Flexible and Committed Profit Sharing with Wage Bargaining: Implications for Equilibrium Unemployment

We analyze the relationship between profit sharing, employee effort, wage formation and unemployment under different relative timings of the wage and profit sharing decisions. The optimal profit share under commitment exceeds that under flexibility, because through a profit share commitment the firm can induce wage moderation. The negotiated profit sharing depends positively on the bargaining power of trade union and it has both effort-enhancing and wage-moderating effects. Higher profit sharing is shown to reduce equilibrium unemployment under ``sufficiently rigid' labor market institutions, but it can harm employment when labor market ``rigidities' are ``small enough'.     

On Pollution Permit Banking and Market Power

We consider a pollution permit market with a large firm and fringe of competitive firms. To smooth compliance towards a long-run emissions goal, firms are initially allocated a stock (i.e., bank) of permits that can be gradually consumed. We first show how the large firm can credibly manipulate the spot market in subgame-perfect equilibrium. Motivated by features observed in the US market for sulfur dioxide emissions, we then show that the introduction of stock transactions has no effects on market power, but that forward trading and incomplete observability of stock holdings do have pro-competitive effects. Both authors are also Research Associates at the MIT Center for Energy and Environmental Policy Research.     

Taxation, Bequests, and Short and Long Run Timber Supplies: An Overlapping Generations Problem

This paper uses an overlapping generations model with one-sided altruism to study the effects of several forest taxes that target bequests and affect timber supply. Unlike previous work, we investigate bequests and timber supply in both the short and long run when bequests are costly (e.g., taxed). The landowner's problem is examined in the short run, while the government's problem is examined in the long run assuming the existence of a steady state. We also consider taxes targeting harvests, growth, savings and bequests. Several new results are established concerning the interactions of taxes that might be used by a government to alter short and long run forest capital stocks: (i) the presence of a forest bequest tax affects the neutrality of harvest tax in both the short and long run, (ii) in the long run the bequest tax decreases bequests and timber supplies. When the bequest tax is not present, the capital income tax is neutral with respect to bequest and timber supply, while the harvest tax is neutral only if forest productivity is also not taxed. Finally, (iii) in the short run, the substitution and total effects of taxes in landowner decisions generally depend on the presence of the bequest tax. The results have implications for Pigouvian tax design and second best tax choice.     

Optimal Factor Income Taxation in the Presence of Unemployment

According to conventional wisdom internationally mobile capital should not be taxed or should be taxed at a lower rate than labour. An important underlying assumption behind this view is that there are no market imperfections, in particular that labour markets clear competitively. At least for Europe, which has been suffering from high unemployment for a long time, this assumption does not seem appropriate. This paper studies the optimal factor taxation in the presence of unemployment which results from the union-firm wage bargaining both with optimal and restricted profit taxation when capital is internationally mobile and labour immobile. In setting tax rates the government is assumed to behave as a Stackelberg leader towards the private sector playing a Nash game. The main conclusion is that in the presence of unemployment, the conventional wisdom turns on its head; capital should generally be taxed at a higher rate than labour.     

A note on progression,penalty schemes and tax evasion

This note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion, when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged. The answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion. If the penalty rate is charged on the undeclared income, tax evasion will increase, while if the penalty rate is charged on the evaded tax, tax evasion will decrease when the tax base is shifted towards progression.     

Monetary policy reaction functions and saving-investment correlations: Some cross-country evidence

Zusammenfassung Reaktionsfunktionen für die Geldpolitik und Korrelationen zwischen Ersparnis und Investitionen: Evidenz aus einer Querschnittsuntersuchung. — In diesem Artikel wird untersucht, wie stark die Geldpolitik auf Ver?nderungen in der Handelsbilanz reagiert. Verschiedene Sch?tzungen der linearen Reaktionsfunktionen mit Quartalsdaten für Deutschland, Italien, Japan und die USA zeigen, da\ in allen L?ndern mit Ausnahme der USA ein Defizit in der Handelsbilanz zu einer restriktiven Geldpolitik führt. Ein spezielles Sch?tzverfahren erlaubt den Schlu\, da\ die Reaktionsfunktionen nicht-linear sind, soweit es sich um die Handelsbilanzvariable handelt. Auch zeigt sich, da\ die Geldpolitik st?rker auf Defizite als auf überschüsse reagiert. Sobald Asymmetrie zugelassen wird, verbessern sich die Reaktionsfunktionen und die Parametersch?tzungen werden pr?ziser.

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Résumé Les fonctions de la réaction de la politique monétaire et les correlations entre épargne et investissements: quelque évidence d’une étude de plusieurs pays. — Dans cet article les auteurs examinent le degré avec lequel la politique monétaire a réagi à la balance courante. L’OMC, robustes et paramètres-variables estimations des fonctions de réaction linéaires avec des données trimestrielles de l’Allemagne, l’Italie, du Japon et des Etats Unis proposent pour les pays sauf les Etats Unis que le déficit de la balance courante mène à une politique monétaire restrictive. Les résultats d’une estimation spécifique indiquent que les fonctions de réaction sont non-linéaires aux termes de la variable pour la balance courante. La politique monétaire réagit plus fortement aux déficits qu’aux surplus. En outre, l’admission de l’asymétrie améliore la performance des fonctions de réaction et produit des paramètres estimés plus précis.

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Resumen Funciones de reacción de politica monetaria y correlaciones entre ahorro e inversión: alguna evidencia para una muestra de países. — En este trabajo se examina el grade en el cual la politica monetaria ha reaccionado a la cuenta corriente. Estimaciones MCC y de parametres robustos y variables de las funciones lineares de reacción con datos trimestrales de Alemania, Italia, Japon y de los Estados Unidos sugieren — los Estados Unidos siendo la excepción — que, ceteris paribus, el déficit de cuenta corriente resulta en una oferta monetaria restrictiva. Los valores criticos de la estimación (threshold estimation) indican que las funciones de reacción son no lineares en cuanto a la variable de la cuenta corriente, y que la política monetaria reacciona más a los déficits que a los superávits. Además, al incorporar la asimetricidad se mejora la performance de las funciones de reacción y se las estimaciones de los parámetros resultan más precisas.

     

Drivers of holding period firm-level returns in private equity-backed buyouts

We extend the research on the drivers of holding period firm-level returns in private equity (PE)-backed buyouts by examining deal-, industry-, and macroeconomic-level drivers and their interaction. To conduct our study, we use a comprehensive and hand-collected dataset covering exited buyouts in the UK between 1995–2004, and we control for sample selection and investment risk. Our study shows that governance variables generally have a limited role in driving value creation but that use of a ratchet is positively related to both equity and enterprise value returns; we also find that leverage has a positive impact on median and top-quartile equity returns. Moreover, returns are driven by the size of the buyout and the acquisitions made during the holding period. With respect to macroeconomic and industry level factors, industry growth particularly drives buyout returns. However, the effect of industry growth is not uniform; its influence is particularly strong in insider-driven and divisional buyouts, in addition to top-quartile transactions.     

The duality of bankruptcy process in Finland

Standard bankruptcy prediction methods lead to models weighted by the types of failure firms included in the estimation sample. These kinds of weighted models may lead to severe classification errors when they are applied to such types of failing (and non-failing) firms which are in the minority in the estimation sample (frequency effect). The purpose of this study is to present a bankruptcy prediction method based on identifying two different failure types, i.e. the solidity and liquidity bankruptcy firms, to avoid the frequency effect. Both of the types are depicted by a theoretical gambler's ruin model of its own to yield an approximation of failure probability separately for both types. These models are applied to the data of randomly selected Finnish bankrupt and non-bankrupt firms. A logistic regression model based on a set of financial variables is used as a benchmark model. Empirical results show that the resulting heavily solidity-weighted logistic model may lead to severe errors in classifying non-bankrupt firms. The present approach will avoid these kinds of error by separately evaluating the probability of the solidity and liquidity bankruptcy; the firm is not classified bankrupt as long as neither of the probabilities exceeds the critical value. This leads the present prediction method slightly to outperform the logistic model in the overall classification accuracy.