Neutral Property Taxation Under Uncertainty

In a framework where no uncertainty arises, Arnott (J Publ Econ Theor 7:27–50, 2005) investigates a neutral property taxation policy that will not affect a landowner’s choices of capital intensity and timing of development. We investigate the same issue, but allow rents on structures to be stochastic over time. We assume that a regulator implements taxation on capital, vacant land, and post-development property so as to expropriate a certain ratio of pre-tax site value as well as to achieve neutrality. We find that the optimal taxation policy is to tax capital and subsidize properties before and after development. We also investigate how this optimal policy changes in response to changes in several exogenous forces related to demand and supply conditions of the real estate market.

Management Policy and Estimated Returns on School Trust Lands

Every state entering the Union since 1803 received land grants from the federal government for the support of their respective public school systems. Inherent in this federal grant is the fiduciary duty to prudently and effectively manage these assets for the beneficiary, their school systems. We develop a framework that measures the present value of the beneficiary’s economic benefits to assist managers of school trust lands in determining future management policy. Using this framework, we assess whether managers of state school trust lands are currently meeting their fiduciary responsibilities of “maximum economic benefit” for their beneficiaries or whether changes in management policy are needed. The present value of realized economic returns from grazing lease revenues and capital appreciation are compared with the present value of income streams that may be generated from alternative investments available to the land trustees if the land were sold and the proceeds reinvested in U.S. Treasury securities. Market values and capital appreciation for school trust lands in Wyoming are estimated using hedonic models formulated from ranch sales data. Because we are comparing a risky return on land investments with a riskless return on Treasury bonds, we observe, in most cases, that the sale of land andreinvestment of proceeds will increase economic benefits on school trust lands. Accepted for Publication in The Journal of Real Estate, Finance and Economics.     

“Location, Location, Location!” The Price Gradient for Vacant Urban Land: New York, 1835 to 1900

We preview new archival evidence on the price of vacant land in New York City between 1835 and 1900. Before the Civil War, the price of land per square foot fell steeply with distance from New Yorks City Hall located in the central business district (CBD). After the Civil War, the distance gradient flattened and the fit of a simple regression of the log of land price per square foot on distance from the CBD declined markedly. Our most remarkable finding is that average nominal land prices at the CBD increased at an average annual rate of over 3% per year between 1835 and 1895, growing particularly rapidly around the time of the Civil War before declining as the century came to an end.     

Optimal policies of call with notice period requirement

When an American warrant or a convertible bond is called by its issuer, the holder is usually given a notice period to decide whether to sell the derivative back to the issuer at the call price or to exercise the conversion right. Several earlier papers have shown that such notice period requirement may substantially affect the optimal call policy adopted by the issuer. In this paper, we perform theoretical studies on the impact of the notice period requirement on issuer’s optimal call policy for American warrants and convertible bonds. We also examine how the optimal call policy of the issuer interacts with holder’s optimal conversion policy.     

How Does a Development Moratorium Affect Development Timing Choices and Land Values?

This paper investigates how a development moratorium affects choices of development timing and land values in a framework where both the value of developed property evolves stochastically and the development costs are fully irreversible. We assume that a regulator initially announces that land is not allowed to be developed during a finite period of time in the future. A developer, thus, must decide whether to develop land before the timing ordinance is imposed, or after it expires. The development moratorium reduces the developer’s option value from waiting and, thus, accelerates development. We also use simulation analysis to demonstrate how the other factors that relate to the demand and supply conditions of the real estate market affect this accelerating effect.     

Dividend Policy in Switzerland

The paper examines dividend policy for a sample of Swiss companies. Several factors that determine cross-sectional variations in dividend policy – such as profitability, growth opportunities, and riskiness – are identified. Price volatility seems to stand out as the most significant factor. Looking at the relationship between dividends and earnings over time, dividend changes are more closely linked to past and current rather than future net income growth. However, they do confirm a persistent shift in the level of earnings. There is also a significant relationship between losses and dividend cuts. These findings suggest that it is the managers’ reluctance to cut dividends that gives informational content to dividend changes.     

Banks’ lending behavior and monetary policy: evidence from Sweden

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.     

Unequal wages for equal utilities

When educational policy is supplemented by a redistributive income tax, and when individuals differ in their ability to benefit from education, the optimal policy is typically rather regressive. Resources are concentrated on the most able individuals in order to get a “cake” as big as possible to share among individuals through income taxation. In this paper, we put forward another reason to push for regressive education. It is not linked to heterogeneity in innate ability but to the property that welfare may be a convex function of an individual’s wage. For simplicity, we assume a linear education technology and a given education budget. To give the equal wage outcome the best chance to emerge, we also assume that individuals have identical learning abilities. Nevertheless, it turns out that in the first-best wage inequality is always preferable to wage equality. Even more surprisingly, this conclusion remains valid in the second-best when the feasible degree of wage differentiation is sufficiently large. This is in spite of the fact that wage equalization would eliminate any need for distortionary income taxation.     

Devaluation with contract redenomination in Argentina

This study offers the first empirical microeconomic analysis of the effectiveness of dollar debt and contract redenomination policies to mitigate adverse financial and relative price consequences from a large devaluation. An analysis of Argentina’s policy of devaluation with redenomination in 2002, in contrast to Mexico’s policy of devaluation without debt redenomination in 1994–1995, shows that devaluation benefited tradables firms, and that dollar debt redenomination in Argentina benefited high-dollar debtors, as shown in these firms’ investment behavior, especially non-tradables firms whose revenues in dollar terms were adversely affected by devaluation. That investment behavior contrasts with the experience of Mexican firms in the aftermath of Mexico’s large devaluation, in which non-tradables producers with high dollar debt displayed significant relative reductions in investment. Stock return reactions to Argentine debt redenomination indicate large, positive, unanticipated effects on high-dollar debtors from debt redenomination. Energy concession contract redenomination likewise increased investment by high energy users in Argentina, and that benefit was apparent also in positive stock returns of those firms.      

Analysis of efficient markets

A simple trading model is presented in which Bayes’ rule is used to aggregate traders’ forecasts about risky assets’ future returns. In this financial market, Bayes’ rule operates like an omnipotent market-maker performing functions that in 1776 Adam Smith attributed to an “invisible hand.” We have analyzed two distinct cases: in the first scenario, the traders’ forecast errors are uncorrelated, and in the second scenario, the traders’ forecast errors are correlated. The contribution of our paper is fourfold: first, we prove that the “efficient market” mean-return can be expressed as a complex linear combination of the traders’ forecasts. The weights depend on the forecast variances, as well as on the correlations among the traders’ forecasts. Second we show that the “efficient” variance is equal to the inverse of the sum of the traders’ precision errors, and is also related to the correlations among the traders’ forecast errors. Third, we prove that the efficient market return is the best linear minimum variance estimator (BLMVE) of the security’s mean return (in the sense that it minimizes the sum of the traders’ mean squared forecast errors). Thus, an efficient market aggregates traders’ heterogeneous information in an optimal way. Fourth, we prove that an efficient market produces a mean return (price) as a Blackwell sufficient (most informative) experiment among all possible aggregated expected return (price) forecasts.     

Land acquisition outcome,developer risk attitude and land development timing

Based on the matched date of initial vacant land parcels and final completed housing projects in Beijing of China from 2003 to 2015, we investigate the correlations of land acquisition outcomes, developer risk attitude and land development timing. We find that real estate developers’ land acquisition gains or losses relative to a referential land acquisition cost have significant impacts on their decisions of land development timing. Developers will postpone the land development process after prior losses in the land acquisition stage. By introducing behavioral economics into the real option model of land development, we explain this relationship from the perspective of varying risk attitude of real estate developers.

     

The “flat tax(es)”: principles and experience

This paper reviews experience with the ‘flat taxes’ that have been adopted in many countries in recent years. It stresses that they differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases, they may have increased progressivity (including through the impact on compliance); adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. A key reason for adoption of the flat tax seems to have been to signal a fundamental shift toward a market-oriented policy regime. Looking forward, as the value of the signal diminishes and familiar political economy forces reassert themselves, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.      

Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion. The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks. Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.     

Investment opportunity set,political connection and business policies of private enterprises in China

The main purpose of this paper is to examine the factors that determine the business policies of private enterprises in the People’s Republic of China. Little is known about these private enterprises although these are surpassing the state-owned enterprises to become the most important corporate sector in China. The phenomenal growths of these enterprises provide an interesting setting to study the effect of the investment opportunity set (IOS) on business policies. We also examine how a firm’s political connection, generally believed to be instrumental to a firm’s success in transition economies, affects its business policies. We provide evidence on the importance of these factors in shaping the private firms’ business policies in China. More specifically, our results show that growth firms pay lower dividends, have lower overdue receivables relative to sales, have higher percentage of bonus shares, and are more likely to engage in joint ventures. In addition, firms with better political connection are able to borrow more, are more likely to establish a board of directors, and are more likely to acquire SOEs. These results have policy implications with regard to private enterprises in transitional economies in general and those in China in particular.     

Equal sacrifice and fair burden-sharing in a public goods economy

Applying a willingness-to-pay approach known from contingent valuation in environmental economics, we develop an ordinally based measure for the size of individual sacrifice that is connected with an agent’s contribution to a public good. We construct a selection mechanism that picks the unique efficient solution among all allocations that have an equal sacrifice as defined in this way. We show that the solution thus obtained corresponds to Moulin’s egalitarian equivalent allocation, conforms to both the ability-to-pay and the benefit principles, and has much in common with the Lindahl equilibrium.      

Within-industry timing of earnings warnings: do managers herd?

An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms accelerate their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (for example, common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding when they examine other determinants of managers’ disclosure decisions.     

Agglomeration and regional labour markets

Conclusion There is no such thing as ‘the labour market’. This term is usually used to describe a simplified combination of very different delimited markets, both regionally and in terms of employee qualifications. Different labour markets can develop quite differently. This insight was underlined by studies presented at the DIW Berlin workshop. Thus, the empirical studies are virtually unanimous in showing that those with higher qualifications benefit particularly from a concentration of economic activity. That investment in human capital is worthwhile particularly in regionally concentrated labour markets is, conversely, demonstrated by the theory. The workshop presentations have, nevertheless, also led to a large number of new questions. For example, the basis of each of the various countries’ experiences needs to be clarified. Among the most important tasks to be solved is undoubtedly also the quantification of the influence emanating from the different agglomeration factors. Can economic policy lessons be learned from the workshop contributions? The heterogeneity of labour markets, as has become evident from the different presentations, suggests that labour market policy would be ill advised to rely solely on an overall observation of a labour market seen as an entity. In light of the questions raised, especially as a result of the empirical studies, it nevertheless seems premature to consider conclusions that go any further as anything more than hypotheses.     

The implementation of SNB monetary policy

We use a regime-switching approach to model the implementation of SNB monetary policy. The regime-switching technique is crucial for assessing the flexibility inherent in the SNB’s monetary policy strategy. The empirical findings support the idea that repo operations are instrumental in smoothing the implementation of monetary policy in normal times, while changes in the official operational target, accompanied by the accommodating use of repo operations, produce the intended effects in periods of distress. Another significant contribution also comes from some new measures designed to improve liquidity in the Swiss franc money market during the financial crisis of 2007–2008.     

Sickness absence and health care in an economic federation

This paper addresses vertical fiscal externalities in a model where the state governments provide health care and the federal government provides a sickness benefit. Both levels of government tax labor income and policy decisions affect labor income as well as participation in the labor market. The results show that the vertical externality affecting the state governments’ policy decisions can be either positive or negative depending on, among other things, the wage elasticity of labor supply and the marginal product of expenditure on health care. Moreover, it is proved that the vertical fiscal externality will not vanish by assigning all powers of taxation to the states.      

Towards a measure of financial fragility

The paper proposes a measure of financial fragility that is based on economic welfare in a general equilibrium model calibrated against UK data. The model comprises a household sector, three active heterogeneous banks, a central bank/regulator, incomplete markets, and endogenous default. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors and how the response of the economy to shocks relates to our measure of financial fragility. Finally we use panel VAR techniques to investigate the relationships between the factors that characterise financial fragility in our model, i.e. banks’ probabilities of default and banks’ profits – to a proxy of welfare.