Restricted interest deductibility and multinationals’ use of internal debt finance

This paper reconsiders the role of interest deductibility for internal debt financing of multinational corporations (MNCs). We provide quasi-experimental evidence using restrictions on interest deductibility through thin-capitalization rules. Explicitly distinguishing between firms subject to a binding restriction and unrestricted firms, a panel data sample selection model is used to explore the tax sensitivity of the capital structure of foreign subsidiaries of MNCs. Our results confirm that the tax incentive for using internal loans is effectively removed for restricted subsidiaries. While internal debt financing of unrestricted subsidiaries positively responds to taxes, the effects are relatively small.     

Kritische Anmerkungen zum „Währungskrieg“

In der Februarausgabe 2011 ver?ffentlichte der Wirtschaftsdienst einen Beitrag von Gunther Schnabl zum Thema „Strukturelle Verzerrungen im W?hrungskrieg“. Georg Quaas setzt sich kritisch mit diesem Beitrag auseinander.     

Localized Technological Progress And Industry Structure: An Empirical Approach *

Modem innovation theory holds that the choice of production technique and technical porgress are unseparable activities so that technological progress can be described as localized. Based on this conception one has to expect an intra-sectoral firm heterogeneity in the production techniques applied and the technical efficiency achieved which contrasts to the presumption of intra-sectoral homogeneity as suggested by neoclassical theory. For measuring intra-industry heterogeneity an empirical tool is required which does not rest on the assumption of homogeneity, i.e. on a common production function for all firms under consideration. The method which does not require this assumption, Data Envelopment Analysis, is non-parametric, allows for firm-specific production functions and helps to determine differences in both technical efficiency and production technique applied. This tool is introduced in its basic formulation, its main features are discussed on ihe basis of modern innovation theory, and an empirical analysis for the German machinery, electronics and chemical industry is presented.     

How Much Did Oil Market Developments Contribute to the 2009 Recession in Germany?

In this paper, we use a structural vector autoregressive model to study the effects of oil market developments on the German economy. We find that higher oil prices are always associated with a decline in private consumption expenditures, but the response of gross domestic product (GDP) crucially depends on the underlying shock. While a disruption in oil supply provokes a recession, positive world demand shocks prompt a temporary increase in exports and investment, which initially outweigh the cutback on consumption. In a counterfactual analysis, we show that the world demand shocks that led to the 2007/2008 oil price rise triggered a delayed 0.8 percent decrease in German GDP in 2009, and therefore notably contributed to the recession of that year.     

In Memory of Michael Watts (November 3, 1950–December 5, 2014)

In an experimental economics simulation, Ukrainian teachers of economics chose free riding responses at a rate similar to those found by Leuthold in an undergraduate class on public economics at the University of Illinois. The authors speculate that those who become academic economists may do so because they have certain insights in deductive logic.     

The PSM approach to transitions: Bridging the gap between abstract frameworks and tangible entities

Transition research investigates processes of fundamental change in societal subsystems, such as a transition to a low-emission mobility system. Much of transition research uses abstract frameworks to structure narratives. An understanding of the underlying mechanisms generating transitions is however required for purposefully influencing transitions (to sustainability). Such mechanisms comprise constellations of actors, technologies, institutions and their interactions leading to a specific type of phenomenon and refer to more confined social phenomena than transitions. This paper introduces the PSM (Phenomenon of interest, Specification and operationalization, Mechanism) approach to embed mechanisms describing particular dynamics of interest within the broader picture of an overall transition. The PSM approach uses three steps to bridge abstraction levels: 1) identify a phenomenon of interest in a specific phase of a transition and on or across levels of the multi-level perspective, 2) specify and operationalize the phenomenon of interest, and 3) identify mechanisms which are (partial) explanations of the phenomenon of interest. The PSM approach is considered useful to bridge levels of abstractions between which policy development must navigate, to empirically ground discussions around abstract frameworks and to transfer insights on relevant mechanisms between cases. An illustrative example from the mobility field is given.     

The Impact of Thin‐Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach

Thin‐capitalization rules (TCRs) aim at limiting the tax advantage of internal debt financing by restricting the tax deductibility of the corresponding interest expenses. This article examines how subsidiaries of multinational firms respond to a change in the German thin‐capitalization legislation. The empirical analysis not only demonstrates that the TCR effectively restricts internal debt financing, it also suggests that firms are able to avoid taxation of interest by substituting external for internal debt. The empirical approach applies propensity score matching techniques and exploits the German tax reform 2001 to solve endogeneity problems.