capital taxation and government debt policy with public discounting abstract this paper characterizes capital taxation and public debt policy in a quantitative macroeconomic model with an impatient government and uncertainty the government has access to linear taxes on capital and labor and to non state contingent bonds government impatience generates positive and empirically realistic long run levels of both capital taxes and public debt prior predictive analysis shows that the simulated model matches the distribution of both variables in a sample of 42 countries alongside other statistics the paper then presents econometric evidence that countries with higher political instability used as an approximation of unobservable public discount rates have both higher capital taxes and debt

is agency theory self activating this article examines the conditions under which the principal agent model is self activating socially causal we do so by exploring a principal agent framework that allows for the possibility that rational agents may hold intrinsic preferences for autonomy in decision making and experience disutility from being monitored using a dynamic model of preference formation we identify conditions under which the principal agent model is self activating in that over time the introduction of the model in an otherwise efficient monitor worker relationship leads to the inefficient adoption of the agency model we also examine the extent to which the agency model is robust when autonomy preferring agents are introduced into the population jel g30 l20 c72 i introduction as a social science economics seeks to both explain and influence behavior this in turn fosters a constructive process of self assessment of the economic approach to decision making for example in examining the effect of exposure to economics and differences in cooperativeness in the prisoner s dilemma frank gilovich and regan 1993 report that economics students were statistically more likely to frame the objective of the game in self interested terms and to refer exclusively to the features of the game itself in explaining their strategy choices rather than considering issues such as fairness trust or social norms frey and meier 2003 offer a more distilled view they use a nonlaboratory experiment voluntary student contributions to two university funds with an eye toward examining whether self interested students self select into economics selection bias or self interested behavior is a consequence of indoctrination surprisingly their most significant variable was the study of business economics which obviated both the self selection and indoctrination effects by contrast those with primary training in political economy exhibited neither effect in examining a dilemma in which subjects were forced to weigh their commitment to profit maximization against concern for workers who would be fired as a consequence of profit maximization during a time of high unemployment rubinstein 2006 found that economics students were statistically more likely to adhere to the profit maximization criterion similarly israeli readers of a business daily who had a ba in economics or an mba laid off more workers in the same survey one area where economic theory has played a significant role in both framing the issues and training the affected parties is executive compensation particularly the principal agent model beginning with berle and means 1932 agency theorists have recognized the need to overcome problems stemming from the separation of ownership and control in public corporations for example jensen and meckling 1976 further not only are the lessons from the principal agent model widely taught but its operationalization is also recognized within the popular press as the intellectual foundation for the shareholder value movement within corporate america as well as the doubling of the number of chief executives who were offered stock option plans from 1980 to 1994 1 whether seen as the embodiment of best practice or as the impetus for corporate avarice it cannot be denied that the operationalization of agency theory has revolutionized the culture of corporate america further bebchuck and fried s 2004 finding that the design of compensation schemes creates its own agency problems reinforces the core assumption of opportunistic behavior in agency theory the principal agent model is an example of a widely disseminated theory in which those who are exposed to it are expected both to put it into practice and have it practiced on them consequently the model raises expectations about the usefulness and occurrence of incentive based compensation schemes through its underlying assumptions about agents opportunism

public trust the law and financial investment abstract how does trust evolve in markets what is the optimal level of regulation and how does this affect trust formation and economic growth in a theoretical model we analyze these questions given the value of social capital and the potential for growth in the market when social capital is valuable regulation and trustfulness are substitutes in this case regulation may cause lower aggregate investment and decreased economic growth when the social capital is less valuable regulation and trustfulness may be complements in the paper we analyze the optimal level of regulation and highlight the novel predictions of the model

political instability and savings in less developed countries evidence from sub saharan africa a four equation model is used to investigate the effects of political instability pi on the savings rate in sub saharan africa utilising a comprehensive measure of pi we find that political instability has a deleterious effect on the savings rate both directly and indirectly through a reduction in investment and economic growth the negative effects of pi on savings rate occurs contemporaneously as well as with a lag we also find that economic growth has a stabilising effect on the political system and that not accounting for these effects through a simultaneous equations model results in biased coefficient estimates these relationships are robust with respect to model specification the implication of our results is that economic factors alone cannot explain the development process in less developed countries

development and inequality revisited three decades after the seminal article of kuznets 1955 and one decade after the empirical investigation of ahluwalia 1976b the relationship between income inequality and economic developement is still controversial this paper examines the above relationship within a time series cross section framework in a sample of countries which are representative of the non centrally planned economies of the world we use gdp per capita in real un international comparison project dollors as an indicator of a country s level of economic development the results lend support to the kuznets inverse u hypothesis although other factors relfecting the institutional setting of a country are found to affect income inequality significantly during the development process as well similar results are obtained if we exclude developed countries from the sample

pension regulation and the market value of pension liabilities a contingent claims analysis using parisian options abstract we analyze the market consistent valuation of pension liabilities in a contingent claim framework whereby a knock out barrier feature is applied to capture early regulatory closure of a pension plan we investigate two cases which we call immediate closure procedure and delayed closure procedure in an immediate closure procedure when the assets value hits the regulatory boundary the pension plan is terminated immediately whereas in a delayed closure procedure a grace period is given to the pension fund for reorganization and recovery before premature closure is executed the framework is then used to construct fair pension deals furthermore we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability

inequality and the instability of polity and policy we create alternative measures of political instability which capture only movements from dictatorship to democracy and vice versa and unlike older well known measures does not capture government changes that preserve the democratic or dictatorial structure of the country we show that inequality is positively correlated with our measures of political instability as well as with a well known measure used by alesina and perotti but the impact of inequality on the latter is only through components of political instability captured by our measures we show that our measures have significant policy implications political instability increases both fiscal and trade polity volatility

income distribution political instability and investment abstract this paper successfully tests on a sample of 71 countries for the period 1960 85 the following hypotheses income inequality by fuelling social discontent increases sociopolitical instability the latter by creating uncertainty in the politico economic environment reduces investment as a consequence income inequality and investment are inversely related since investment is a primary engine of growth this paper identifies a channel for an inverse relationship between income inequality and growth we measure socio political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two equation model in which the endogenous variables are investment and an index of socio political instability our results are robust to sensitivity analysis on the specification of the model and the measure of political instability and are unchanged when the model is estimated using robust regression techniques

pension plan accounting estimates and the freezing of defined benefit pension plans abstract this study provides evidence that when hard freezing their defined benefit pension plans employers select downward biased accounting assumptions to exaggerate the economic burden of their benefit plans downward biased expected rates of return and discount rates allow managers to increase reported pension expenses and for discount rates allow managers to increase reported pension liabilities we find that prior to the sarbanes oxley act both rates are downward biased when firms freeze their plans whereas after sox the bias is lower this finding is consistent with managers opportunistically biasing pension estimates to obtain labor concessions during periods of reduced regulatory scrutiny

the impact of the arab spring on the tunisian economy this paper uses synthetic control methodology to estimate the output loss in tunisia as a result of the arab spring the results suggest that the loss was 5 5 percent 5 1 percent and 6 4 percent of gdp in 2011 2012 and 2013 respectively these findings are robust to a series of tests including placebo tests and are consistent with those from an autoregressive distributed lag model of tunisia s economic growth moreover this paper finds that investment was the main channel through which the economy was adversely impacted by the arab spring

regulation and pension fund risk taking abstract we investigate the extent to which regulations governing investment valuation and funding affect the riskiness of defined benefit pension funds asset allocation we compare the regulatory frameworks of public corporate and industry pension funds in the united states canada and the netherlands over 1992 2011 derived from panel data analysis of a unique set of asset allocation details for close to 600 funds our results highlight that regulatory factors are more economically significant than pension funds characteristics in shaping asset allocation in particular risk based capital requirements and mark to market valuation are both associated with a 7 lower risky asset exposure especially equities regardless of market conditions by contrast the exposure of a pension fund subject to a 100 funding requirement does not differ significantly from that of an unconstrained pension fund during normal times but the constrained pension fund invests 4 less in risky assets during a financial crisis in line with theoretical predictions we find that risk based capital requirements and minimum funding limits have different consequences for pension funds risk taking

inequality growth and democracy the analysis of the relationship between inequality and economic growth in distinct politi coeconomic environments has been one of the central preoccupations of the extensive theoretical and empirical work on growth in the last decade the authors argue that the empirical evidence available to date strongly indicates the relevance of this work for understanding the elusive causal connection between economic development and democracy the state of the literature suggests considerable sophistication in conceptualizing the direct economic effects of inequality and contains critical insights into politically unconstrained policy making aimed at the alleviation of their negative economic impact however the political feasibility of the recommended policy measures and the politically mediated effects of inequality and redistributive policy on growth and on the strength and stability of democratic regimes are understood less well the authors discuss the critical factors influencing these effects and sketch several approaches to creating a comprehensive politicoeconomic account of the interaction between inequality redistributive policy making and political regimes

inequality and democracy why inequality harms consolidation but does not affect democratization under what conditions do democracies emerge and consolidate recent theories suggest that inequality is among the leading determinants of both democratization and consolidation by contrast this article argues that inequality harms consolidation but has no net effect on democratization the author shows that the existing theories that link inequality to democratization suffer from serious limitations 1 they are useful only for understanding transitions from below and thus do not apply to many other transitions that is those from above 2 even for democratization from below their predictions are unlikely to hold since inequality actually has two opposite effects and 3 they ignore collective action problems which reduces their explanatory power however these objections do not affect the relationship between inequality and consolidation in particular while inequality has two opposite effects on the probability of transition to democracy it unambiguously increases the probability of transition away from democracy this article conducts the most comprehensive empirical test to date of the relationship between inequality and democracy it finds no support for the main democratization theories contrary to what they predict estimation suggests neither a monotonic negative nor an inverted u shaped relationship yet inequality increases the probability of backsliding from democracy to dictatorship

does income polarization affect economic growth the case of the european regions ezcurra r does income polarization affect economic growth the case of the european regions regional studies this paper examines the relationship between income polarization and economic growth in the regions of the european union over the period 1993 2003 the results indicate that the level of income polarization is negatively associated with regional growth this finding is in fact robust to various alternative specifications including a number of additional explanatory variables such as initial per capita gross domestic product industry mix human capital stock population density or market potential furthermore it should be noted that the observed negative correlation between polarization and economic performance does not depend on the number of groups used to analyse the degree of income stratification within the sample regions ezcurra r la polarisation des revenus affecte t elle la croissance economique le cas des regions europeennes regional studies cet article etudie les relations en

consumer activism producer groups and production standards we examine competition between groups of producers when consumers prefer costly ethical production technologies consumers are unable to identify or monitor production technologies producers can freeride on their group s reputation by substituting cheaper unethical technologies when an ethical technology is pareto optimal social pressures within competing producer groups can ensure long run dominance of groups relying most heavily on the ethical technology even if social pressures cannot support the choice of the ethical technology in the long run competition between producer groups can increase the average level of adoption of the ethical technology for an arbitrarily long period of time

have the tax benefits of debt been overestimated abstract we re examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields we show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions we develop improved estimates of marginal tax rates using a non parametric procedure that produces more accurate estimates of the distribution of future taxable income we show that additional debt would provide firms with much smaller tax benefits than previously thought and when expected distress costs and difficult to measure non debt tax shields are also considered it appears plausible that most firms have tax efficient capital structures

household behaviour in times of political change evidence from egypt abstract using representative household survey data we study the short term effects of the 2011 egyptian uprisings on household behaviour in terms of education and health expenditure as well as savings we construct a measure of political instability by analysing the number of fatalities during political protests throughout the country difference in difference estimations show that affected households increased spending on education especially on their sons higher education the increase in education expenditure is particularly prominent in areas where households were in favour of a regime change we argue that after the fall of mubarak those households had a positive outlook towards the future with better labour market prospects and therefore invested more in their sons education at the same time households decreased spending on health and increased savings which can be interpreted as precautionary behaviour our results are robust to placebo tests excluding cairo spillovers and alternative ways of measuring political instability

trust social capital and economic development many argue that elements of a society s norms culture or social capital are central to understanding its development however these notions have been difficult to capture in economic models here we explore ap ossible role for trustworthiness as corresponding to social capital individuals are trustworthy when they perform in accordance with promises even if this does not maximize their payoffs the usual focus on incentive structures in motivating behaviour plays no role here instead we emphasize more deep seated modes of behaviour and consider trustworthy agents being socialized to act as they do to model this socialization we borrow from a process of preference evolution pioneered by bisin and verdier 2001 the model developed endogenously accounts for social capital and explores its role in the process of economic development it captures in a simple formal way the interaction between social capital and the economy s productive processes the results obtained caution against rapid reform and provide an explanation for why late developing countries may not easily be able to transplant the modes of production that have proved useful in the west

principals preferences for agents with social preferences abstract this study explores a nested representation of ethical moral social identity motivated opportunistic and reciprocal agent preferences to characterize screening contracts in a principal agent model under adverse selection this leads to a ranking of the type of social preferences that principals should seek in agents based upon the information rents associated with each agent type when moral hazard is introduced the ranking further depends upon the interaction of limited liability with self selection these results are interpreted in light of the 2010 dodd frank act and principal agent experiments

determinants of corporate pension funding strategy abstract several hypotheses concerning pension funding strategy are tested in a cross sectional regression model on a sample of 255 firms results are consistent with the following explanations 1 finance incentives tax benefits and financial slack for high level funding 2 labor incentives for low level funding and 3 financial statement incentives relating to political costs for high level funding and debt contracting costs for low level funding pension funding strategy appears to be complex involving tradeoffs between funding incentives the nature of these interactions and tradeoffs remains to be clarified through future research

is income inequality harmful for regional growth evidence from the european union this article examines the relationship between income inequality and economic growth in the regions of several european union countries over the period 1993 2002 using the information provided by the european community household panel taking into consideration the relevance of spatial effects in this context different versions of a spatial econometric model are estimated the results indicate that the degree of income dispersion is negatively associated with regional growth this finding is in fact robust to various alternative specifications including a number of additional explanatory variables such as initial per capita gdp the sectoral composition of economic activity human capital stock population density and market potential furthermore the observed negative correlation between income inequality and economic performance does not depend on the specific measure used to quantify the degree of income dispersion

crossroads the myth of a monolithic economics fundamental assumptions and the use of economic models in policy and strategy research in 1990 in the first issue of organization science paul hirsch and his co authors ray friedman and mitchell koza published a caveat to researchers about possible pitfalls of using economic models in behaviorally oriented strategy and policy research hirsch et al 1990 crossroads provides a context for a reply to this paper and todd zenger and william hesterly have taken the opportunity to do so they seek to clarify where economics stands with respect to fundamental assumptions about humans organizations markets and investors they concur with many of hirsch friedman and koza s 1990 warnings concerning the adoption of unrealistic assumptions but disagree that the assumptions they impute to economics are universally held by economic models particularly those models most often used by strategy and policy researchers zenger and hesterly show that there are significant differences among economic theories in their fundamental assumptions finally they suggest how strategy and policy researcher

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

does income inequality raise aggregate saving this paper reviews analytically and empirically the links between income distribution and aggregate saving consumption theory brings out a number of direct channels through which income inequality can affect overall household saving positively in most cases however recent political economy theory points toward indirect negative effects of inequality through firm investment and public saving on aggregate saving on theoretical grounds the sign of the saving inequality link is therefore ambiguous this paper presents new empirical evidence on the relationship between income distribution and aggregate saving based on a new and improved income distribution database for both industrial and developing countries the empirical results using alternative inequality and saving measures and various econometric specifications on both cross section and panel data provide no support for the notion that income inequality has any systematic effect on aggregate saving these findings are consistent with the theoretical ambiguity q 2000 elsevier science b v all rights reserved

conspicuous by its absence ethics and managerial economics this paper gives prescriptions for introducing ethical concerns into the economic theory of the firm topics include social responsibility corporate governance profit maximization competition barriers collusion the market system and welfare economics the need for such prescriptions is based on a content analysis of 21 managerial economics texts for their coverage of ethics my analysis finds that substantive discussions of ethics are conspicuous by their absence as ethical breaches can involve significant monetary damages to a firm particularly through adverse market reactions moral reasoning abilities can complement analytical skills consequently my analysis demonstrates how ethics figure into the opportunity costs of managerial decision making which is central to the economic definition of profit

institutional and individual investors saving for old age this paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the special issue this introductory article and the papers in the special issue contribute to the debate on how to support individuals in their savings commitments and investment decision making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry there are three main conclusions i individual investors are not ready for the role that has been assigned to them in the pension industry ii institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients and iii more effective regulation may be needed

earnings manipulation pension assumptions and managerial investment decisions managers appear to manipulate firm earnings through their characterizations of pension assets to capital markets and alter investment decisions to justify and capitalize on these manipulations managers are more aggressive with assumed long term rates of return when their assumptions have a greater impact on reported earnings firms use higher assumed rates of return when they prepare to acquire other firms when they are near critical earnings thresholds and when their managers exercise stock options changes in assumed returns in turn influence pension plan asset allocations instrumental variables analysis indicates that 25 basis point increases in assumed rates are associated with 5 percent increases in equity allocations

government spending and the distribution of economic growth in the united states total government spending and especially government social spending has increased greatly over the last 50 years what effect this has had on economic growth is a subject of intense debate among politicians policymakers and economists however there has been less attention paid to the distributional effects of government spending even though economic inequality has grown greatly over the last generation and much social spending is at least indirectly intended to reduce inequality the effects of government social spending in the united states on growth in family income at deciles of the income distribution were estimated the results suggested that social spending but not non social spending was likely to increase growth in family income per capita measured over 10 year intervals the largest effects of social spending were for deciles below the median income at no point in the distribution does social spending have a negative effect

what determines corporate pension fund risk taking strategy abstract corporate sponsors of defined benefit pension plans generally assume low investment risk when they have low funding ratios and high default risk consistent with the risk management hypothesis however for financially distressed sponsors and sponsors that freeze terminate or convert defined benefit to defined contribution plans the risk shifting incentive moral hazard dominates pension fund risk taking is also affected by labor unionization and sponsor incentives to maximize tax benefits restore financial slack and justify the accounting choices of pension assumptions sponsors shift toward an aggressive risk strategy when their pension plans emerge from underfunding bankruptcy risk is reduced or marginal tax rate decreases overall we show that corporate sponsors adopt a dynamic risk taking strategy in their pension fund investments

the political economy of growth a critical survey of the recent literature this article reviews the recent literature on the political economy of growth focusing on the research that has developed at the intersection of the endogenous growth literature and the new political economy it explores the relationship among four key variables economic growth and capital accumulation political instability political freedom and democratic institutions and income inequality

the integration of insurance and taxes in corporate pension strategy this paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy it is shown that neither the mini max nor the maxi min strategy advocated by previous authors is necessarily best in corporate pension management in the presence of capital market imperfections the analysis via a single period contingent claims model indicates that optimal corporate pension strategy in both asset allocation and funding decisions can be a noncorner interior solution since the passage of the employee retirement income security act erisa in 1974 considerable attention has been given to the development of optimal strategies for corporate pension management under erisa the corporate pension liabilities have become parts of corporate liabilities and consequently the management of corporate pension plans has become an integral dimension of the overall corporate financial policy at present corporate pensions are subject to special tax treatments in the internal revenue code as well as various erisa regulations therefore it is important to analyze the complex tradeoffs among various explicit and implicit benefits and costs in order to derive an optimal corporate pension strategy several important contributions in the area of corporate pension strategy have been developed in finance and economic literature for instance sharpe 18 has shown that in the absence of taxes and under the current structure of a fixed insurance premium charged by the pension benefit guaranty corporation pbgc the insurance effect calls for the mini max corporate pension strategy that involves a minimum level of pension plan funding and a maximum level of pension investment in risky assets conversely black 1 and tepper 19 have argued that in the absence of default risk and pension insurance the tax effect calls for the maxi min corporate pension strategy that suggests a maximum level of plan funding and a minimum level of investment in the lowtax risky assets in their recent work harrison and sharpe 8 and marcus 12 have shown that the corner solutions in pension strategy are optimal even when the insurance and tax effects are considered jointly the purpose of this study is to examine the joint insurance and tax effects on corporate pension strategies in the presence of some relevant market imperfections the single period contingent claim analysis is applied to examine these important effects on corporate pension strategies

income distribution and sociopolitical instability as determinants of savings a cross sectional model the purpose of this cross national study is twofold first it introduces income distribution and sociopolitical instability as arguments in the savings function second it presents some empirical evidence in relation to their quantitative effects on savings it is shown that sociopolitical instability has profound effects on the savings ratio it is also shown that the bulk of savings is produced by the middle income class as a result a redistribution of income at the expense of the upper income class yields a constant or an increased savings ratio developing on whether such a redistribution includes the lower income class or not

sociopolitical instability and the behavior of savings in less developed countries the paper argues for the introduction of sociopolitical instability as a factor in explaining saving behavior it also provides empirical evidence in regard to the quantitative and qualitative relationship between these two variables the empirical results point towards an inverse relationship between sociopolitical instability and savings our estimates are based on a sample of 7 observations from 60 countries a new pooling procedure is used to address the problems of autocorrelation and heteroskedasticity

the dynamics of business ethics and economic activity the authors model the agency relationship between managers and investors through socialization ethical managers develop internalized norms that prevent them from acting opportunistically unethical managers lack these norms higher ethical standards on the part of managers increase economic activity in the short run however increased economic activity increases opportunities to profit from unethical behavior eroding ethical standards over the long run when this rate of erosion is high cycling of ethics and economic activity emerges otherwise ethics and economic activity converge to a stable long run limiting value

a sceptic s comment on the study of economics a survey was carried out among two groups of undergraduate economics students and four groups of students in mathematics law philosophy and business administration the main survey question involved a conflict between profit maximisation and the welfare of the workers who would be fired to achieve it significant differences were found between the choices of the groups the results were reinforced by a survey conducted among readers of an israeli business newspaper and phd students of harvard it is argued that the overly mathematical methods used to teach economics encourage students to lean towards profit maximisation

scale economies in pension fund investments a dissection of investment costs across asset classes abstract using a unique dataset of 225 dutch occupational pension funds with a total of 928 billion euro of assets under management we provide a comprehensive cross sectional analysis of the relation between investment costs and pension fund size our dataset is free from self reporting biases and decomposes investment costs for 6 asset classes in management costs and performance fees we find that a pension fund that has 10 times more assets under management on average reports 7 67 basis points lower annual investment costs economies of scale differ per asset class we find significant economies of scale in fixed income equity and commodity portfolios but not in real estate investments private equity and hedge funds we also find that large pension funds pay significantly higher performance fees for equity private equity and hedge fund investments

shareholder activism of public pension funds the political facet abstract this paper studies the political incentive of public pension funds in shareholder activism using a sample of shareholder proposals from 1993 to 2013 and a hand collected data set of the political variables of public pension funds we document evidence consistent with the political attention hypothesis we find that the number of politicians on public pension fund boards is significantly positively related to the frequency with which portfolio firms are targeted moreover the frequency of social responsibility proposals by public pension funds increases significantly as the funds have a greater number of board members running for election to public office however the frequency of corporate governance proposals is not related to the number of board members running for elections to public office furthermore we document that political connection between a portfolio firm and a public pension fund mitigates the firm s likelihood of being targeted by the fund with social responsibility proposals this result supports the political contribution hypothesis the paper provides direct evidence that public pension fund board members employ shareholder proposals to enhance their political capital

the pbgc s flat fee schedule moral hazard and promised pension benefits abstract the pension benefit guarantee corporation pbgc initially insured private pension benefits in exchange for a premium that was not risk sensitive this paper derives conditions under which a moral hazard problem caused promised pension benefits to increase the hypotheses are tested using data on individual pension contracts from the pre and post pbgc periods