Distress Risk,Growth and Earnings Quality

We extend and complement prior work by investigating the earnings quality of firms with different financial health characteristics and growth prospects. By using three alternative measures of default likelihood and two alternative measures of growth options, without being limited to a specific event, we provide a more comprehensive setup for analysing the earnings characteristics of the universe of firms than examining distressed firms with persistent losses, dividend reductions or bankruptcy‐filings. Our dataset consists of 15,049 healthy U.S. firms over the period 1990–2004. Results show that the relation between earnings quality and financial health is not monotonic. Distressed firms have a low level of earnings timeliness for bad news and a high level for good news, and manage earnings toward a positive target more frequently than healthy firms. On the other hand, healthy firms have a high level of earnings timeliness for bad news. Growth aspects play an important role in a firm's ability to manage earnings. In contrast to the findings of prior studies, growth firms have greater earnings timeliness for bad news, whereas value firms manage earnings toward a positive target more frequently than growth firms.     

Laboratory Federalism: The Open Method of Coordination (OMC) as an Evolutionary Learning Process

In view of the concept of laboratory federalism, the Open Method of Coordination (OMC), adopted by the EU as a mode of governance, can be interpreted as an imitative learning dynamics of the type considered in evolutionary game theory. Its iterative design and focus on good practice are captured by the behavioral rule “imitate the best.” In a redistribution game with utilitarian governments and mobile welfare recipients, we compare the outcomes of imitative behavior (long‐run evolutionary equilibria) and decentralized best‐response behavior (Nash equilibria). The learning dynamics leads to coordination on a strict subset of Nash equilibria, favoring policy choices that can be sustained by a simple majority of Member States.     

Saving and Portfolio Allocation Before and After Job Loss

We investigate the development of household labor income, financial wealth, and asset holdings over a 9‐year period around job loss, using unique administrative panel data from Norway. Consistent with predictions from theory, the data show additional saving and a shift toward safer assets in the years leading up to unemployment, and depletion of savings after job loss. In the years after job loss, the households' after‐tax labor income is reduced by about USD 12,500. Over the same time period, households deplete USD 3,000 of their financial assets, of which one third is accumulated prior to the job loss. This suggests that at least some households can foresee and prepare for the upcoming unemployment, which indicates that private savings can, to some extent, serve as a substitute for publicly provided unemployment insurance.     

TAX COMPETITION,RELATIVE PERFORMANCE,AND POLICY IMITATION

Rather than about their absolute payoffs, governments in fiscal competition often seem to care about their performance relative to other governments. Moreover, they often appear to mimic policies observed elsewhere. I study such behavior in a standard tax competition game. Both with relative payoff concerns and for imitative policies, evolutionary stability for games with finitely many players is the appropriate solution concept. Independently of the number of jurisdictions involved, an evolutionarily stable tax policy coincides with the competitive outcome of a tax competition game with infinitely many players. It, thus, involves drastic efficiency losses.     

Distortionary Taxation, Debt, and the Price Level

This paper compares the determinacy of equilibria under exogenous interest rates in an economy with a cash constraint, in which taxation is lump-sum or distortionary. Under passive fiscal policies lump-sum taxes generate nominal indeterminacy, while with distortionary taxes indeterminacy can be real, but not purely nominal. In general, under distortionary taxation uniqueness of the equilibrium allocation depends on monetary and fiscal policy interactions through taxes, debt, and interest rates. To illustrate this principle, we consider balanced-budget policies under distortionary income taxation and show that a unique equilibrium allocation prevails if interest rates are set consistent with long-run deflation. A separate section extends the analysis to endogenous interest rates.     

The Shadow Margins of Labor Market Slack

We use a mix of new and existing data to develop the Aggregate Hours Gap (AHG), a novel measure of labor market underutilization. Our measure differentiates individuals by detailed categories of labor market participation and uses data on their desired work hours as a measure of their potential labor supply. We show that desired hours vary widely by demographics and detailed labor force status, and that the gap between desired and actual work hours is strongly positively correlated with reported search effort. The AHG suggests a more sluggish labor market recovery since the Great Recession than either the official unemployment rate or alternative measures of labor market underutilization. Modest amounts of underutilization among the part-time employed and a substantial degree of underutilization among those out of the labor force account for the disparity. The AHG also does well in accounting for wage movements over our sample period.     

Asset Market Participation and Portfolio Choice over the Life‐Cycle

Using error‐free data on life‐cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life‐cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per‐period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.