Foreign direct investment,heterogeneous workers and employment security: Evidence from Germany

We analyze how foreign direct investment (FDI) affects employment security using administrative microdata for German employees. Measuring FDI intensity at the industry level enables us to take into account the sum of direct effects at multinationals as well as indirect effects of FDI throughout the affected industry. We find that both inward and outward FDI significantly reduce employment security. This is particularly the case for inward FDI coming from the western part of the European Union as well as for outward FDI going to Central and Eastern Europe. The effects are sizeable for older and low‐skilled workers.     

THE PRIVATE RATIONALITY OF BOTTLED WATER DRINKING

This article examines evidence for the private rationality of decisions to choose bottled water using a large, nationally representative sample. Consumers are more likely to believe that bottled water is safer or tastes better if they have had adverse experiences with tap water or live in states with more prevalent violations of EPA water quality standards. Perceptions of superior safety, taste, and convenience of bottled water boost consumption of bottled water. Blacks and Hispanics are more likely to drink bottled water due to their relatively greater exposure to unsafe water and greater risk beliefs. The coherent network of experiences, beliefs, and actions is consistent with rational consumer choice. (JEL D12, D80, Q50)     

Credit Spread Changes and Equity Volatility: Evidence from Daily Data

We investigate the determinants of daily changes in credit spreads in the U.S. corporate bond market. Using a sample of liquid investment grade and high‐yield bonds, we show that both systematic bond and stock market factors as well as idiosyncratic equity market factors affect changes in the yield spread at the daily frequency. In particular, we find that increase in stock market volatility has a positive effect on changes in the spread of corporate bonds over the corresponding Treasuries beyond that captured by standard term structure variables. Our results show that there is an almost contemporaneous inverse relationship between changes in the bond yield spread and the stock return of the issuing firm.     

Financial reporting,tax, and real decisions: toward a unifying framework

This paper provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. It develops a framework that formalizes the idea that the attractiveness of some investment decisions is enhanced because they provide managers with discretion over the timing of taxable income and/or book income. It then examines from this perspective several current examples of tax and accounting issues.     

War and peace: Third-party intervention in conflict

This paper develops a simple sequential-move game to characterize the endogeneity of third-party intervention in conflict. We show how a third party's “intervention technology” interacts with the canonical “conflict technologies” of two rival parties in affecting the sub-game perfect Nash equilibrium outcome. From the perspective of deterrence strategy, we find that it is more costly for a third party to support an ally to deter a challenger from attacking (i.e., to maintain peace or acquiescence), as compared to the alternative case when the third party supports the ally to gain a disputed territory by attacking (i.e., to create war), ceteris paribus. However, an optimally intervening third party can be either “peace-making”, “peace-breaking”, or neither depending on the characteristics of the conflict and the stakes the third party holds with each of the rival parties.     

On the timing of information release

We consider a simple principal-agent model in which moral hazard concerns can make it attractive to delay the release of valuable planning information. We also demonstrate that temporary manipulation of the content of the information released can be valuable.     

Changing fuel use behavior: The Pittsburgh smoke control movement, 1940–1950

Local policy development in Pittsburgh brought about cleaner air by influencing change in the household use of fuel and combustion equipment. By a combination of media campaigns, voluntary organizations, technical advisers, and business and labor leaders, the public was convinced of the necessity to reduce air pollution. The unique aspect is that the public accepted the costs of a long-range policy decision through education and persuasion.     

Three challenges for public finance

Conclusions There is one common thread that runs through all three of these challenges. It is a plea to look beyond the standard model of taxation in which it is assumed that the taxed goods directly enter into individuals' utility functions or firms' production functions. At a very basic level this assumption is incorrect because what is taxed is what the taxpayer reports or the tax agency observes, not what the taxpayer consumes or the firm uses and produces. Thus we must analyze tax systems in which the compliance and enforcement elements are explicit.This focus is especially important for international taxation issues because of the difficulty of taxing nonresidents' income and the foreign-source income of domestic residents. It is inevitable that tax systems are designed with these practical difficulties in mind, and, in order to participate fully in the policy debates, economists ought to think carefully about these issues.The distinction may also hold the key to making sense of the empirical evidence about the impact of the U. S. tax changes of the 1980s. There are many avenues of response to tax rate changes other than changing one's consumption bundle or input mix; we need to think hard about whether these responses preclude or merely accompany the real responses that are of ultimate interest.If public finance is to decline in the 1990s, it will not be because of a lack of intellectually exciting challenges that confront us. There are many such challenges, and I am confident that they will attract the attention of both newly minted and well circulated economists.     

CORPORATE GOVERNANCE, EVA, AND SHAREHOLDER VALUE

Together with corporate governance expert Stuart Gillan, the managing partner of Stern Stewart discusses important issues of corporate financial management, including the fundamental objective of the public corporation and how boards of directors can achieve it. Whereas financial economists have long argued that the corporate goal is the maximization of firm value, Stern advocates a variation of the concept known as "Market Value Added"–one that is designed to discourage corporate growth and capital raising that does not end up adding value for shareholders. To accomplish this goal, he emphasizes the importance of incentive compensation systems tied not to accounting earnings, but to a measure of economic profit like EVA. And, as Stern argues in closing, EVA-based incentive systems are likely to be effective not only in the private sector, but in increasing the efficiency and value of state-owned enterprises. Indeed, such systems could bring about a new kind of employee capitalism that ESOPs promised, but have largely failed, to deliver.