Evaluating Consumer Protection Laws: II. Promising Methods

Three quasi-experimental research designs which promise the possibility of yielding strong conclusions about the effects of consumer protection initiatives are reviewed. The threats to internal validity which face these designs are described and illustrated with specific studies. The broader implications of evaluation research for consumer protection are discussed.     

PROPERTY RIGHTS, REGULATORY TAKING, AND COMPENSATION: IMPLICATIONS FOR ENVIRONMENTAL PROTECTION

The 104th Congress considered several proposals requiring compensation for regulatory actions that diminish property values. Aimed primarily at weakening environmental protection, the bills focus on property rights independent of the public benefits from regulation. By significantly broadening the constitutional standard for compensation, the bills generate a government liability well in excess of compliance costs and thus discourage regulatory agencies from carrying out their mandates. The bills would increase transactions costs and undermine the efficient provision of environmental quality, public safety, and other public goods.     

ABATEMENT COST HETEROGENEITY IN PHASE I ELECTRIC UTILITIES

The market-based instruments embodied in the Acid Rain Program have been instrumental in the reduction of SO₂ and NO _x emissions from electric utilities. Economic theory suggests that tradable pollution permit systems encourage polluters to reallocate pollution burdens to take advantage of any differences in marginal abatement costs. Such reallocations improve the efficiency of pollution reduction. This article evaluates the effectiveness of the first phase of the Acid Rain Program in achieving increased homogeneity of marginal abatement costs using an output distance function approach. The results indicate that plants have been successful in adapting to this more flexible regulatory framework.     

Overconfidence and Early‐Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.     

International Transmission of U.S. Monetary Policy Shocks: Evidence from Stock Prices

This paper analyzes intraday changes in firm‐level equity prices around interest rate announcements to assess the transmission of U.S. monetary policy to the global economy. We document that foreign firms on average are roughly as sensitive to U.S. monetary policy as U.S. firms, although we also find considerable cross‐sectional variation across firms. In particular, foreign stocks in cyclically sensitive industries show stronger responses to interest rate surprises, consistent with a demand channel of policy transmission. In addition, transmission of U.S. policy appears to be stronger to economies with fixed exchange rates. Evidence for a credit channel is weaker.     

Tax Advice and Reporting under Uncertainty: Theory and Experimental Evidence*

Abstract. This study extends the Beck, Davis, and Jung (1992) experimental study by incorporating opportunities for taxpayer subjects to purchase advice before making their tax reporting decisions. Tax advice has two roles in the model and experiment. First, tax advice allows taxpayers to reduce their uncertainty about the amount of taxes owed. This permits us to study the demand for tax advice in conjunction with its effect on tax reporting decisions. Second, the decision to purchase tax advice from an expert provides a means of signaling that may alter tax agency audit policies. The resulting audit policies, in turn, can affect taxpayers' decisions to purchase tax advice. These interdependencies are incorporated in a game-theoretic model and several predictions are tested experimentally. Consistent with theory, subjects sorted themselves into three groups based upon their private information. Another prediction supported by the experiment is that the demand for tax advice increased with the magnitude of an uncertain tax deduction (amount-at-risk). We also found, as expected, that the effects of tax advice on pre-audit tax revenues depend upon the amount-at-risk. When the amount-at-risk was high, subjects in settings with tax advice reported lower average incomes and paid lower taxes than did those subjects in settings without the opportunity to purchase tax advice. The opposite was true for the low amount-at-risk condition, supporting our prediction that tax advice and amount-at-risk would have an interactive effect on tax reporting. Analysis was also performed on post-audit tax collections. Contrary to theory, post-audit tax payments were found to increase when subjects had an opportunity to purchase tax advice. This result apparently was caused by a tendency to over-purchase tax advice and, in some cases, to report a low income regardless of the advice received. Résumé. Les auteurs développent l'étude expérimentale de Beck, Davis et Jung (1992) en y incorporant la possibilité pour les sujets contribuables de solliciter des conseils avant de prendre leurs décisions relatives à l'information qu'ils fourniront aux fins fiscales. Les conseils fiscaux jouent deux rôles dans le modèle et l'expérience. Premièrement, ils permettent aux contribuables de réduire leur incertitude relative au montant des impôts auxquels ils sont assujettis. Les auteurs peuvent ainsi étudier la demande de conseils fiscaux en conjonction avec leurs conséquences sur les décisions relatives à l'information à fournir aux fins fiscales. Deuxièmement, la décision de solliciter les conseils fiscaux d'un expert est un signal pouvant influer sur les politiques de vérification des représentants du fisc. À leur tour, ces politiques peuvent influer sur les décisions des contribuables de solliciter des conseils fiscaux. Ces interdépendances ont été intégrées à un modèle de jeu théorique et les auteurs ont vérifié plusieurs prédictions par expérimentation. Conformément à la théorie, les sujets se sont répartis en trois groupes, en fonction de l'information privilégiée dont ils disposaient. L'expérimentation a confirmé une autre prédiction: la demande de conseils fiscaux augmente avec l'importance de la somme dont la déductibilité est incertaine (montant à risque). Les auteurs constatent également, comme ils s'y attendaient, que les effets des conseils fiscaux sur les recettes fiscales antérieures à la vérification dépendent du montant à risque. Lorsque le montant à risque est élevé, les sujets pouvant solliciter des conseils fiscaux font état de revenus moyens inférieurs et paient moins d'impôt que les sujets n'ayant pas la possibilité de solliciter des conseils fiscaux. L'inverse est vrai lorsque le montant à risque est faible, ce qui confirme la prédiction selon laquelle les conseils fiscaux et le montant à risque ont un effet interactif sur l'information fournie aux fins fiscales. Les auteurs analysent également les impôts perçus postérieurement à la vérification. Contrairement à la théorie, ils constatent que les paiements fiscaux postérieurs à la vérification augmentent lorsque les sujets ont eu la possibilité de solliciter des conseils fiscaux. Ce résultat semble être attribuable à une tendance à solliciter des conseils fiscaux avec excès et, dans certains cas, à faire état d'un faible revenu, malgré les conseils reçus.