Income taxes and entrepreneurial choice: empirical evidence from two German natural experiments

Does tax policy affect entrepreneurial choice? We use two tax reforms in Germany as “natural experiments”. These reforms reduced the marginal income tax rate for entrepreneurs with income above a certain threshold, with the exception of freelance professionals. The two conditions for belonging to the treatment group allow us to apply a “difference-in-difference-in-difference” identification strategy to estimate the effects of the tax rate reductions. We base our analysis on the microcensus, the official representative continuous household survey in Germany. The results indicate that the tax rate reductions increased the probability of choosing self-employment.     

Cognitive abilities and portfolio choice

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits.     

Consumer choice and information : New experimental evidence

Many laws and regulations aimed at safeguarding consumers deal with the amount and kind of product information that consumers receive. Implicit in these regulations is the belief that consumers can make use of the appropriate information, provided only that it is made available. Recently a number of authors have argued that consumer decisionmaking is subject to consistent biases, suggesting poor purchase decisions may result even with access to the relevant information. Indeed some critics have argued that consumers may be subject to information overload so that they may make worse decisions with extra information than without it. The experimental results presented in this paper address some of these issues. The results suggest that untrained people can use simplifying strategies in quite complicated decision problems. Also, while information overload clearly can occur, the subjects in our experiments appeared able to ignore unnecessary or unwanted information.     

Moving costs, nondurable consumption and portfolio choice

The substantial adjustment cost for housing affects nondurable consumption and portfolio allocations, as well as the frequency of housing transactions. A simple theoretical model, roughly calibrated, is used to assess the quantitative impact of adjustment costs on those decisions. The impact on portfolios is found to be significant, suggesting that housing wealth should be useful in empirical studies of portfolio choice. The welfare loss from the transaction cost is also substantial. The effect on nondurable consumption is small, however, so adjustment costs can explain only a small part of the equity premium puzzle.     

Saving rates and portfolio choice with subsistence consumption

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.     

Housing prices and tenure choice with asymmetric taxes and progressivity

This paper studies the effects of tax schedule changes on prices and tenure choice in the housing market. It is shown that, given the present asymmetric treatment of owner-occupants vs. renters, an increase in the degree of progressivity is likely to lead to an increasein the prices of both owner-occupied and rental housing. A numerical example indicates that the effects may be quite large. Equilibrium prices are calculated based on the actual Swedish income tax schedules for 1971 and 1979. According to these simulations the tax changes that took place between these years caused the price of owner-occupied houses to increase by around 30 percent, and the rent level to increase by 2 or 3 percent.     

International portfolio diversification and endogenous labor supply choice

This paper presents a multi-country general equilibrium model driven by productivity shocks, where labor supply and consumption are chosen endogenously. We use this framework to study the effect of labor supply for optimal international diversification. We find that the model's ability to help explain home-bias depends crucially on the level of substitutability between consumption and non-working time. Quantitatively, the non-separability in the preferences helps in a nonnegligible way, but it cannot entirely explain the extreme degree of home-bias in U.S. portfolios.     

国际投资组合选择理论研究进展

国际投资组合选择理论研究的是在一定的假设条件下,当经济实现均衡时,投资者所应持有的本国与外国金融资产的比例。它的发展有5个特征:从追求金融市场的局部均衡到追求经济的一般均衡;从不考虑投资者的存在到考虑投资者个人效用的最大化;从单纯的理论模型构建到结合现实数据进行实证检验;从假设金融市场完全到考虑金融市场不完全的情况;从假设金融市场一体化到考虑金融市场存在分割的情况。     

The influence of taxes on migration: evidence from Switzerland

Empirical studies on the impact of taxation on migration havebeen limited by a lack of comparable data in an internationalcontext and a lack of variation in tax burdens within countries.A notable exception to the latter is Switzerland. Prior empiricalstudies on tax competition in Switzerland have had to rely onaggregated data. In general, these studies have been supportiveof the notion of tax competition, i.e., high earners tend torelocate to low-tax regions. The authors use an alternativepanel approach based on micro-data from the first three wavesof the newly established Swiss Household Panel. Despite activecommunity tax policies aimed at attracting new residents anda significant increase in tax-burden dispersion among communitiesin the past decade, no tax-induced migration is observed. Migrationdecisions are found to be strongly influenced by accommodation-relatedfactors that point to important housing-market effects.     

The choice of excise taxes when savings and labour decisions are distorted

The framework is a simple two period life-cycle model with identical individuals who work in period 1 and are retired in period 2. Initially there are optimally chosen uniform income and commodity tax rates, which lead to distortions in both the labour/leisure choice and the consumption/savings choice. The purpose is to demonstrate in an intuitively comprehensible way how differentiating commodity taxation by slightly increasing the tax on one consumption good can mitigate existing distortions. The sufficient conditions for a welfare improvement are similar to that of Corlett and Hague plus some conditions on average and marginal consumption propensities.     

Household search choice: theory and evidence

Since the work by Stigler (1961) on the economics of information in the early 1960s, economists have paid closer attention to the role of search for information. However, search methods are not considered in the theory of portfolio choice. We present a model of investor search behaviour in order to provide a framework by which to evaluate our empirical evidence on the role of search in portfolio selection and performance. We study two types of search methods: informal and professional. We show that the income, wealth and risk preference of households influence their search choice.     

Uncertainty,liquidity preference and portfolio choice: aspects of the Hicksian approach

Sir John Hicks's contribution towards dealing with issues of choice under conditions of uncertainty was very significant. He was the first to advocate the use of the portfolio balance approach in making asset choices. He was also the first to employ the techniques of value theory to such choice and he originated the ‘moments approach’ to choice under uncertainty. These developments exerted a major influence upon monetary theory and, within it, portfolio choice.     

Effects of background risks on cautiousness with an application to a portfolio choice problem

We provide necessary and sufficient conditions on an individual's expected utility function under which any zero-mean idiosyncratic risk increases cautiousness (the derivative of the reciprocal of the absolute risk aversion), which is the key determinant for this individual's demand for options and portfolio insurance.     

Distorting taxes and interest on reserves

Few governments in developed economies currently pay interest on reserves. However, Goodfriend (2001) [Goodfriend, M., 2001. Interest on reserves and monetary policy, mimeo, Federal Reserve Bank of Richmond] concludes that it is a useful tool to implement monetary policy. In a monetary growth model with a financial intermediary and a firm who needs to borrow to pay wages, it is shown that paying interest on reserves financed by a labor tax reduces welfare.     

A re-examination of international portfolio diversification based on evidence from leveraged bootstrap methods

This article investigates the issue of international portfolio diversification with respect to the three largest financial markets in the world—namely the US, Japan and the UK. In addition to making use of traditional portfolio analysis, we also suggest a procedure to calculate bootstrap correlation coefficients that can take into account the dynamic structure between the markets as measured by bootstrapped causality tests. Weekly data is used. The results from the first approach are supporting international diversification. The bootstrapped causality tests provide additional empirical support for this conclusion since the size of the causal effects is negligible and the bootstrap correlations are similar as the standard ones.     

A new choice of dynamic asset management: the variable proportion portfolio insurance

The constant proportion portfolio insurance (CPPI) achieves the advantage of simplicity due to its constant multiple. However, a dynamic multiple could improve the effectiveness of portfolio management. In this article, we provide a complete and detailed examination of the mechanism of variable proportion portfolio insurance (VPPI) strategy. The multiple of the VPPI states that when the stock price goes up, the multiple gets larger accordingly and when the stock price goes down, the multiple gets smaller. A portfolio insurance strategy with this discipline could yield better performance. Based on this principle, we recommend an exponential proportion portfolio insurance (EPPI). In addition, we also propose a new performance measure for portfolio insurance. Compared with the CPPI, simulation and empirical evidence support that the EPPI works better in both upside capture and downside protection, implying that the EPPI could be an effective tool for asset management.     

Fiscal dependence on trade taxes and economic development: additional results and a reconciliation of the empirical evidence

Using Brazilian data spanning the period 1910–75,new evidence is presented on the hypothesis that a country's fiscal dependence on trade taxes is inversely related to her level of economic development, at least once the latter passes a certain threshold. Unlike previous studies, this study uses methods which highlight the dynamic and temporal nature of the underlying relationships. The results indicate strong support for the hypothesis and also suggest that the conflicting time-serious evidence can be reconciled.     

A two-period model with portfolio choice: Understanding results from different solution methods

Using a stylized two-period model we compare portfolio solutions from two local solution approaches–the approach of Judd and Guu (2001) and the approach of Devereux and Sutherland (2010, 2011)–with the true nonlinear portfolio solution.     

Operational risk management and regulatory investment constraints on portfolio allocation: evidence from property and casualty insurers

Journal of Regulatory Economics - We examine an insurer’s portfolio allocation choice in the context of a regulatory environment where investment in specific asset classes is constrained. We...