Junior must pay: pricing the implicit put in privatizing Social Security

Summary. Proposals that a portion of the Social Security Trust Fund assets be invested in equities entail the possibility that a severe decline in equity prices will render the Funds assets insufficient to provide the currently mandated level of benefits. In this event, existing taxpayers may be compelled to act as insurers of last resort. The cost to taxpayers of such an implicit commitment equals the value of a put option with payoff equal to the benefits shortfall. We calibrate an OLG model that generates realistic equity premia and value the put. With 20 percent of the Funds assets invested in equities, the highest level currently under serious discussion, we value a put that guarantees the currently mandated level of benefits at one percent of GDP, or a temporary increase in Social Security taxation of, at most, 20 percent. We value a put that guarantees 90 percent of benefits at .03 percent of GDP. In contrast to the earlier literature, our results account for the significant changes in the distribution of security returns resulting from Trust Fund purchases.We thank Henning Bohn for his insightful comments. We also thank Kenneth Arrow, Jean Boivin, John Campbell, Kenn Judd, Narayana Kocherlakota, Mordecai Kurz, Rick Mishkin, Nobu Kiyotaki, Ed Prescott, Steve Ross, Andrei Shleifer, Kent Smetters, Luis Viceira, David Webb, Steve Zeldes and the seminar participants at Columbia, Harvard, LSE, Minnesota, MIT, NYU, Oslo, Stanford, Stockholm School of Economics, UCLA, USC, Wharton, Wisconsin and Yale for helpful discussions.     

Deficits and money growth in the United States 1872–1983

This paper reports empirical evidence on the relation between government budget deficits and the growth of high-powered money in the United States. High-powered money growth appears to be positively related to war spending during periods when such spending is a substantial fraction of GNP. There is little evidence that the growth of high-powered money is related to the non-war government deficit, measured either in cash or in real terms, after controlling for the level of overall economic activity.     

What's in a Name? An Experimental Examination of Investment Behavior

A fundamental unresolved issue is whether information asymmetries underlie investors predisposition to invest close to home (i.e., domestically or locally). We conduct experiments in the United States and Canada to investigate agents portfolio allocation decisions, controlling for the availability of information. Providing participants with information about a firms home base, without disclosing its specific identity, is not sufficient to change investment behavior. Rather, participants need to know a firms name and home base. Additional evidence indicates that participants have a greater perceived familiarity with local and domestic securities and, in turn, invest more in such securities.The authors thank Ann Gillette, Josef Zechner (the editor), and two anonymous referees for helpful comments and acknowledge the financial support of the Federal Reserve Bank of Atlanta, Georgia Tech, and Social Sciences and Humanities Research Council of Canada. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.     

Fiscal externalities and the design of intergovernmental grants

This paper describes the tax and expenditure externalities that can occur in a federation, focusing on the (relatively neglected) vertical tax and expenditure externalities which arise when state governments' tax and expenditure decisions affect the federal government's budget constraint and vice versa. Formulas are derived for matching grants which correct the distortions in governments' decision-making caused by fiscal externalities. With vertical tax externalities, the matching revenue grant may result in transfers from the state government to the federal government. With vertical expenditure externalities, the federal government should provide a matching expenditure grant equal to the additional federal revenue that is generated from an additional dollar spent by a state on productivityenhancing activities such as education.     

Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since the Crash?

This study assesses the state of the policy debate that surrounds the federal regulation of margin requirements. A review of the literature finds no undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of excess volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.     

Economic Effects of the 2003 Partial Integration Proposal in the United States

On January 7, 2003, President George W. Bush proposed a significant change in capital income taxation in the United States. In the context of a jobs and growth package, the President proposed to reduce substantially the double taxation of corporate-source income by eliminating investor-level taxes on dividends paid from earnings on which corporate tax had been paid. In addition, the Presidents proposal would have reduced the tax on retained earnings by allowing a basis adjustment for accumulated previously taxed retained earnings. Taken together, these proposals would have moved the U.S. income tax much closer to an integrated tax system along the lines outlined by the Treasury Department in President George H.W. Bushs administration a decade earlier.Putting together the impacts of the Presidents proposal on economic activity through greater capital accumulation and improved calculation, I estimate that the proposal, if it had been enacted in its original form, would yield a permanent increase of 0.48 percent in the U.S. economys potential output. This estimated gain does not include any gains made possible by improved corporate financial policy.At the time of the integration proposal, the author was Chairman of the Council of Economic Advisers.     

Fiscal Externalities and Efficient Transfers in a Federation

This paper investigates properties of the second best allocation in a fiscal federal system in which both federal tax and intergovernmental grants are involved and the taxation is distortionary. Also, optimal federal grants and tax policies in a decentralized fiscal system are examined. Our major findings are: (i) the second best does not require the equalization of marginal cost of public funds across regions in a conventional form; (ii) matching grants based on either the local tax rates or tax revenues should be introduced to internalize the tax externality; and (iii) once lump-sum and matching grants are optimized, federal tax policy becomes redundant so the optimal fiscal gap is indeterminate.     

U.S. banking regulations and foreign banks' entry into the United States

This study provides a review of foreign banking activities in the U.S. over the past decade. Foreign banking entry into the United States has occurred through representative offices, branches, agencies, subsidiary banks, Edge Act offices, and investment companies. The total assets of foreign offices, branches, and subsidiaries in the U.S. increased 310 percent, while total assets of domestically owned commercial banks increased 99 percent. Foreign interests are not currently dominating U.S. banking activities. The shares of balance sheet accounts for foreign entrants are growing more rapidly than domestic institutions in six states, but not in New York and California. To eliminate any disadvantages U.S. institutions may face in competing with foreign banks, American state and federal banking laws need to be liberalized.     

The Relevance of Non-financial Performance Measures for CEO Compensation: Evidence from the Airline Industry

This paper investigates the role of non-financial performance measures in executive compensation. Using a sample of airline firms we document that passenger load factor, an important non-financial measure for firms in this industry, is positively associated with CEO cash compensation. This association is significant after controlling for traditional accounting performance measures (return on assets) and financial performance measures (stock returns). This evidence is consistent with the hypothesis that non-financial measures provide incremental information about CEOs actions over financial measures and hence, receive a positive weight in compensation contracts. We also explore cross-sectional differences in the importance of non-financial performance measures. We find weak evidence that CEO power and the noise of financial performance measures impact the relationship between non-financial performance measures and cash compensation.JEL Classification: J33, L25, L93, M41, M52     

WHAT MOTIVATES GOING PRIVATE?: AN ANALYSIS OF AUSTRALIAN FIRMS

We investigate going private transactions in Australia between 1988 and 1991. Approximately ten percent of all takeovers during this period are instances of going private. In contrast to studies of similar transactions in the United States, we find no direct evidence to support a free cash flow explanation for going private, although going private is frequently preceded by the threat of a takeover offer. However, the free cash flow explanation for going private may not be applicable in Pacific Basin countries where exchange-traded investment activity is in relatively high growth sectors and foreign ownership accounts for a large part of those investment sectors where managerial abuse of free cash flow has been alleged.     

政府和社会资本合作(PPP)立法的美国镜鉴与启示

尽管我国与美国的体制、国情社情、PPP发展情况不尽相同,但美国PPP立法的经验与教训对我国的PPP立法具有重要启示作用。PPP在美国是旧现象、新概念,存在"横向""纵向"之分。联邦层面至今没有统一的PPP法律,相关立法散见联邦立法与州立法中,集中在交通运输领域,主要是授权立法,整体上呈现多层级、分散式的特征。美国现行PPP法律引发合同条款约束政府公共行为、为加快项目进程不惜削弱环境保护、PPP采购缺乏竞争性等争议,由此带来的经验启示包括:加强顶层设计、加大金融支持力度、明确政府间财政关系等。     

Innovations and the portfolios of weekly reporting banks

This paper examines changes in portfolios of domestic offices of large banks in the United States. Empirical evidence indicates that representative portfolios changed by statistical significant amounts because of improved cash management, broadening of the federal funds market, more sophisticated tax avoidance, and new financial instruments. Changes over the years 1970–1976 were analyzed by examining the distribution of mean portfolio shares, performing a canonical correlation study, and examining the stationarity of a portfolio model that is described in The Econometrics of Panel Data, Annales de l'insee, April–September, 1978, pp. 297–329. The final section interprets the findings for the design of monetary policy.     

A survey of exchange-traded basket instruments

This survey discusses basket financial instruments generically known as Index Participation shares (IPs). An IP is a hybrid instrument that has characteristics similar to those of existing index-futures contracts, options contracts, and stock-index mutual funds. An IP is a contract and does not represent direct ownership over any individual security. Similar to other derivatives, an IP has a clearing house guaranteeing its performance and a zero net supply. The equilibrium market price of an IP will differ from its underlying index's cash price by an amount defined as the IP basis. The IP basis will be determined by the dividend stream of the underlying index and expected short-term interest rates. IP contracts opened trading on the AMEX and PHILX exchanges on May 12, 1989, after the SEC lifted a temporary stay of trading.     

Creditworthiness or Management Signal? An Empirical Investigation of Loan Commitments Obtained by Non-taxable Firms

Market reaction to the announcement of obtaining loan commitments (LCs) is examined for a unique sample of tax-exempt real estate investment trusts (REITs). Debt-interest tax incentives may be ruled out on a theoretical basis and empirically due to a significant positive market reaction. Thus, evidence is developed to differentiate between two signaling-effect explanations. The analysis supports the hypothesis that management procures LCs to undertake new real estate investments. This action is interpreted by the market as a signal of managements superior information regarding the REITs true equity value.     

Progression and revenue effects of income tax reform

Usually, only initial revenue effects of personal income tax reforms are considered. However, a tax reform characterized by base broadening in exchange for rate reduction can reduce the income elasticity of tax revenue. In that case, the increase in revenue after income growth will be relatively smaller: the tax reform has a negative effect on revenue in the second period. Using the microtax model of the Central Planning Bureau we simulated the effects of the Dutch Oort reform 1990 on revenue elasticities and, consequently, on tax revenue. The income tax revenue elasticity declined by 17 percent which caused an additional revenue loss of 0.6 percent in 1990, rising to 3.8 percent in 1993.     

The federal “safety net” and the repeal of the Glass-Steagall act's separation of commercial and investment banking

If banks were allowed to engage in securities activities, it is feared that the federal safety net-deposit insurance, the Fed's role as lender-of-last resort, and government intervention to prevent financial crises-might be strained, and possibly broken as banks' risk taking increased. An analysis of methods of controlling risk taking and bankers' present ability and propensity to take risks leads to a contrary conclusion. Nevertheless, the concern has given rise to a considerable body of empirical work. Studies on bank failures, risk-return profiles, cash flows, and profits and losses from underwriting are reviewed critically. On the whole, both the empirical and theoretical analyses provide little reason for concern about the federal safety net.     

The Effect of Mortgage Price and Default Risk on Mortgage Spreads

Variations over time in mortgage yield spreads should reflect changes in the underlying prepayment option value; moreover, the relationship between mortgage yield spreads and interest rate dynamics should weaken as the value of the borrowers prepayment option declines. We verify this hypothesis through an empirical analysis of residential mortgage yield spread behavior, and we also present evidence that the strength of the relationship between mortgage spreads and interest rate dynamics weakens (strengthens) as the level of default risk increases (decreases). This result is consistent with the competing risks effect between a borrowers option to prepay or default. Our results demonstrate the importance of accounting for mortgage price discount to par as well as default risk when developing time series of mortgage yields.     

Optimal Design of Intergovernmental Grants Under Asymmetric Information

This paper develops a theoretical explanation why it may be optimal for higher-level governments to pay categorical block grants or closed-ended matching grants to local governments. We consider a federation with two types of local governments which differ in the cost of providing public goods. The federal government redistributes between jurisdictions, but cannot observe the type of a jurisdiction. In this asymmetric information setting, it is shown that the second-best optimum can be implemented with the help of categorical block grants and closed-ended matching grants, but not with unconditional block grants or open-ended matching grants. JEL Code: H77, D82     

Government spending,political cycles,and the cross section of stock returns

Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies. An investment strategy that exploits the presidential cycle predictability generates abnormal returns as large as 6.9% per annum. Our results suggest market underreaction to predictable variation in the effect of government spending policies.     

中国商业银行在美并购法律问题研究

美国是中国商业银行海外拓展的重要市场,并购是中国商业银行拓展美国市场的重要方式。并购涉及大量法律问题,而中关法律体系差异较大,使得中国商业银行在关并购过程中的法律问题显得更加突出。本文根据美国的成文法规定和司法实践,对法定合并与三角合并、股权收购与资产收购等并购方式及其特点进行比较,进而从中国商业银行在美并购的实际需要...