Multinational Firms’ Heterogeneity in Tax Responsiveness: the Role of Transfer Pricing

In this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment (FDI). We offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices. Perhaps paradoxically, we show that the ability to shift profits can make parent companies' investment more sensitive to host-country tax rates, as long as investors expect fisscal authorities to use price and profit detection methods. We then offer a comprehensive empirical study to test our predictions in the case of Japanese FDI. We exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of a±liates and R&D expenditure. Based on country, parent firm and sector characteristics, we estimate an investment equation on a sample of 3614 Japanese affiliates in 49 emerging countries. We obtain a greater semi-elasticity of investment to the statutory tax rate in a±liates that are wholly-owned and that have R&D intensive parents. We interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of FDI activity.

The effects of entry in thin markets

We consider entry of additional firms into the market for a single commodity in which both sellers and buyers are permitted to interact strategically. We show that the market is quasi-competitive, in that the inclusion of an additional seller lowers the price and increases the volume of trade, as expected. However, whilst buyers benefit from this change under reasonable conditions on preferences, we cannot conclude that sellers are always made worse off in the face of more intense competition, contrary to the conventional wisdom. We characterize the conditions under which entry by new sellers may raise the equilibrium profit of existing sellers, which will depend in an intuitive way on the elasticity of a strategic analog of demand and the market share of existing sellers, and encompass completely standard economic environments.

Marriage as a Rat Race: Noisy Pre-Marital Investments with Assortative Matching

We study the incentive to invest to improve marriage prospects, in a frictionless marriage market with non-transferable utility. Stochastic returns to investment eliminate the multiplicity of equilibria in models with deterministic returns, and a unique equilibrium exists under reasonable conditions. Equilibrium investment is efficient when the sexes are symmetric. However, when there is any asymmetry, including an unbalanced sex ratio, investments are generically excessive. For example, if there is an excess of boys, then there is parental over-investment in boys and under-investment in girls, and total investment will be excessive.

Complexity and Bounded Rationality in Individual Decision Problemsing.

I develop a model of endogenous bounded rationality due to search costs, arising implicitly from the problems complexity. The decision maker is not required to know the entire structure of the problem when making choices but can think ahead, through costly search, to reveal more of it. However, the costs of search are not assumed exogenously; they are inferred from revealed preferences through her choices. Thus, bounded rationality and its extent emerge endogenously: as problems become simpler or as the benefits of deeper search become larger relative to its costs, the choices more closely resemble those of a rational agent. For a fixed decision problem, the costs of search will vary across agents. For a given decision maker, they will vary across problems. The model explains, therefore, why the disparity, between observed choices and those prescribed under rationality, varies across agents and problems. It also suggests, under reasonable assumptions, an identifying prediction: a relation between the benefits of deeper search and the depth of the search. As long as calibration of the search costs is possible, this can be tested on any agent-problem pair. My approach provides a common framework for depicting the underlying limitations that force departures from rationality in different and unrelated decision-making situations. Specifically, I show that it is consistent with violations of timing independence in temporal framing problems, dynamic inconsistency and diversification bias in sequential versus simultaneous choice problems, and with plausible but contrasting risk attitudes across small- and large-stakes gambles.

Penalizing Cartels: The Case for Basing Penalties on Price Overcharge

In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.

Revisiting Shiller’s excess volatility hypothesis

One of the cornerstone of financial anomalies is that there exists money making opportunities. Shiller’s excess volatility theory is re-investigated from the perspective of a trading strategy where the present value is computed using a series of simple econometric models to forecast the present value. The results show that the excess volatility may not be exploited given the data available until time t. However, when learning is introduced empirically, the simple trading strategy may offer profits, but which are likely to disappear once transaction costs are considered.

Revisiting Shiller’s excess volatility hypothesis

One of the cornerstone of financial anomalies is that there exists money making opportunities. Shiller’s excess volatility theory is re-investigated from the perspective of a trading strategy where the present value is computed using a series of simple econometric models to forecast the present value. The results show that the excess volatility may not be exploited given the data available until time t. However, when learning is introduced empirically, the simple trading strategy may offer profits, but which are likely to disappear once transaction costs are considered.