Multinationals’ profit response to tax differentials: Effect size and shifting channels

This paper provides a quantitative review of the empirical literature on profit‐shifting behaviour of multinational firms. We synthesize the evidence from 27 studies and find a substantial response of profit measures to international tax rate differentials. Accounting for confounding factors by means of meta‐regressions, we predict a tax semi‐elasticity of subsidiary pre‐tax profits of about 0.8. Moreover, we disentangle the tax response by means of financial planning from the transfer pricing and licensing channel. Back‐of‐the‐envelope calculations suggest that transfer pricing and licensing are the dominant profit‐shifting channels.     

Opportunism,incentives, and the m-form hypothesis: A laboratory study

Opportunism is one central premise of the M-form hypothesis. This premise is investigated in a laboratory experiment using M-form and U-form organizations under incentives based on corporate profit and divisional profits. There was greater opportunism under U-form organization than under the M-form, and under divisional profit than under corporate profit incentives. Additionally, a misguided altruism lead a number of individuals to misrepresent information. The M-form yields higher performance than the U-form. Also, corporate profit incentives yield higher total profit than divisional profit incentives. The results partially explain why empirical studies do not strongly support the M-form hypothesis.     

Commitment and observability in a contracting environment

This paper examines leader-follower games where a leader must purchase an essential input from a price-setting supplier in order to take an action. We show that equilibrium outcomes when the followers perfectly observe the leaders' actions cannot be approximated by mixed equilibrium outcomes of the game where followers imperfectly observe the leaders' actions, i.e. they are not accessible. Accessibility fails since in a pure strategy equilibrium, a supplier makes positive profits; however in an equilibrium where a leader randomizes, supplier profits must be zero. Our result follows from a generalized indifference principle that mixed strategies must satisfy in economic environments. While supplier profits cannot be approximated, player action profiles are accessible. Our results also apply to games with costly observation.     

Profit-sharing versus interest-taking in the Kaldor–Pasinetti theory of income and profit distribution

Abstract

This paper reformulates the Kaldor–Pasinetti model of income and profit distribution by introducing the interest rate from the very outset of the model but maintaining other Kaldor–Pasinetti assumptions intact. It is shown that the profit rate and the share of profits in national income are not independent from either the capitalists' or workers' propensity to save. Many contributors to the theory of income and profit distribution have erred in attributing a potentially positive impact of the interest rate upon profits. The interest rate is always and everywhere a tax on functional and personal incomes together. This result explains Schumpeter's observation that ‘Interest acts as a tax upon profit.’ In an alternative model, workers receive a share of profits instead of fixed contractual interest. It is shown that the profit rate and share are not independent from either propensity to save. Furthermore, the workers' share of profits has a positive impact on the rate and share of profits. This implies that a profit sharing regime could be more conducive to capital accumulation and job creation. It is found that Pasinetti's Cambridge Equation is more akin to a profit sharing regime.     

Profit persistence and stock returns

This article attempts to assemble further empirical evidence on the relationship between the product and the financial market. Drawing back on work in industrial organization, we analyse the relationship between profit persistence and factor-adjusted stock returns looking at about 2000 listed US firms over the last 34 years. While the relationship between (current, lagged and unexpected) profits/earnings and returns has been extensively analysed before, to our knowledge this is the first study to look at the relationship between stock returns and profit persistence. We interpret profit persistence as a result of market competition and innovation of the firm. It is shown that firm-specific long-run profit persistence after correction for other additional economic fundamentals of the firm has a positive impact on four-factor adjusted returns and a negative impact on their volatility.     

Wages and International Tax Competition

We introduce wage bargaining and private information into a model of profit shifting and tax competition between a large and a small country. Shifting profits to the small country not only reduces a firm's tax bill but also creates private information on profitability, altering the wage bargaining in favor of the firm. This additional shifting incentive makes the tax base of the large country more elastic and leads to higher outflows, lower wages, higher firm profits and lower equilibrium tax rates. Tax rates are no longer the only determinant of the direction and extent of profit shifting.     

MODELING INTERNAL DECISION MAKING PROCESS: AN EXPLANATION OF CONFLICTING EMPIRICAL RESULTS ON BEHAVIOR OF NON‐PROFIT AND FOR‐PROFIT HOSPITALS

This article develops multiobjective models of hospital decision making that incorporate the internal decision process in both a for‐profit and a non‐profit hospital (NPH). Predicted output and quality for an NPH differ from those for a for‐profit hospital under some conditions but converge under others. Convergence may be the result of a complex internal decision structure with decision control primarily by physicians, similar objectives across different organizational forms, or differing constraints. The mechanisms underlying these outcomes provide explanations for conflicting results in empirical studies of non‐profit and for‐profit hospitals and provide a different rationale for convergence than non‐profit response to competition from for‐profit hospitals. Understanding the source of convergence is important for policies directed toward the tax treatment of NPHs.(JEL D21, D23, I11, L3, L21)     

How much profit shifting do European banks do?

This paper studies whether and to what extent the largest and systemically relevant European multinational banks engage in profit shifting to lower their tax burden. We exploit unique data on bank operations reported on a country-by-country basis since 2015 in compliance with European legislation. The dataset contains information on profits, turnover, taxes paid and employment of bank affiliates worldwide, including tax and regulatory havens. In our empirical model, profits shifting incentives are captured through a weighted average of international tax rate differences between all countries where the bank is active. We find that international tax differences trigger the geographical distribution of profits within multinational banks, and that low tax jurisdictions, notably tax havens, attract disproportionately high profits. Our results suggest that, overall, 21% of profits is shifted. Moreover, profits in tax havens are 51% higher than they would be without tax-motivated profit shifting, pointing to a significant reduction of tax bases in high-tax countries.     

THE POTENTIAL FOR SHORT‐RUN SHIFTING OF A CORPORATE PROFITS TAX

Can the owners of a firm shift a corporate profits tax to consumers? Not in the short run if the tax is stated as a proportion of profits and the firm is a profit maximizer. But what if the firm wishes to pursue a strategy other than profit maximization, say revenue maximization subject to a profit constraint? Under such a condition the firm's reaction to a tax or tax increase might be a price rise that captures part of the foregone profits. We show that firms which operate at a point on their demand curve that differs from profit maximization have an incentive to raise price in response to the tax – and that high cost firms have a greater incentive to raise price than do low cost firms. Our empirical analysis of the US beer industry confirms this finding, and sheds light on the Krzyzaniak–Musgrave analysis of the 1960s which suggested that the corporation income tax produced significant short‐run shifting.     

考虑集成商营销努力的养老服务提供商服务质量激励研究

在考虑养老服务集成商营销努力的情况下,通过设计成本分担契约、收益共享契约激励养老服务提供商改善服务质量,分析了两类激励契约的适用条件;比较了对养老服务质量、营销水平决策和各成员利润的改善作用。研究结果表明：提供商的服务质量、利润会随着成本分担比例的增加而递增,随着收益共享比例的增加而递减;集成商的营销水平会随着成本分担比例的增加而增加,而随着收益共享比例的增加而递减,利润水平会随着成本分担比例和收益共享比例的增加而递减;需求影响系数对三种情境下的提供商和集成商利润产生正向作用,签订成本分担契约对提供商较为有利,集成商可能更倾向于收益共享契约;成本影响系数则对利润产生负向作用,签订收益共享契约对提供商较为有利,对于集成商来说,其利润在三种情境下的差异不大;成本分担契约对激励提供商改善服务质量和集成商提升营销水平具有最佳的激励作用。在大多数情况下,提供商获得的利润总是高于集成商。     

Factor Uses and the Pattern of Specialization

We show that in the setting of multiple goods and factors, the factor proportions theory has the following prediction: across industries, the impacts of the endowment of a given factor on industry outputs have positive co‐variance with the relative uses of this factor. The intuition is that, on average, the industries that use a given factor heavily have positive output responses, following an increase in the endowment of this factor. This co‐variation condition is robust to Hicks neutral‐ and factor‐augmenting productivity differences, and constitutes a direct test of the production side of the factor proportions theory. We also show that the co‐variation condition finds empirical support. This is evidence that is consistent with the factor proportions theory.     

Service sharing,profit mode and coordination mechanism in the Online-to-Offline retail market

How does the sharing economy affect the retail industry? This study investigates the impact of service sharing on the decisions and profits of two profit modes in the Online-to-Offline (O2O) retail market. We find that service sharing always improves the profit of the brand supplier as a service demander in both two profit modes, and improves the profit of the offline franchisee as a service provider in the profit-sharing mode under certain circumstances, but always reduces its profit in the non-profit-sharing mode. This is associated with the double marginalisation effect of the non-profit-sharing mode which leads to channel conflicts. Thus, a service-cost sharing mechanism is introduced to coordinate conflicts and achieve a win-win strategy, thereby improving the performance of the entire O2O supply chain.     

买方抗衡势力与制造商定价决策

本文研究了买方抗衡势力的存在对上游制造商定价决策的影响,讨论了制造商在不同定价形式（线性定价、两部收费制和转售价格维持（RPM））之间的选择问题,并构建了两阶段动态博弈模型,引入买方抗衡势力,比较分析了制造商在零售商具有和不具有买方抗衡势力两种情况下,制造商最优定价形式的选择。研究发现当零售商不具有买方抗衡势力时,制造商选择两部收费制和RPM是无差异的,都能使上游制造商获得相等的最优利润;当零售商具有买方抗衡势力时,对于上游制造商来说两部收费制优干RPM,RPM又优于线性定价。此外,本文还发现存在一个由抗衡势力和零售商替代程度决定的临界条件,当满足这一条件时,两部收费制是上游的最优选择;一旦这一条件不满足时,RPM就成了上游的最优选择。     

THE PUZZLING DIVERGENCE OF RENTS AND USER COSTS, 1980–2004

This paper demonstrates that, in the context of U.S. housing data, rents and ex ante user costs diverge markedly—in both growth rates and levels—for extended periods of time, a seeming failure of arbitrage and a puzzle from the perspective of standard capital theory. The tremendous volatility of even appropriately‐smoothed ex ante annual user cost measures implies that such measures are unsuitable for inclusion in official price statistics. The divergence holds not only at the aggregate level, but at the metropolitan‐market level as well, and is robust across different house price and rent measures. But transactions costs matter: the large persistent divergences did not imply the presence of unexploited profit opportunities. In particular, even though detached housing is readily moved between owner and renter markets, and the detached‐unit rental market is surprisingly thick, transactions costs would have prevented risk‐neutral investors from earning expected profits by buying a property to rent out for a year, and would have prevented risk‐neutral homeowners from earning expected profits by selling their homes and becoming renters for a year. Finally, computing implied appreciation as a residual yields a house price forecast with huge errors; but either longer‐horizon or no‐real‐capital‐gains forecasts—which turn out to have similar forecast errors—imply a far less divergent user cost measure which might ultimately be useful for official price statistics. Some conjectures are offered.     

EFFECT OF MULTI-FIBER ARRANGEMENT TRADE RESTRICTIONS ON TEXTILE INDUSTRY PROFIT MARGINS

This article tests the anti-competitive effect of trade restrictions under the Multi-Fiber Arrangement in the U.S. textile industry. The modeling approach differs from that of traditional empirical studies. That is, it allows for non-competitive behavior by domestic firms and therefore permits estimating the effect of trade policy on domestic firms' conduct, market power, and profit margins. The model is estimated for several selected product categories of the U.S. textile industry. Empirical results indicate that trade restrictions enabled domestic producers to behave less competitively and raise their profit margins. The empirical evidence is significant in the man-made fiber sub-sectors. The anti-competitive effect, however, tended to taper off over time, suggesting that higher profits might have induced new entry and hence boosted competition.     

The Effect of Quotas on Domestic Product Price and Quality

A quota on foreign competition generally leads to quality upgrading (downgrading) of the low-quality (high-quality) firm, an increase in average quality, a reduction of quality differentiation, and a reduction of domestic consumer surplus, irrespective of whether the foreign firm produces higher or lower quality. Effects of a quota on industry profits and domestic welfare depend on the direction of international vertical differentiation. If the foreign firm produces low quality, both firms prices and profits rise but domestic welfare falls. This describes well some major effects of a Japanese Voluntary Export Restraint (VER) in the U.S. auto market and relevant empirical findings. If the foreign firm produces high quality, foreign profits will fall. Since domestic consumer surplus falls only unsubstantially, domestic profit gains lead to an increase of domestic welfare.I am grateful to Jim Gaisford, and Konrad Stahl, seminar participants at the Universität Mannheim and at the ZEW, and an anonymous referee for useful comments and suggestions. As Senior Fellow at the Center for European Integration Studies (ZEI), Bonn, I gratefully acknowledge its continued support.     

Agency Contracts,Noncommitment Timing Strategies and Real Options

Given that an owner lacks the ability to commit to his or her timing decisions under a manager's hidden action, we consider the optimal design of the contract and the owner's optimal timing decisions. Using a real options approach, we show that, compared with the full commitment case, a higher (lower)‐quality project is launched later than (at the same time as) the first‐best case, whereas the replacement of the manager is (is not necessarily) made later if the hidden‐action problem is severe enough (is not severe enough). Severance pay may serve to minimize the compensation for the manager's loss of corporate control.     

中国电力行业规制效果实证分析

2002年国务院批准的《电力体制改革方案》确定了电力体制改革的基本方针,据此,国家采取了诸多规制手段,目的是通过合理规制自然垄断环节,促进相对有效竞争,提高经济效率。4年过去了,中国电力改革的效果究竟如何呢?文章从价格水平、价格结构、行业利润和经济效率等方面进行了实证分析,以检验我国电力行业的规制效果,结果显示:规制制定了合理的价格水平和价格结构,改进了电力行业效率,但在规制垄断利润和制止A-J效应方面仍未成功。     

On the profitability of self‐sabotage

We demonstrate how a supplier can enhance his expected profit by intentionally increasing his expected production costs or limiting his ability to reduce these costs. Such self‐sabotage benefits the supplier when it induces a buyer to implement a more favourable procurement policy, i.e., one that motivates the supplier to deliver cost‐reducing effort systematically rather than selectively. We also demonstrate how the seemingly inefficient persistent implementation of a procurement contract that does not change as the prevailing environment changes can reduce procurement costs by deterring self‐sabotage.     

Strategic Delegation of Multiple Tasks

This paper studies both the owner–manager relationship and the union–firm relationship in a model of unionised duopoly to analyse whether a firm's owner delegates the task of wage bargaining to a manager along with the task of output determination. We also analyse the profit and welfare effects of multiple‐task delegation. It has been shown in the literature that, when there is only one delegation task – output determination – delegation of output decisions to managers leads to lower profits for owners than non‐delegation as pure profit‐maximisation. However, when there are two delegation tasks as in our model – output determination and wage bargaining – we show that owners are better off delegating both tasks than delegating only the output decision or not delegating at all. This result provides a rationale and managerial insight for strategically delegating multiple tasks to managers. Moreover, we show that union utility, consumer surplus and social welfare are all higher when owners do not delegate the task of wage bargaining than when they do. This result suggests that governments implement union contracts that require owners, rather than managers, to negotiate wages with unions in order to benefit unions and consumers and to improve social welfare as well.