and were more apt to lease capital than were other firms during the bonus depreciation period

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

up or out contracts a signaling perspective a firm will typically gather information concerning its own workers that is not available to other potential employers while other firms will attempt to reduce this information asymmetry by observing the actions of the initial employer i argue that this process can be important in environments characterized by up or out contracts in that the retention decision can serve as a signal of productivity the article investigates this argument in an environment where up or out contracts are employed because they provide workers with an incentive to accumulate general human capital and where learning takes place in a diffuse fashion

debt and the marginal tax rate abstract do taxes affect corporate debt policy this paper tests whether the incremental use of debt is positively related to simulated firm specific marginal tax rates that account for net operating losses investment tax credits and the alternative minimum tax the simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code tax regime shifts business cycle effects and the progressive nature of the statutory tax schedule using annual data from more than 10 000 firms for the years 1980 1992 i provide evidence which indicates that high tax rate firms issue more debt than their low tax rate counterparts

optimal tournament contracts for heterogeneous workers abstract we consider a rank order tournament between workers with different abilities under malcomson s self commitment property the employer optimally uses individual tournament prizes to extract rents from the workers without the self commitment property individual prizes are used to make the asymmetric competition less uneven by discriminating against the more able worker i e he is offered a lower winner prize than the less able worker in this spirit individual prizes serve as a substitute for handicaps

corporation tax asymmetries and investment evidence from uk panel data theoretical work has emphasised the potentially powerful impact of corporation tax asymmetries on investment behaviour but empirical work has mainly been confined to the measurement of effective tax rates this paper uses panel data from 597 u k companies to ask are tax asymmetries important to understanding observed investment behaviour an optimising investment model is developed and estimated both as a q equation and a euler equation in which the cost of capital appears careful modelling of asymmetries does not noticeably improve the empirical performance of these equations possible explanations are discussed

risk sharing vs incentives contract design under two sided heterogeneity we study the matching patterns between heterogeneous principals and agents in a principal agent model the resulting equilibrium relationship between risk and incentives could be negative positive or u shaped these results may provide an explanation for the absence of systematic empirical support for the standard risk model d 2005 elsevier b v all rights reserved

pay equality and industrial politics personnel managers often argue that equitable pay treatment manifested as wage compression is useful because it reduces disharmony among workers but it is far from obvious that a compressed salary structure is morale improving since better workers may feel disenchanted by this scheme however when workers rewards are based on relative comparisons salary compression reduces uncooperative behavior that is detrimental to the firm relative comparisons imply that some reference group must be selected the major result is that within the relevant groups some wage compression is efficient

cross border loss offset can fuel tax competition following recent court rulings cross border loss compensation for multinational firms has become a major policy issue in europe this paper analyzes the effects of introducing a coordinated cross border tax relief in a setting where multinational firms choose the size of a risky investment and host countries non cooperatively choose tax rates we show that coordinated cross border loss compensation may intensify tax competition when following current international practice the parent firm s home country bases the tax rebate for a loss making subsidiary on its own tax rate in equilibrium tax revenue losses may thus be even higher than is implied by the direct effect of the reform in contrast tax competition is mitigated when the home country bases its loss relief on the tax rate in the subsidiary s host country

firm s output under uncertainty and asymmetric taxation we consider competitive firms operating under price uncertainty when taxation is asymmetric i e profits are taxed at a higher rate than losses are compensated in the absence of risk sharing tools the larger gap in taxation may either lower or increase the firm s optimal output depending on whether the relative measure of risk aversion is less than or larger than 1 in the presence of risk sharing markets optimal output does not depend on the tax rates nor on the price distribution or the firm s attitude towards risk the firm will engage in hedging and as a result will lower its expected taxes

work incentives hierarchy and internal labor markets this paper argues that contracts with payment based on a ranking of employee performance can provide performance incentives even under asymmetric information that prevents payment based on individual performance only being enforceable such contracts also fit with five features of labor markets that have aroused considerable interest 1 hierarchical wage structures 2 internal promotion 3 wage rates that rise with seniority and experience more than productivity 4 the variance of earnings increasing with experience and 5 wage rates attached to jobs rather than individuals with differentials set by administrative procedures rather than by reference to external market wages

an opposing responses test of classic versus market based promotion tournaments we use a systems based econometric method to show that classic and market based tournament models are empirically distinguishable since the role of risk differs across these models implementing the method using a large finnish worker firm matched panel we find support for classic tournaments given that promotions depend on relative performance the firm s wage structure is convex promotion probabilities are decreasing in the number of competitors performance is increasing in the wage spread and workers and firms adjust their choice variables in opposite directions when the variance of the stochastic component of worker performance changes

investment incentives and corporate tax asymmetries abstract recent facts on the importance of corporate losses motivate more careful study of the impact of tax incentives for investment on firms that lose money i model firm investment decisions in a setting featuring financing constraints and carrybacks and carryforwards of operating losses i estimate investment responses to tax incentives allowing effects to vary with cash flows and taxable status results suggest that asymmetries in the corporate tax code could have made recent bonus depreciation tax incentives at most 4 less effective than they would have been if all firms were fully taxable cash flows have more important effects on the impact of tax incentives recent declines in cash flows would predict a 24 decrease in the effectiveness of bonus depreciation results thus suggest that tax incentives have the smallest impact on investment exactly when they are most likely to be put in place during downturns in economic activity when cash flows are low

job discrimination market forces and the invisibility hypothesis the invisibility hypothesis holds that the job skills of disadvantaged workers are not easily discovered by potential new employers but that promotion enhances visibility and alleviates this problem then at a competitive labor market equilibrium firms profit by hiding talented disadvantaged workers in low level jobs consequently those workers are paid less on average and promoted less often than others with the same education and ability as a result of the inefficient and discriminatory wage and promotion policies disadvantaged workers experience lower returns to investments in human capital than other workers

promotion turnover earnings and firm sponsored training i develop a model in which different technological conditions lead to distinct equilibria with different patterns in labor mobility promotion earning distribution and provision of firm sponsored training key is the asymmetric learning of workers characteristics because of the information that is conveyed to the market by promotion firms have incentives to adopt strategic promotion policies which result in different patterns in the use of internal labor market the theory explains well the differences between the japanese and the united states labor markets

corporation tax finance and the cost of capital this paper examines the influence of corporate tax exhaustion on the firm s financial and investment decisions a dynamic programming model is used to establish effective marginal tax rates in the presence of a tax system that permits the carry forward of losses to future periods the paper demonstrates that internal optimal financial structures may result which do not require the imposition of external constraints the cost of capital is highly sensitive to the current taxable earnings of the firm and the implications of this for such tax transfer activities as leasing are discussed

corporate hedging under a resource rent tax regime in addition to the ordinary corporate income tax special purpose taxes are sometimes levied to extract abnormal profits arising from the use of natural resources such dual tax regimes exist in norway for oil and hydropower where the corresponding special purpose tax bases are unaffected by any derivatives payments dual tax firms with hedging programs therefore face the risk of potentially large discrepancies between the tax bases for corporate income tax and special purpose tax i investigate how this tax base asymmetry influences the extent of hedging of value maximizing firms facing hedgeable as well as unhedgeable risk dual tax firms facing deadweight costs in low profit events generally demand less hedging than ordinary firms but otherwise respond similarly to characteristics of the underlying risk exposures the special purpose tax does not influence firms hedge portfolios in the absence of deadweight cost

proxies for the corporate marginal tax rate abstract this paper focuses on how best to measure the corporate marginal tax rate which is an important input into financial analysis of the cost of capital financing policy corporate hedging and corporate reorganizations the results indicate that the simulated tax rate used by shevlin 1990 and graham 1996 although difficult to calculate is the best available proxy for the true marginal tax rate if the simulated rate is unavailable an easy to calculate trichotomous variable or the statutory marginal tax rate which captures the progressivity in the tax schedule are reasonable alternatives better than most commonly used tax variables

corporate tax incentives and capital structure new evidence from uk firm level tax returns abstract we investigate how companies capital structure is affected by corporate income taxes using confidential company level tax returns for a large sample of uk firms exploiting variation in companies marginal tax rates we find a positive and substantial long run tax effect on leverage leverage responds more to decreases in the marginal tax rate and it responds to changes in the marginal rather than the average tax rate most importantly we find that the marginal tax rate based on tax returns has greater explanatory power for companies leverage than the marginal tax rate based on financial statements our study suggests that errors in the measurement for tax incentives using financial statements could lead to underestimation of the tax effects on capital structure

an evaluation of alternative measures of corporate tax rates abstract this paper examines the ability of financial statement measures of average and marginal tax rates mtr to capture tax attributes utilizing firm level tax and financial data the results suggest commonly used average tax rate measures provide little insight about statutory tax burdens and may introduce substantial bias into analyses of tax incidence financial statement based proxies for mtr particularly those based on simulation methods are found to perform well in estimating current year tax rates both current year and present value mtr are found to be highly correlated with an easily constructed binary proxy of firms tax status

the choice of organizational form by closely held firms in sweden tax versus non tax determinants this article makes use of individual data from 2004 to 2008 on owners of closely held businesses in sweden to estimate the role of both tax and non tax determinants in the choice to be a closely held corporation chc versus a proprietorship although lower income individuals face relatively neutral incentives higher income households face strong tax incentives to be corporate the data suggest a strong response to these tax incentives many conventional non tax determinants are confirmed in the data as well copyright 2013 the author 2013 published by oxford university press on behalf of associazione icc oxford university press

how much do taxes discourage incorporation the double taxation of corporate income should discourage firms from incorporating we investigate the extent to which the aggregate allocation of assets and taxable income in the united states between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959 1986 in theory profitable firms should shift out of the corporate sector when the tax distortion is large and conversely for firms with tax losses our empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue one of the most basic distortions created by the double taxation of corporate income in the united states is the disincentive to incorporate even in most countries with integrated or partially integrated tax systems there are differential taxes across organizational forms however obvious this distortion may be most articles investigating the distortions created by the corporate tax have taken as exogenous a firm s choice whether or not to incorporate assuming for example that some industries are inherently corporate while others are inherently noncorporate a variety of nontax factors described below can certainly influence a firm s choice of organizational form causing some to favor incorporating and others not but are these nontax factors so dominant that taxes do not in practice influence a firm s choice of organizational form as gravelle and kotlikoff 1989 1993 emphasize tax induced changes in firms choices of organizational form in principle can create large excess burdens the size of these excess burdens in practice depends on the extent to which firms respond to these tax incentives in this article we calculate how the tax distortion discouraging firms from incorporating has varied over time then estimate the extent to which the allocation of assets and taxable income between corporate and noncorporate

on the implications of introducing cross border loss offset in the european union abstract this article investigates a tax competition model where countries compete for capital and profits of multinational enterprises mnes through statutory tax rates and cross border loss offset provisions which allow a transfer of foreign subsidiaries losses to the parent company a joint implementation of full cross border loss relief is welfare maximizing because it ensures production efficiency and no profit shifting in equilibrium local governments choose zero level of the loss relief in a noncooperative equilibrium if only capital is mobile and relax the loss offset when mnes engage in profit shifting therefore allowing multinationals to undertake international tax planning activities may be welfare improving in our model

the league composition effect in tournaments with heterogeneous players an empirical analysis of broiler contracts we compare welfare effects of tournaments and piece rates in contracts with heterogeneous ability agents and demonstrate that tournaments that mix players of unequal abilities create a league composition effect when leagues are fixed and the time horizon sufficiently long piece rates improve welfare over tournaments using contract production data for broiler chickens we estimate the variances of growers abilities common production shock and grower s idiosyncratic shock growers abilities are heterogeneous and common production shocks are significant leagues in broiler tournaments disintegrate rapidly over time suggesting that tournament contracts offer more welfare than piece rates

external recruitment versus internal promotion this article analyzes the choice between internal promotion and external recruitment within the framework of an economic contest opening up the competition for a position to external candidates re