International Corporate Taxation and U.S. Multinationals’ Behavior: an Integrated Approach

Using data from the International Revenue Service, this paper explores the effcts of corporate taxation on U.S. capital invested abroad and on tax planning practices (dividend payments, income shifting, and passive investment). The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact for particularly low-tax rates implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Firms also report higher Subpart F income in countries in which they shift their profit, suggesting that cross-crediting provides an incentive to shift passive income in low-tax countries and that passive investment can be an alternative strategy to minimize taxes when active investment opportunities are lacking. Finally, the paper estimates the role of effective transfer pricing regulation on income shifting activities using the quality of host countries' law enforcement. It appears that low degrees of law enforcement are associated with higher income-shifting.

The Changing Inter-Industry Wage Structure of the Organised Manufacturing Sector in India, 1973-74 to 2003-04

This study examines the inter-industry wage structure of the organised manufacturing sector in India for the period 1973-74 to 2003-04 by estimating the growth of average real wages for production workers by industry. In order to estimate the growth rates, the study adopts a methodological framework that differs from other studies in that the time series properties of the concerned variables are closely considered in order to obtain meaningful estimates of growth that are unbiased and (asymptotically) efficient. Using wage data on 51 manufacturing industries at three digit level of the National Industrial Classification 1998 (India), our estimation procedure obtains estimates of growth of real wages per worker that are deterministic in nature by accounting for any potential structural break(s). Our findings show that the inter-industry wage structure in India has changed a lot in the period 1973-74 to 2003-04 and that it provides some evidence that the inter-industry wage differences have become more pronounced in the post-reforms period. Thus this paper provides new evidence from India on the need to consider the hypothesis that industry affiliation is potentially an important determinant of wages when studying any relationship between reforms and wages.

Experimental evidence of a sunk–cost paradox: a study of pricing behavior in Bertrand–Edgeworth duopoly

A well–known implication of microeconomic theory is that sunk costs should have no effect on decision making. We test this hypothesis with a human–subjects experiment. Students recruited from graduate business courses, with an average of over six years of work experience, played the role of firms in a repeated price–setting duopoly game in which both firms had identical capacity constraints and costs, including a sunk cost that varied across experimental sessions over six different values. We find, contrary to the prediction of microeconomic theory, that subjects’ pricing decisions show sizable differences across treatments. The effect of the sunk cost is non–monotonic: as it increases from low to medium levels, average prices decrease, but as it increases from medium to high levels, average prices increase. These effects are not apparent initially, but develop quickly and persist throughout the game. Cachon and Camerer’s (1996) loss avoidance is consistent with both effects, while cost–based pricing predicts only the latter effect, and is inconsistent with the former.

Payoff levels, loss avoidance, and equilibrium selection in the Stag Hunt: an experimental study

Game theorists typically assume that changing a game’s payoff levels—by adding the same constant to, or subtracting it from, all payoffs—should not affect behavior. While this invariance is an implication of the theory when payoffs mirror expected utilities, it is an empirical question when the “payoffs” are actually money amounts. In particular, if individuals treat monetary gains and losses differently, then payoff–level changes may matter when they result in positive payoffs becoming negative, or vice versa. We report the results of a human–subjects experiment designed to test for two types of loss avoidance: certain–loss avoidance (avoiding a strategy leading to a sure loss, in favor of an alternative that might lead to a gain) and possible–loss avoidance (avoiding a strategy leading to a possible loss, in favor of an alternative that leads to a sure gain). Subjects in the experiment play three versions of Stag Hunt, which are identical up to the level of payoffs, under a variety of treatments. We find differences in behavior across the three versions of Stag Hunt; these differences are hard to detect in the first round of play, but grow over time. When significant, the differences we find are in the direction predicted by certain– and possible–loss avoidance. Our results carry implications for games with multiple equilibria, and for theories that attempt to select among equilibria in such games.

Changing Eating Habits - A Field Experiment in Primary Schools

We conduct a field experiment in 31 primary schools in England to test whether incentives to eat fruit and vegetables help children develop healthier habits. The intervention consists of rewarding children with stickers and little gifts for a period of four weeks for choosing a portion of fruit and vegetables at lunch. We compare the effects of two incentive schemes (competition and piece rate) on choices and consumption over the course of the intervention as well as once the incentives are removed and six months later. We find that the intervention had positive effects, but the effects vary substantially according to age and gender. However, we find little evidence of sustained long term effects, except for the children from poorer socio‐economic backgrounds.

Exchange Rate Predictability in a Changing World

An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.

A Theory of Wage Setting Behavior

Concerns for fairness, workers' morale and reciprocity infuence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn in uences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms expectations are key drivers of the propositions derived.