Tacit Coordination in a Decentralized Market Entry Game with Fixed Capacity

We focus on a class of market entry games in which a newly emergent market opportunity may be fruitfully exploited by no more than a commonly known, exogenously determined number of firms. Our results show significant effects of the parameters manipulated in the study, namely, the market capacity, entry fee, and method of subject assignment to groups (fixed vs. random). In contrast to previous market entry games with linear payoff functions, we find no evidence of convergence to equilibrium play on the aggregate level. Shifting the focus of the analysis from the aggregate to the individual level, four clusters of subjects are identified. The patterns are: (1) choice of the same action that is independent of the parameters of the game or the outcome of previous presentations of the same game; (2) random choices with probabilities prescribed by the equilibrium solution for risk-neutral players; (3) random choices with probabilities equal to the individual observed overall proportion of entry; and (4) sequential dependencies that violate any model that assumes randomization. Subjects in the fourth and largest category are shown to adjust their choices in accordance with a simple principle of strategic reasoning.     

The taxation of passive foreign investment: lessons from German experience

Abstract The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited.     

Informal self-employment and macroeconomic fluctuations

Informal self-employment is a major source of employment in developing countries. Its cyclical behavior is important to our understanding of the functioning of LDC labor markets, but turns out to be surprisingly complex. We develop a flexible model with two sectors: a formal salaried (tradable) sector that may be affected by wage rigidities, and an informal (non tradable) self-employment sector faced with liquidity constraints to entry. This labor market is then embedded in a standard small economy macro model. We show that different types of shocks interact with different institutional contexts to produce distinct patterns of comovement between key variables of the model: relative salaried/self-employed incomes, relative salaried/self-employed sector sizes and the real exchange rate. Model predictions are then tested empirically for Argentina, Brazil, Colombia and Mexico. We confirm episodes where the expansion of informal self-employment is consistent with the traditional segmentation views of informality. However, we also identify episodes where informal self-employment behaves “pro-cyclically”; here, informality is driven by relative demand or productivity shocks to the non tradable sector.     

The German generation internship and the minimum wage introduction: evidence from big data

The new German minimum wage applies a specific exemption clause for internships, where internships that last up to three months are exempted while internships that exceed three months are due to the minimum wage. Negative minimum wage effects on internships are heavily debated as internships are mostly non-productive. Difference-in-difference analyses that exploit establishment and regional variation in the bite of the minimum wage do not show a reduction in the number of internships. In addition, we pursue an innovative approach by using Google search data to analyse how the search intensity for internships changed in course of the minimum wage introduction. Difference-in-difference comparisons with other countries in Europe do not reveal an effect on the search for internship positions in general, but we observe a significant reduction in Google search for ‘generation internship’. This suggests that the underlying societal phenomenon of a generation entering internships without a perspective for regular jobs has lost in relevance.     

Progressive taxation and corporate liquidation policies with mean-reverting earnings

This paper develops a real options model of an all-equity financed firm that receives mean-reverting earnings and is subject to progressive taxation. Tax progression arises from an exogenously given tax exemption threshold such that the firm pays no corporate income taxes should its earnings be less than this threshold. The firm possesses a perpetual option to liquidate its operation for a deterministic salvage value at any time. We show that the firm optimally exercises the liquidation option at the first instant when its earnings reach an endogenously determined threshold (the liquidation trigger) from above. Using numerical analysis, we show that the liquidation trigger is higher or lower than the exogenously given tax exemption threshold, depending on whether the tax exemption is below or above a unique critical level, respectively. We further show that the liquidation trigger is strictly decreasing for all tax exemption thresholds less than the critical level, and can be hump-shaped for all tax exemption thresholds greater than the critical level, especially when the salvage value is small. Corporate income taxes as such are not neutral when tax schedules are progressive.     

Does racial prejudice affect black entrepreneurship?: evidence exploiting spatial differences in prejudicial attitudes

This article explores the relationship between racial prejudice towards blacks and the black-white self-employment rate gap and provides the first direct empirical evidence that racial prejudice negatively impacts black self-employment, particularly in high start-up cost industries. To perform this analysis, I construct a measure of prejudicial attitudes using responses from the General Social Survey and estimate the relationship between self-employment and this index using the American Community Survey. I find that an amount of prejudice equal to the difference in least and most prejudiced census divisions increases the black-white self-employment rate gap in high start-up cost industries by 10.4–16.8%, depending upon whether parental self-employment is controlled for, and represents the entire impact of racial prejudice on the black-white self-employment rate gap. Additionally, racial prejudice widens the black-white self-employment income gap by between 6.4% and 8.2% in my full specification, dependent upon how income is measured. Evidence indicates that racial prejudice is causing blacks difficulty in financing their businesses. The results presented are robust to various modelling and data assumptions.     

LAND USE REGULATION AS A BARRIER TO ENTRY: EVIDENCE FROM THE TEXAS LODGING INDUSTRY*

This article examines the anticompetitive effects of land use regulation using microdata on midscale chain hotels in Texas. I construct a dynamic entry–exit model that endogenizes hotel chains’ reactions to land use regulation. My estimates indicate that imposing stringent regulation increases costs considerably. Hotel chains nonetheless enter highly regulated markets even if entry probabilities are lower, anticipating fewer rivals and hence greater market power. Consumers incur the costs of regulation indirectly in the form of higher prices.     

Taxation and the quality of entrepreneurship

We study the effect of taxation on entrepreneurship, investigating how taxes affect both the number of start-ups and their average quality. We show theoretically that even with risk neutral agents and no tax evasion progressive taxes can increase entrepreneurial entry, while reducing average firm quality. So called “success taxes” encourage start-ups with lower value business ideas by reducing the option value of pursuing better projects. This suggests that the most common measure used in the literature, the likelihood of entry into self-employment, may underestimate the adverse effect of taxation.     

On the simultaneity bias in the relationship between risk attitudes,entry into entrepreneurship and entrepreneurial survival

We consider the simultaneity bias when examining the effect of individual risk attitudes on entrepreneurship. We demonstrate that entry into self-employment is related to changes in risk attitudes. We further show that these changes are correlated with the probability to remain in entrepreneurship.     

The effects of employment protection: Learning from variable enforcement

Employment protection legislation (EPL) is not enforced uniformly across the board. There are a number of exemptions to the coverage of these provisions: firms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive provisions. This within-country variation in enforcement allows us to make inferences on the impact of EPL which go beyond the usual cross-country approach. In this paper we develop a simple model which explains why these exemptions are in place to start with. Then we empirically assess the effects of EPL on dismissal probabilities and on the equilibrium size distribution of firms. Our results are in line with the predictions of the theoretical model. Workers under permanent contracts in firms with less restrictive EPL are more likely to be dismissed. However, there is no effect of the exemption threshold on the growth of firms.     

An investigation into the effects of ethnicity and immigration on self-employment

This paper examines self-employment across industries and states in the U.S. It attempts to determine whether self-employment is due more to pull or push factors and whether one or the other model fits some industries better or fits some states better. The 1990 Public Use Microdata Samples from the U.S. Census Bureau are used in the empirical analysis. It is found that self-employment rates differ considerably across ethnic groups, and that the rate of self-employment tends to be higher for immigrants. This paper also finds that increasing urbanization tends to reduce self-employment rates while the shift from manufacturing to service industries tends to increase self-employment rates.     

The effect of self-employed health insurance subsidies on self-employment

This paper estimates the effect of an increase in the deductibility of health insurance premiums for self-employed individuals on the probability of being self-employed. Using a panel of tax returns from 1999 to 2004, we estimate fixed effects instrumental variable regressions for the probability of being self-employed, entering into self-employment, and exiting from self-employment. Our results suggest that this policy increased the probability of being self-employed by 1.5 percentage points, and increased the probability that a taxpayer would be primarily or exclusively self-employed by 1.1 and 0.35 percentage points respectively. These effects explain about a third to a half of the total increase in self-employment by these definitions over the sample period. We also find that the probability of entering self-employment increased by 0.8 percentage points and find suggestive evidence that the probability of exit decreased by 2.8 percentage points.     

Entrepreneurship, windfall gains and financial constraints: Evidence from Germany

We investigate the link between the propensity to become an entrepreneur and the exogenous release from financial constraints in Germany. This is defined in terms of the movement from employment to self-employment on receipt of a financial windfall. A theoretical framework developing Evans and Jovanovic (1989) is set up and tested with panel data from German households. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. The data reveal that differences in ability and income affect the change in employment status. We also report that there is no evidence that becoming self-employed involves the anticipation of windfall gains.     

Home Bias in International Stock Return Expectations

Despite the advantages of international portfolio diversification, actual equity portfolio holdings reveal a strong bias towards domestic stocks. One hypothesis is that this bias can be explained by stock return expectations expressed in probability judgments. To test that hypothesis and to analyze the underlying effects that might cause distortions in investors' expectations, we conducted a cross country study in Germany and the U.S. comparing participants' judgments about an identical set of German and U.S. stocks.

Results show that both test groups feel more competent about domestic stocks. The asymmetric perception of competence is connected with an asymmetric assessment of probabilities. For both test groups subjective probability distributions of stock returns are significantly less dispersed and more optimistic for stocks associated with high competence levels than for stocks associated with low competence levels.     

Analyzing the Efficiency of County Road Production – Evidence from Eastern German Counties

This study analyzes the efficiency of the road production by local governments using data envelopment analysis. The production of roads is a costly public service, which makes an efficiency analysis in this field an interesting subject. I enhance the previous literature, first, by examining the differences in the efficiencies of eastern German counties while considering the deformation of the pavement and foundation of roads, which previous studies have not included due to data limitations. Second, I use a unique dataset on road quality for my efficiency analysis and show that the efficiency levels differ from those in studies that apply proxies, such as the number of accidents, to capture the quality of roads. These findings indicate that there is a great need to develop reliable variables to describe government services. Additionally, I show that the correlations between efficiency levels and county characteristics vary greatly depending on the quality indicator used.     

Private insurance subsidies and public health care markets: evidence from Canada

In this study I examine the effects of government subsidies to employer-provided health insurance on the decision to purchase insurance, and on utilization of publicly funded health services. Using unique variation in tax subsidies across Canadian provinces as an instrument, I estimate the effects of these subsidies on the demand for supplemental health insurance and their extended effects on the decision to use publicly-funded health services. My results show that government subsidies through tax exemptions have significant effects on the decision to purchase insurance. Furthermore, additional insurance policies lead to moral hazard in the use of publicly funded health services. JEL Classification: H2,H4, I1     

Do the skilled and prime-aged unemployed benefit more from training? Effect heterogeneity of public training programmes in Germany

This study analyses the treatment effects of public training programmes for the unemployed in Germany. Based on propensity score matching methods, we extend the picture that has been sketched in previous studies by estimating the treatment effects of medium-term programmes for different skill and age groups. Our results indicate that programme participation has a positive impact on employment probabilities and earnings for almost all sub-groups. We find little evidence for the presence of heterogeneous treatment effects, and the magnitude of the differences is quite small. Our results thus – at least in part – conflict with the strategy to provide training increasingly to individuals with better employment prospects.     

Fixed-prize tournaments versus first-price auctions in innovation contests

This paper analyzes a procurement setting with identical firms and stochastic innovations. In contrast to the previous literature, I show that a procurer who cannot charge entry fees may prefer a fixed-prize tournament to a first-price auction. The reason is that holding an auction may leave higher rents to firms when the innovation technology is subject to large random factors. I would like to thank Dominique Demougin and Carsten Helm for helpful comments and discussions. Financial support by the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk” is gratefully acknowledged.     

Why do some firms contract out production? Evidence from firm-level panel data

This paper examines the determinants of self-employment and transitions from salaried employment to self-employment using two sets of Finnish data from the 1990s. The results show that capital constraints have only a minor effect on new business starts. Human capital, in the form of intergenerational links in self-employment and psychological factors play a much larger role. The paper also provides empirical evidence that less risk-averse workers are more likely to become entrepreneurs.     

Natural monopoly and differential pricing

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.