On the political economics of tax reforms: survey and empirical assessment

Political constraints and incentives are the true driver of tax reforms. This paper reviews the political economics literature on personal income tax systems and reforms to see how political mechanisms help explain tax reforms. We take some of the implications of these theories to the data using LABREF, a database that identifies labor tax reforms in the European Union for the period 2000–2007, and control for economic and labor market factors. We find that political variables carry more weight than economic variables, and we show empirical regularities that support political economy theories. We also find that governments tended to reform more in better economic times, engaging in pro-cyclical behavior.     

Political Connections and Corporate Borrowing: an Analysis on the Listed Real Estate Firms in China

This paper investigates the relationship between political connections and corporate borrowing behaviour using the listed real estate development firms in China from 2001 to 2014. Evidence from China is of particular importance due to China being the world’s largest emerging and transition economy. We find that the benefit of political connections is manifested in firms obtaining loans from state-controlled banks in the first instance, but that political influence diminishes over subsequent loan extensions. The performance based requirement prevents banks providing systemic favourable treatment to the connected real estate firms, especially after the Chinese banking system reform in 2006. The results provide fresh insight on the risks and benefits of political connections in the Chinese real estate market as it transitions from a centrally planned to a market based economy under on-going market oriented banking and political reforms.     

Public Versus Private Insurance with Dual Theory: A Political Economy Argument

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's [Econometrica, 55, 95–115, 1987] dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.     

Structural reforms in a debt overhang

The effects of reforms in product and labor markets are assessed in an economy where credit restrictions and long-term debt combine to produce a persistent recession with slow deleveraging following a negative financial shock. We show that product market reforms stimulate output and employment even in the short run, despite their deflationary effects. By favoring a faster recovery of investment and collateral values, such reforms bring forward the end of the deleveraging phase. This channel is missing in the case of labor market reforms, which have more modest effects on economic activity.     

Protecting the Vulnerable: the Tradeoff between Risk Reduction and Public Insurance

In a risky world should governments provide public goods thatreduce risk or compensate the victims of bad outcomes throughsocial insurance? This article examines a basic question indesigning social protection policies: how should a governmentallocate a fixed budget between these two activities? In thepresence of income and risk heterogeneities a simple publicinsurance scheme that pays a fixed benefit to all householdsthat suffer a negative shock is an effective redistributionalinstrument of public policy. This is true even when a well functioningprivate insurance market exists, and so the role of public insuranceis not to correct a market failure. In fact, the existence ofa private insurance market means that the public system hasdesirable targeting properties—all but the poor and high-risktake up private insurance. The provision of public goods thatreduce risk for all should therefore be complemented with publicinsurance that (automatically) benefits those who are especiallyvulnerable.     

供求矛盾、信息决策与政府会计改革——兼评我国公共领域的信息悖论

在西方国家的政治市场中,会计信息被公众视为政府不同公共政策经济后果的货币化体现与替代变量。公众通过会计信息识别公共政策的差异,做出支持或反对执政当局的决定。政府披露会计信息,说明公共资源的使用过程(预算信息)与使用结果(形成的资产、负债与发生的成本),以便获得公众的支持,谋取再次当选。政治市场中的信息供求双方经过博弈,导致会计信息披露将受"准则"的约束而实现均衡。然而,我国公共领域会计信息披露并未实现上述均衡状态,反而呈现出供给过剩与短缺并存的现象。本文期望通过分析我国政治体制下的信息供求双方与信息产品的特殊性,解读上述现象形成的公共领域信息披露悖论,并对我国政府会计改革的实施策略提出建议。     

Financial reforms and time-varying microstructures in emerging equity markets

This paper seeks to investigate the impact of financial reforms on time-varying microstructures in emerging equity markets. We develop annual indicators of informational efficiency, market volatility and transaction costs, using daily data for a panel of 28 emerging markets over the 1996–2007 period. We then analyze the impact of insider trading regulations, trading system automation and accounting standardization on microstructures through a set of panel regressions controlling for financial development and simultaneous reforms. Our results suggest that emerging market microstructures are affected by economic and political context, are strongly related to one another and depend on specific institutional reforms.     

Market and Political/Regulatory Perspectives on the Recent Accounting Scandals

Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What caused the scandalous behavior? Why was there such a rash of accounting scandals at one time? Who killed Arthur Andersen—the Securities and Exchange Commission, or the market? Did fraudulent accounting kill Enron, or just keep it alive for too long? What is the social cost of financial reporting fraud? Does the United States in fact operate a “principles‐based” or a “rules‐based” accounting system? Was there market failure? Or was there regulatory failure? Or both? Was the Sarbanes‐Oxley Act a political and regulatory overreaction? Does the United States follow an ineffective regulatory model?     

关于政府会计监管的再思考

政府会计监管产生的主要动因在于市场失灵,但与此对应的则是政府失灵,后者导致了监管成本膨胀以及对市场竞争条件的破坏。由此引发了对政府会计监管的再度思考———怎样使政府会计监管更加富于效率和效果?本文认为,转变监管理念,实现行政处罚让位于法律约束是根本途径;而法律约束发挥作用的基础则在于信誉机制,不仅包括管理层和独立审计信誉机制,也包括政府会计监管本身的信誉。     

Financial development,institutions and banks

This paper presents a framework for understanding the interactions between political and legal institutions, property rights protection, and their implications for financial development. Whereas the literature has answered questions on why some countries lag behind in terms of financial and economic development, the current study suggests how to get around some institutional attributes to spearhead financial intermediation and economic growth through a set of institutional, information, and banking reforms. It finds little support that common law legal heritage is more suitable than French civil law for some key features of financial development. It concludes that types of institutional and market reforms are more relevant to financial intermediation than legal systems. It proposes some ways forward to increase financial intermediation; and expects, over the long run, the proposed approach to financial development to be beneficial for a number of developing countries.     

The Politics of M&A Antitrust

Antitrust regulators play a critical role in protecting market competition. We examine whether the political process affects antitrust reviews of merger transactions. We find that acquirers and targets located in the political districts of powerful U.S. congressional members who serve on committees with antitrust regulatory oversight receive relatively favorable antitrust review outcomes. To establish causality, we use plausibly exogenous shocks to firm–politician links and a falsification test. Additional findings suggest congressional members’ incentives to influence antitrust reviews are affected by three channels: special interests, voter and constituent interests, and ideology. In aggregate, our findings suggest that the political process adversely interferes with the ability of antitrust regulators to provide independent recommendations about anticompetitive mergers.     

Postnormal network futures: A rejoinder to Ziauddin Sardar

Sardar's “Welcome to Postnormal Times” describes the chaotic, contradictory and uncertain climate today, and analyses the failure of progress, modernisation or efficiency to provide ethical, political or even trustworthy economic solutions to the instability of the present. Missing in his analysis is the role of knowledge, especially as it is migrating from individuals to technical networks. This paper argues that recent developments in the networking of knowledge point towards a new constellation in which networks are emerging as major powers alongside the nation and the market, the two pillars of global political economy in the 20th and early 21st century. It responds to Sardar's challenge to imagine the future by imagining the political consequences of recognising non-human agencies as political actors.     

Finance and employment: Evidence from U.S. banking reforms

Economic theory offers competing hypotheses about how the cost and availability of finance influence labor market outcomes. Making use of the U.S. banking reforms between the 1970s and the 1990s as a quasi-natural experiment, this paper studies the impact of credit market development on employment. This paper documents the significant effects of these reforms on employment growth. Potential channels between finance and employment are also investigated. Changes in the growth of the number of self-employed individuals, the entry and exit of firms, and investment growth do not explain most of the employment growth following the reforms. The reforms had a substantially higher impact in industries with higher labor intensity, which is consistent with the idea that labor has fixed costs that need to be financed.     

Credit card interchange fees

We build a model of credit card pricing that explicitly takes into account credit functionality. In the model a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. This always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.     

Accounting Ratios and the Cross‐section of Expected Stock Returns

Under clean‐surplus accounting, the log return on a stock can be decomposed into a linear function of the contemporaneous log return on equity, the contemporaneous log dividend–price ratio (if the stock pays a dividend), and both the contemporaneous and lagged values of the log book‐to‐market equity ratio. This paper studies the implications of this decomposition for the cross‐section of conditional expected stock returns. The empirical analysis reveals that the log accounting ratios capture cross‐sectional variation in both the conditional mean and conditional variance of log stock returns, which is consistent with the decomposition. It also brings fresh insights to the relation between firm size (market equity) and conditional expected stock returns. The evidence indicates that the conditional median return increases with firm size, while the conditional return skewness decreases with firm size. Empirically, the skewness effect outweighs the median effect, leading to the well‐documented inverse relation between size and average returns. The results of out‐of‐sample tests suggest that investors could use the information provided by the observed values of the log accounting ratios to formulate more effective portfolio strategies.     

The incentive to locate a multinational firm: The effect of tax reforms in the United Kingdom

The advent of the single European market has focused attention on the structure of international tax incentives for the location of multinational business. Multinationals that channel foreign income through the United Kingdom have been likely to suffer double taxation in the form of surplus advance corporation tax when they subsequently distribute the income to a foreign parent. This paper shows that the 1993 U.K. tax reforms create a significant reduction in the tax cost of locating in the United Kingdom, relative to traditionally favorable tax regimes such as the Netherlands.     

Forecasting risk,informed speculation,and financial innovation

Speculators who prey on hedgers can stifle financial innovation in the sense that new markets can fail. In this paper I analyze whether a profit maximizing exchange nonetheless chooses to open markets for speculative securities and if so, how to circumvent the problem of market failure. I find that the optimal financial innovation takes two forms. The first is a market structure consisting of hedge instruments, traded in low volume at stable asset prices. The second is a market structure consisting of speculative instruments, traded in greater volume at volatile asset prices. These strategies are derived within the same framework where the cost and the quality of the speculators' information set and the hedgers risk aversion ultimately determine which is the optimal one.     

One monetary policy and 18 central bankers: The European monetary policy as a game of strategic delegation

This paper employs a multi-country delegation monetary policy model and argues that a decision-making mechanism based on the median voter theorem where intensity of preferences cannot play a role does not capture important aspects of policy setting in the European Monetary Union. Replacing the median voter mechanism with a less restrictive “weighted mean mechanism”, it is shown that strategic delegation can lead to a surprising degree of central bank inflation aversion. This finding supports the “The Twin Sister Hypothesis” and the perception of the European Central Bank implementing the policy of the Bundesbank rather than a more inflationary monetary policy.     

Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers

This article builds on Froot and Stein in developing a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers. The model incorporates three key features: (i) value‐maximizing insurers and reinsurers face product‐market as well as capital‐market imperfections that give rise to well‐founded concerns with risk management and capital allocation; (ii) some, but not all, of the risks they face can be frictionlessly hedged in the capital market; and (iii) the distribution of their cash flows may be asymmetric, which alters the demand for underwriting and hedging. We show these features result in a three‐factor model that determines the optimal pricing and allocation of risk and capital structure of the firm. This approach allows us to integrate these features into: (i) the pricing of risky investment, underwriting, reinsurance, and hedging; and (ii) the allocation of risk across all of these opportunities, and the optimal amount of surplus capital held by the firm.     

我国经济转轨时期"市场失灵"的特征与治理

我国经济转轨时期的“市场失灵”,其本质不是在市场已经高度发育基础之上的内生性或功能性市场失灵,而是市场发育不足,市场经济制度缺失所导致的外生性、制度性“市场失灵”,是制度缺失与政府失灵的混合物。因此,治理“市场失灵”,不能简单强调政府干预,而应该首先培育市场,完善制度,充分发挥市场在资源配置中的基础性作用。在此,政府职能的转变起着至关重要的作用。