Advertising,learning, and consumer choice in experience good markets: an empirical examination*

This article empirically analyzes different effects of advertising in a nondurable, experience good market. A dynamic learning model of consumer behavior is presented in which I allow both “informative” effects of advertising and “prestige” or “image” effects of advertising. This learning model is estimated using consumer level panel data tracking grocery purchases and advertising exposures over time. Empirical results suggest that in this market, advertising's primary effect was that of informing consumers. The estimates are used to quantify the value of this information to consumers and evaluate the welfare implications of an alternative advertising regulatory regime.     

Identifying Laffer Bounds: A Sufficient‐Statistics Approach with an Application to Germany

We derive a simple sufficient‐statistics test for whether a nonlinear tax‐transfer system is second‐best Pareto efficient. If it is not, then it is beyond the top of the Laffer curve and there exists a tax cut that is self‐financing. The test depends on the income distribution, extensive and intensive labor supply elasticities, and income effect parameters. A tax‐transfer system is likely to be inefficient if marginal tax rates are quickly falling in income. We apply this test to the German tax‐transfer system, and we find that the structure of effective marginal tax rates is likely to be inefficient in the region where transfers are phased out.     

A Simple Model of Corporate Bailouts in a Globalized Economy*

In this paper, we explore how globalization influences the decision of governments to rescue inefficient domestic firms when bailouts affect firms’ markup. We develop a model of international trade in which immobile domestic-owned enterprises (DOEs) compete with foreign-owned enterprises (FOEs) in an oligopolistic market. The decision to bail out DOEs leads to lower corporate tax revenues if FOEs are immobile, whereas tax revenues might increase if FOEs are mobile. Interestingly, the mobility of FOEs makes governments more prone to rescuing inefficient domestic firms because tax competition reduces the opportunity cost of a bailout policy in terms of public good provision.     

Excess Burden of Taxation and Environmental Policy Mix with a Consumer‐Friendly Firm

This study examines the environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer‐friendly firm. We analyse the interplay of the two policies and the welfare consequences in the presence of excess burden of taxation. We show that an emission tax can be redundant when both the excess burden of taxation and the degree of consumer friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be applied to enhance welfare in the presence of a consumer‐friendly firm. Finally, under the tax revenue‐neutral case where the excess burden of taxation does not matter, the environmental policy mix is also efficient if the degree of consumer friendliness is sufficiently high.     

TO TAX OR NOT TO TAX? THE CASE OF ELECTRONIC COMMERCE

Despite the intensifying debate over the taxation of Internet commerce, the relevant issues have not been given a systematic treatment in the context of the literature on optimal taxation. This article presents such an analysis and investigates separately the taxation of business purchases of intermediate goods, the taxation of consumer purchases of final goods and services, and the various issues of administration and compliance costs as they apply to the development of E-commerce. The authors conclude that generally the optimal tax literature cannot be used in support of a blanket tax exemption for Internet purchases. Certain conditions could lead to the optimality of an exemption, but those conditions are not likely to be met in practice.     

Efficient Management of Insecure Fossil Fuel Imports through Taxing Domestic Green Energy?

A small open economy produces a consumer good as well as renewable (green) and fossil fuel based (brown) energy. It imports fossil fuel at an uncertain price and suffers from carbon emission damages. Unregulated competitive markets are shown to be inefficient. The implied market failures are due to the agents' attitudes toward risk, to risk shifting, and the uniform price for both types of energy. Under the plausible assumptions that consumers are prudent and at least as risk‐averse as the producers of brown energy, the risk can be efficiently managed by placing a tariff on fuel imports (which is equivalent to taxing carbon emissions in the model at hand) and taxing green energy. The need to tax green energy contradicts the widespread view that subsidization of green energy is an appropriate means to enhance energy security in countries depending on risky fossil fuel imports.     

Uniform domestic tax rates,trade distortions and economic integration

This paper examines the argument that uniform indirect tax rates are necessary to remove trade distortions for participating countries in economic integration. In a simple goods mobile, factor immobile international trade model it is shown that uniformity of tax rates is not necessary with either a general origin or destination based tax. Under a restricted origin basis, absence of distortion is only possible if trade is bilaterally balanced, in which case uniform or nonuniform rates across countries serve equally well.     

TRADE BARRIERS IN THE PACIFIC FOREST SECTOR: WHO WINS AND WHO LOSES

This study uses a global model of the forest sector to examine changes in log production, consumption, prices, and trade and discusses the impacts of changes on economic wealth transfers for log export ban and log export tax scenarios. The results indicate that trade barriers are inefficient in allocating logs to domestic processors when a supply shortage exists. The trade barrier produces economic losses that exceed the benefits to the processors. A log export ban reduces log prices in the Pacc North-west by 8.5% and reduces timber harvests by 6.7%. The logs diverted to domestic mills save 1,208 more jobs than log export job losses but at an average annual cost of £230,463 per job saved. Economic transfers benefit lumber producers in the region under the ban. However, the benefits amount to 61% of regional timber producer losses including losses in the log export price premium, 39% of the loss to Asian processors, and 55% of the global consumer losses. Globally, lumber consumers lose £733 million. A log export tax scenario produces smaller impacts on prices and harvests since it does not eliminate total log exports. The tax scenario saves no jobs, and the average economic gain per job lost is £24,251 or about two-thirds of the current average salary in the forest products sector in the region. A log tax has the ability to retain £78 million in tax revenues.     

Transfer Pricing Rules,OECD Guidelines,and Market Distortions

We study the impact of transfer pricing rules on prices, firms' organizational structure, and consumers' utility in a two‐country monopolistic competition model with source‐based profit taxes. Firms can either be multinationals and serve the foreign market through a fully controlled affiliate, or be exporters and serve the foreign market by contracting with an independent distributor. The use of the OECD's comparable uncontrolled transfer price (CUP) rule distorts firms' output and pricing decisions, because the comparable arm's length transactions between exporters and distributors—which serve as the benchmark—are not efficient. We show that the CUP rule is detrimental to consumers in the low‐tax country, yet benefits consumers in the high‐tax country when compared to the benchmark of unconstrained profit shifting. Using the OECD rule increases tax revenue at the expense of consumer surplus. Those results also hold under the alternative cost‐plus transfer pricing rule.     

Government Expenditure Financing in a Two‐Sector Cash‐In‐Advance Model of Endogenous Growth

We show that an expansion in the government size could be desirable from the viewpoint of the economy's long‐run growth, wherein factor intensity between the sectors, the mode of public spending financing, and the form of the cash‐in‐advance (CIA) constraint are crucial. We also show that when real balances are required only for consumption purchases, money financing is equivalent to consumption tax financing, but is not equivalent to income tax financing. If both consumption and gross investment are liquidity‐constrained, then the three financing methods are mutually not equivalent. The optimal financing scheme has the following features: (1) when the CIA constraint applies only to consumption purchases, any combination of the money growth rate and the consumption tax rate that satisfies the government budget constraint constitutes an optimal financing mix; (2) when the CIA constraint applies to both consumption and investment purchases, consumption tax financing only is optimal.     

Waste management regulation: policy solutions and policy shortcomings

A model of packaging waste management is presented to explore the policy options available to governments to implement waste regulation in light of the Extended Producer Responsibility (EPR ). Our model endogenizes the packaging design as an additional determinant for the overall amount of waste jointly with consumers’ sorting effort and producers’ output decisions. The model shows that the policies that yield the first‐best allocation may not find public support. Furthermore, if the set of available policy instruments is limited, production and consumption of the good is likely to settle on a sub‐optimal level even though the optimal allocation may be achievable. Finally, the model demonstrates that a landfill tax may actually increase landfill waste in the presence of tradable credits for recycling activities. The results shed light on some shortcomings of existing regulatory schemes such as the Producer Responsibility Obligations (Packaging Waste) Regulations of the UK .     

Capital Mobility—Resource Gains or Losses? How,When, and for Whom?

This paper investigates which of the two types of countries—resource‐rich or resource‐poor—gains from capital market integration and capital tax competition. We develop a framework involving vertical linkages through resource‐based inputs as well as international fiscal linkages between the two types of countries. Our analysis shows that capital market integration causes capital flows from resource‐poor to resource‐rich countries and improves global production efficiency. However, such gains accrue only to resource‐poor countries, and capital mobility might even negatively affect resource‐rich countries. Furthermore, we show that resource‐rich countries can exploit the gains when taxes on capital are available.     

Useful Government Spending and Macroeconomic (In)stability under Balanced-Budget Rules

It has been shown that an otherwise standard one‐sector real business cycle model may exhibit indeterminacy and sunspots under a balanced‐budget rule that consists of fixed and “wasteful” government spending and proportional income taxation. However, the economy always displays saddle‐path stability and equilibrium uniqueness if the government finances endogenous public expenditures with a constant income tax rate. In this paper, we allow for productive or utility‐generating government purchases in either of these specifications. It turns out that the previous indeterminacy results remain unchanged by the inclusion of useful government spending. By contrast, the earlier determinacy results are overturned when public expenditures generate sufficiently strong production or consumption externalities. Our analysis thus illustrates that a balanced‐budget policy recommendation which limits the government's ability to change tax rates does not necessarily stabilize the economy against belief‐driven business cycle fluctuations.     

On indeterminacy and growth under progressive taxation and productive government spending

We examine the theoretical interrelations between equilibrium (in)determinacy and economic growth in a one‐sector representative‐agent model of endogenous growth with progressive taxation of income and productive flow of public spending. We analytically show that, if the demand‐side effect of government purchases is weaker, the economy exhibits an indeterminate balanced‐growth equilibrium and belief‐driven growth fluctuations when the tax schedule is sufficiently progressive or regressive. If the supply‐side effect of public expenditures is weaker, indeterminacy and sunspots arise under progressive income taxation. In sharp contrast to traditional Keynesian‐type stabilization policies, our analysis finds that raising the tax progressivity may destabilize an endogenously growing economy with fluctuations driven by agents’ self‐fulfilling expectations.     

Two-sector perspectives on the effects of payroll tax cuts and their financing

This paper analyzes the consequences of lifting from labor some of the burden of taxation in a life-cycle two-sector setup where a consumption good is produced alongside a capital good. The analysis focuses on the implications of alternative ways of financing payroll tax cuts in closed and small-open neoclassical economies. In our models payroll tax cuts do not necessarily stimulate hours worked in the stationary state. We show, for example, that in the closed economy –paradoxically– long-run aggregate labor hours and the capital stock will be reduced if labor tax proceeds are replaced by capital taxation. If instead government purchases of the capital good (or government labor services) are decreased, manhours are left unchanged in the long-run, while capital formation is spurred. In the small-open economy it is only if the offsets are a fall in entitlement spending or a rise in the wealth tax that aggregate manhours are increased —otherwise steady state hours worked are invariant.     

Utilitarianism and horizontal equity: The case for random taxation

This paper reports on the use of an algorithm to compute optimal policies in the areas of commodity taxation, international trade and public shadow pricing for a government which is interested in redistributing income but has limited powers of taxation. The algorithm is applied to selected LDC data using a highly simplified general equilibrium model. Some insight into the relationships between constraints on taxation and other areas of government policy is provided by analyzing models where domestic tax restrictions can make inefficient public production or tariffs on international trade desirable.     

The Final Incidence of Australian Indirect Taxes

The Australian Bureau of Statistics provides a breakdown by industry of the revenue collected from each of the major indirect taxes in Australia. This information does not show who bears the ultimate burden of indirect tax as each industry may pass on its initial burden to others. Thus, the burden of the tax may be passed on round by round to indirect business purchases and final demand until the total burden of the tax is passed onto the final consumer. Using a method to derive final indirect tax incidence developed from earlier studies, the final incidence of a selection of indirect taxes in Australia is presented. The major innovation is to include the use of margin industries in the initial flows of the input-output matrix ensuring that taxes on inputs to margin services are fully passed forward onto the good or service that the consumer purchases. It is found that many goods and services that are initially exempt from the main indirect taxes, such as the wholesale sales tax, have significant effective tax rates once taxes on inputs to industry are taken into account.     

The Taxation of Financial Capital under Asymmetric Information and the Tax‐competition Paradox

Information sharing between governments is examined in an optimal‐taxation framework. We introduce a taxonomy of alternative systems of international capital‐income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion found in earlier literature that integration of international caopital markets may lead to the under‐provision of publicly provided goods. However, in contrast to previous results in the literature, under‐provision occurs due to inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public‐good provision as well as complete and voluntary information exchange between national tax authorities.     

A factor analysis approach to measure the biased effects of retail fruit juice advertising

This study presents a structural factor analysis approach to measure the impact of advertising on consumer demand. It is assumed that advertising affects the latent perception of consumers, which in turn influences their purchasing behavior. This study investigates the relationship between consumer purchases and retail store advertising (i.e., newspaper advertising, in-store display, and point-of-purchase display) of three fruit juices using an extended Rotterdam model. The results show that the demand for orange juice and grapefruit juice was affected by their own advertising, while the demand for apple juice was only affected by advertising of competitive juices.The authors are a Senior Econometrician, TRS Risk Management, American Express Company; and a Research Economist, Florida Department of Citrus, and Adjunct Professor, Food and Resource Economics Department, University of Florida, respectively.The authors thank B. Dixon, A. Reynolds, S. Shonkwiler, H. Theil, K. Young, editor, and other anonymous reviewers for comments and suggestions. The usual disclaimer applies. This study was partially supported by the McKethan-Matherly Eminent Scholar Chair at the University of Florida.