Mutual supervision in preshipment inspection programs

Preshipment inspection (PSI) programmes are implemented in many developing countries to assist governments in the collection of revenue at their borders. These programs consist of the delegation of the inspection of imports to a private firm. To study these PSI programmes, we develop a hierarchical agency model in which the government authority can rely on two supervisors, namely the private inspection firm and the customs administration, to control importers' declarations. The government's optimal contract is fully characterized. We devote some attention to the inspection policy and its comparative statics properties. In particular, we identify the situations in which PSI programmes are revenue enhancing. We also discuss the reconciliation policy, i.e. what to do in case of conflicting inspection reports by the inspection firm and the customs administration. In the optimal mechanism, mutual supervision between the inspection firm and the customs administration is used to provide adequate incentives to all parties.     

Tax Auditing as a Public Good Game: An Experimental Study on Punishment and Compliance

Prior experimental studies on tax evasion generally assume that the budget and the probability of audit are exogenously given, and ignore taxpayers' incentives to detect evasion and their compliance behaviour under such incentives. The experimental evidence of the present paper shows that, on average, subjects are willing to spend 20 to 30% of their tax revenue on auditing. Compliance is also greatly improved if subjects can determine the budget and, hence, the probability of audit. These findings suggest that taking taxpayers' incentives to detect evasion into consideration is important for the design of compliance‐improvement audit schemes.     

Itemised Deductions: A Device to Reduce Tax Evasion

With direct incentives and sanctions being the most common instruments to fight tax evasion, the theoretical literature has tended to overlook indirect schemes, such as itemised deductions, in which one agent's behaviour affects the likelihood that others will declare their revenue. Itemised deductions provide an incentive for consumers to declare their purchases. This induces a partial shift in the demand from the black market to the legal one, for consumers need a transaction receipt to enjoy the tax deduction. I show that it is possible to increase tax proceeds by choosing a suitable level of itemised deduction, and this, for any level of taxation. Indeed, the cost for the tax authority on the consumers' side is more than compensated for by the extra proceeds generated on the sellers' side.     

Taxation of firms with unknown mobility

We analyze optimal business tax policy when some firms are able to escape taxation by moving abroad. In contrast to the existing literature, we assume that the true number of mobile firms is ex ante unknown. While the government may learn from the firms' location responses to past tax rate changes, firms may anticipate this and adjust their choices accordingly. We find that incomplete information on mobility substantially affects the properties and the implications of equilibrium policy choices. First, the government may find it optimal to set a tax rate that triggers partial firm migration but full revelation of the true number of mobile firms. Second, we show that, if the firms' outside option is attractive (i.e., relocation cost and foreign tax rates are low), expected tax rates and expected firm migration are higher if the degree of mobility is unknown. Third, there is a positive value of learning, i.e., commitment on future tax rates cannot increase the government's expected revenue. However, if the government can commit to a rule‐based learning mechanism, i.e., credibly tie its future tax policy to present policy outcomes, it may obtain a Pareto improvement.     

“Interest Rate Trap”, or Why Does the Central Bank Keep the Policy Rate Too Low for Too Long?

In this paper, we provide a framework for modeling one risk‐taking channel of monetary policy, the mechanism whereby financial intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to a financial crisis. The anticipation of the central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering an “interest rate trap” – the economy will remain stuck in a long‐lasting period of suboptimal, low interest rate equilibrium. We demonstrate that interest rate policy as a financial stabilizer is dynamically inconsistent, and the constrained efficient outcome can be implemented by imposing ex ante liquidity requirements.     

Optimal environmental taxation and enforcement policy

We study the optimal environmental taxation and enforcement policy when (i) the regulator does not know the firms’ abatement costs, (ii) penalties for tax evasion are limited, and (iii) monitoring of pollution is costly. We show that the threat of being audited alter the usual firms’ incentives to over-estimate their abatement costs. In particular, depending on the firms’ abatement costs, the optimal policy may involve over or under-deterrence compared to the full information outcome. We then investigate the properties of a pollution standard. We show that this policy comes close to an environmental tax once the economic incentives of the accompanying enforcement policy are considered.     

Authority and Incentives in Organizations

I consider a corporation that consists of an owner, a manager, and two divisions. There exist externalities between the divisions: if a division behaves cooperatively, its success will increase the performance of the other division. The owner creates monetary effort incentives and allocates decision authority over the divisions. I characterize how externalities and benefits of control determine the corporation's optimal organization. The introduction of endogenous incentives changes the major findings of the existing literature, because then concentrated delegation of authority over both divisions to one of the division heads will be optimal if cooperation is important and divisions are difficult to incentivize.     

Audit Probability versus Effectiveness: The Beckerian Approach Revisited

The Beckerian approach to tax compliance examines how a tax authority can maximize social welfare by trading‐off audit probability against the fine rate on undeclared tax. This paper offers an alternative examination of the privately optimal behavior of a tax authority tasked by government to maximize expected revenue. The tax authority is able to trade‐off audit probability against audit effectiveness, but takes the fine rate as fixed in the short run. I find that the tax authority's privately optimal audit strategy does not maximize voluntary compliance, and that voluntary compliance is nonmonotonic as a function of the tax authority's budget. Finally, the tax authority's privately optimal effective fine rate on undeclared tax does not exceed two at interior optima.     

Trade policy reform and international trade tax revenue in Uganda

This paper contributes to the literature on the relationship between tariff reform and customs tax revenue by explicitly capturing the institutional features of decision making in the econometric modeling. The results show that exchange rate depreciation has had pass through effects to the domestic market price of imports which reduces trade tax revenue to GDP ratio in the long run, though it increases trade tax revenue in the short term. There are also seasonal patterns in the short term trade tax payment. The results point to some scope to harness the benefits associated with trade policy reform without having to worry a lot about its effects on trade (and overall) tax revenue. In fact, it would be possible to realise modest increases in trade tax revenue if the exemption regime were to be reviewed and if there was capacity to contain the disruptive impact of sharp exchange rate depreciations.     

INCENTIVE AND INSURANCE EFFECTS OF INCOME TAXATION

Tax distortions cause a trade‐off between efficiency and equity. However, taxes not only affect incentives; they also provide implicit insurance, and this may critically affect the efficiency–equity relationship. For a standard labour supply problem it is shown that the insurance effect mutes the sensitivity of labour supply to taxes, which tends to reduce tax distortions and lower the marginal costs of public funds. The relation between incentives and insurance and thus efficiency and equity is flattened by the insurance effect and it may even be non‐monotone. However, the optimal utilitarian policy implies that there is always a trade‐off between efficiency and equity on the margin.     

CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM

We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.     

The trade-off between risk and incentives in fiscal federalism: Evidence from China

A central argument of the second-generation fiscal federalism literature is that allocating a considerable share of tax revenue to local governments can provide fiscal incentives for local officials to promote economic growth. However, increasing incentives will increase the costs of uncertainty if local government officials are risk averse. Building on the insights of the classic principal-agent models, we predict that the optimal share of tax revenues retained by local government will decrease as the uncertainty of total tax revenues increases. Using Chinese provincial data, we find a robust negative relationship between volatility and the tax-sharing ratio at the sub-provincial level. Our results indicate that optimal decentralization in developing countries balances the trade-off between risk and incentives.     

Tax evasion in Kenya and Tanzania: Evidence from missing imports

In this paper we estimate the amount of tax evasion in customs authorities in both Kenya and Tanzania by calculating measurement errors in reported trade flows between the two countries and correlate those errors with tax rates. We find that the measurement error is correlated with the tax rates in Tanzania. We also introduced a third country into our analysis, the United Kingdom, and tax evasion seems to be more severe in trade flows between Kenya and Tanzania compared to trade flows between the United Kingdom and Kenya/Tanzania. Finally we also find that the tax evasion coefficient is lower in the Kenya–United Kingdom case compared to the Tanzanian–United Kingdom case which suggests that tax evasion is more severe in the Tanzanian customs authority.     

ON CENTRAL BANK INDEPENDENCE, WAGE INDEXING AND A MONOPOLY UNION

The Rogoff proposition (Quarterly Journal of Economics, 100 (1985), pp. 1169–90) that it is socially optimal to delegate monetary policy to a central banker that is more inflation‐averse than society has been widely accepted and implemented in practice. However, there is a literature that argues that, if there is an inflation‐averse monopoly union in the economy, it is optimal to delegate monetary policy to an ‘ultra‐liberal’ central banker, i.e., a central banker that is interested only in output. In this paper, we examine whether introducing wage indexing into the latter models has any effect on the optimal degree of central bank conservativeness and find that, once a monopoly‐type labour union is introduced, wage indexing does not matter for the determination of the optimal degree of conservativeness of the monetary authority.     

Use it or lose it

We examine the optimality of budget policies imposed by a funding authority on a bureaucrat who operates under a fixed budget. In particular, we study a “use‐it‐or‐lose‐it” (UILI) policy under which the bureaucrat has to return any unspent budget without being able to “roll over” any part to the next period. Instead of returning the unspent budget, the bureaucrat can go on a spending spree and engage in policy drift, which is inversely related to his motivation. The bureaucrat's motivation represents how well matched he is with the bureaucracy's mission. We show that a UILI policy is complementary to motivation as it has stronger ex ante positive incentive effects on more motivated bureaucrats. Such ex ante positive effects can overcome the ex post inefficiency of the policy and make a UILI policy optimal when the bureaucrat is well matched with the bureaucracy's mission or when its budget is large.     

Environmental policy incentives to adopt advanced abatement technology:: Will the true ranking please stand up?

We investigate incentives through environmental policy instruments to adopt advanced abatement technology. First, we study the case where the regulator makes long-term commitments to policy levels and does not anticipate arrival of new technology. We show that taxes provide stronger incentives than permits, auctioned and free permits offer identical incentives, and standards may give stronger incentives than permits. Second, we investigate scenarios where the regulator anticipates new technologies. We show that with taxes and permits the regulator can induce first-best outcomes if he moves after firms have invested, whereas this does not always hold if he moves first.     

Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic

An increasing number of central banks implement monetary policy via a channel system or a floor system. We construct a general equilibrium model to study the properties of these systems. We find that a floor system is weakly optimal if and only if the target rate satisfies the Friedman rule. Unfortunately, the optimal floor system requires either transfers from the fiscal authority to the central bank or a reduction in seigniorage payments from the central bank to the government. This is the unpleasant fiscal arithmetic of a floor system. When the central bank faces financing constraints on its interest expense, we show that it is strictly optimal to operate a channel system.     

CAREER CONCERNS,MATCHING, AND OPTIMAL DISCLOSURE POLICY*

Raiders may suffer from information disadvantage since the current employer is often better informed about his workers' quality. When workers have career concerns and matching influences productivity, the initial employer can strategically disclose information to influence incentives and matching efficiency. Long‐term complete contracts induce full disclosure when raiders are perfectly competitive. The optimal short‐term contract induces full disclosure if raiders are perfectly competitive, and the workers are risk neutral and are not liquidity constrained. These conditions are not only sufficient but also “almost necessary” for full disclosure. Partial disclosure may be optimal if any of these conditions is relaxed.     

On the Provision of Insurance against Search‐Induced Wage Fluctuations*

Should workers be provided with insurance against search‐induced wage fluctuations? To answer this question, I rely on the numerical simulations of a model of on‐the‐job search and precautionary savings. The model is calibrated to low‐skilled workers in the United States. The extent of insurance is determined by the degree of progressivity of a non‐linear transfer schedule. The fundamental trade‐off is that a more generous provision of insurance reduces incentives to search for better‐paying jobs, which increases the cost of providing insurance. I show that progressivity raises the search intensity of unemployed workers, which reduces the equilibrium rate of unemployment, but it lowers the search intensity of employed job seekers, which reduces the output level. I also solve numerically for the optimal non‐linear transfer schedule. The optimal policy is to provide little insurance up to a monthly income level of $1350, so as to preserve incentives to move up the wage ladder, and nearly full insurance above $1450. This policy reduces the standard deviation of labor income net of transfers by 34 per cent and generates a consumption‐equivalent welfare gain of 0.7 per cent. The absence of private savings does not fundamentally change the shape of the optimal transfer function, but tilts the optimal policy towards more insurance, at the expense of a less efficient allocation of workers across jobs.     

Message-contingent delegation

The paper studies the role of delegation and authority in a principal-agent relation in which a non-contractible action has to be taken. The agent has private information relevant for the principal, but has policy preferences different from the principal. Consequently, an information revelation problem arises. I consider a partially incomplete contracting environment with contractibility of messages and decision rights and with transferable utility. I contribute to the literature by allowing for message-contingent delegation and by deriving the optimal partially incomplete contract. It is shown that message-contingent delegation creates incentives for information revelation and may outperform unconditional authority and unconditional delegation.