An Economic Analysis of "Riding to Hounds": Pierson v. Post Revisited

Pierson v. Post, an 1805 New York case, concerns the ownershipof a dead fox; Post had organized a fox hunt and was pursuinga fox, when Pierson appeared and killed the animal. The ruleestablished by the court in this case (awarding ownership toPierson) has proven to be highly influential. This article undertakesan economic analysis of the issues raised by the case. The incentivesfor the killing of foxes created by the court's rule and thealternative rule, giving property rights to Post, advocatedin a vigorous dissent by Justice Livingston are analyzed. Theconsequences for social welfare are derived under various circumstances;the formal approach leads to a number of new insights. Finally,the implications of this analysis for contemporary issues inproperty law are explored through an application to the phenomenonof "cybersquatting" (involving the ownership of Internet domainnames).     

Corporate tax avoidance and high-powered incentives

This paper analyzes the links between corporate tax avoidance and the growth of high-powered incentives for managers. A simple model demonstrates the role of feedback effects between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. A novel measure of corporate tax avoidance (the component of the book-tax gap not attributable to accounting accruals) allows for an investigation of the link between tax avoidance and incentive compensation. Increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. In addition, this negative effect is driven primarily by firms with relatively weak governance arrangements, confirming a central prediction of the model. These results can help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the undersheltering puzzle, and why large book-tax gaps are associated with subsequent negative abnormal returns.     

“PAY IT FORWARD” AND HIGHER EDUCATION SUBSIDIES: A MEDIAN VOTER MODEL

Since 2012, at least 24 states have considered legislation on Pay It Forward (PIF) models of higher education finance (which enable students to pay the price of college upon departure from an institution, as opposed to paying upfront tuition). This paper proposes a theoretical model of PIF policies within a framework in which voters belonging to different income groups vote over the level of subsidies to higher education. We analyze the impact of two types of potential PIF policies—a deferred tuition approach and an income share approach—on college access and on voting equilibria over subsidy levels. The results show that college access is enhanced by PIF policies. The equilibrium level of subsidies depends crucially on the pattern of income distribution, in particular on the relationship between mean income and the income of the median income group, and on whether higher education widens or narrows the distribution of income. We show that the equilibrium level of subsidies to higher education will not necessarily decline under PIF, and may increase in some circumstances due to changes in college access for low‐income groups. (JEL I22, I23)     

DEA ARs and CRs applied to worldwide major oil companies

Data Envelopment Analysis (DEA) methods were applied to data of 14 major oil companies (Majors) for the years 1980–1987. The oil model focuses on the worldwide reserve exploration and oil production activities. Data were reported by Arthur Andersen & Co.'sOil & Gas Reserve Disclosures.Newly developed DEA theory was used to link the input and output multiplier bounds and to measure maximum and minimum profit ratios. Also, this theory was used to identify uniquely inefficient firms and to project them uniquely to the DEA frontier.The DEA profit and efficiency measures partitioned the firms into low and high achievers. Discriminant analysis of a similarly constructed data base lends statistical support to this partition.With DEA, top-managers of major oil companies may capture the cost savings/profit ratio gains of making inefficient firms efficient. DEA allows them to benchmark entire firms against the best-practice norm. Looking outwardly, they may gain much more from adapting best-practice competitor practices than from just looking inwardly searching for small marginal gains.     

Campaign War Chests, Entry Deterrence, and Voter Rationality

It is often claimed that the accumulation of "war chests" by incumbents deters entry by high–quality challengers in Congressional elections. This paper presents a game–theoretic analysis of the interaction between an incumbent, potential challengers, an interest group, and a representative (rational) voter, where the incumbent's "quality" (or "legislative effectiveness") is known to the interest group, but not to the voter or to potential challengers. Under certain conditions, a perfectly revealing equilibrium exists; the incumbent signals her quality by raising funds from the interest group to accumulate a war chest. The entry deterrence effect thus operates solely through the role of war chests in signaling incumbent quality.     

Importance for DEA of zeros in data,multipliers, and solutions

Some prominent literature in the DEA field has displayed the following three problems involving zeros: (1) The structural role of zeros in data has not necessarily been recognized; in fact, without explanation, arbitrary, small positive numbers have been substituted for such zeros. (2) It is not well recognized that the artificial, non-Archimedean construct is not necessarily needed to exclude zero multipliers and to identify positive slacks. (3) Because of degeneracy, optimal solutions are not necessarily unique; this lack of uniqueness is especially important in interpretation of the multipliers and slacks.The editor for this paper was R. Robert Russell.     

Taxes,institutions and foreign diversification opportunities

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). The worldwide tax regime employed by the US potentially distorts this choice by penalizing FDI, relative to FPI, in low-tax countries. On the other hand, weak investor protections in foreign countries may increase the value of control, creating an incentive to use FDI rather than FPI. By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflects these incentives to bypass home and host country institutional regimes. The results suggest that the residual tax on US multinational firms' foreign earnings skews the composition of outbound capital flows — a 10% decrease in a foreign country's corporate tax rate increases US investors' equity FPI holdings by approximately 10%, controlling for effects on FDI. Investor protections also seem to shape portfolio choices, though these results are not robust when only within-country variation is employed.     

Which countries become tax havens?

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15% of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Controlling for other relevant factors, governance quality has a statistically significant and quantitatively large association with the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 26% to 61% as governance quality improves from the level of Brazil to that of Portugal. Evidence from US firms suggests that low tax rates offer much more powerful inducements to foreign investment in well-governed countries than do low tax rates elsewhere. This may explain why poorly-governed countries do not generally attempt to become tax havens, and suggests that the range of sensible tax policy options is constrained by the quality of governance.