Front‐Running Scalping Strategies and Market Manipulation: Why Does High‐Frequency Trading Need Stricter Regulation?

Regulators continue to debate whether high‐frequency trading (HFT) is beneficial to market quality. Using Strongly Typed Genetic Programming (STGP) trading algorithm, we develop several artificial stock markets populated with HFT scalpers and strategic informed traders. We simulate real‐life trading in the millisecond time frame by applying STGP to real‐time and historical data from Apple, Exxon Mobil, and Google. We observe that HFT scalpers front‐run the order flow, resulting in damage to market quality and long‐term investors. To mitigate these negative implications, we propose batch auctions every 30 milliseconds of trading.     

Wages in the East German Transition Process: Facts and Explanations

We analyze wage developments in the East German transition process both at the macro- and at the microeconomic level. At the macroeconomic level, we draw special attention to the important distinction between product and consumption wages, describe the development of various wage measures, labor productivity and unit labor costs in East Germany in relation to West Germany, and relate these developments to the system of collective wage bargaining. At the microeconomic level, we describe changes in the distribution of hourly wages between 1990 and 1997 and analyze the economic factors determining these changes by way of empirical wage functions estimated on the basis of the Socio-Economic Panel for East Germany. The paper also draws some conclusions on the likely future course of the East–West German wage convergence process.     

Markets and Regulation: On the Contrast Between Free-Market Liberalism and Constitutional Liberalism

A liberalism that does not close its eyes to the constitutional level of choice must seek to extend the same fundamental logic that it applies in its theory of the market to the questions of what the sovereignty of the individual can mean, and how it can be secured, in constitutional matters. The problems that arise with such an extension to the constitutional level may well be more difficult than those that the liberal theory of the market has to deal with, and the conclusions that a constitutional liberalism arrives at may be less determinate that what the free-market approach pronounces. Yet, if these difficulties are inherent in the subject matter, and if the indeterminacy follows from arguments that we are required to accept, then denying them does not seem to be a promising strategy for strengthening the liberal paradigm.     

Financial Student Aid and Enrollment in Higher Education: New Evidence from Germany*

Means‐tested student aid might affect enrollment in higher education. To derive the potential influence of student aid, we use a tax‐benefit microsimulation model. The effect is a non‐linear function of parental income, with variation as a result of bracket creeping and various reforms. Therefore, the effect of student aid on enrollment can be separated from the effects of income and other family characteristics. Using the German Socio‐Economic Panel, we find a small but significant positive effect, similar in size to the effects reported in previous studies for European countries but smaller than in the US.     

Work Incentives and Labor Supply Effects of the ‘Mini-Jobs Reform’ in Germany

We analyze the work incentives and labor supply effects of the so-called mini-jobs reform (subsidies of social security contributions to people with low-earnings jobs) introduced in Germany in April 2003. The analysis is based on a structural labor supply model embedded in a detailed tax-benefit microsimulation model for which we use the German Socio-Economic Panel (GSOEP). Our simulation results show that the likely employment effects of the mini-jobs reform will be small. The small positive participation effect is outweighed by a negative hours effect among already employed workers. The fiscal effects of the reform are also likely to be negative. We conclude that the analyzed mini-jobs reform is not an effective policy to increase employment of people with low earnings capacity.*We thank the German Science Foundation (DFG) for financial support under the research program Flexibilisierungspotenziale bei heterogenen Arbeitsmärkten (project STE 681/5-1).     

Causes of recurrent unemployment—An empirical analysis

Zusammenfassung Die Determinanten erneuter Betroffenheit von Arbeitslosigkeit werden mittels Individualdaten für einen lokalen Arbeitsmarkt über einen Zeitraum von rund drei Jahren untersucht. Dazu wird ein Probit-Modell mit persönlichen Charakteristika der ehemals Arbeitslosen, der individuellen Arbeitsmarktbiographie im Anschluß an Arbeitslosigkeit, einem Arbeitsmarktindikator und der Arbeitslosenunterstützung als erklärenden Variablen spezifiziert. Die Wahrscheinlichkeit erneuter Betroffenheit von Arbeitslosigkeit hängt primär von bestimmten persönlichen Merkmalen ab. Das Verhältnis der Zahl der Arbeitslosen zur Zahl der offenen Stellen auf berufsspezifischen Teilarbeitsmärkten (Stellenandrangszahl) hat nur einen geringen Effekt, die vergangene Arbeitsmarktbiographie übt nur bei den Männern einen statistisch signifikanten Effekt aus. Der Einfluß der Arbeitslosenunterstützung ist weder bei den Männern noch bei den Frauen statistisch signifikant.

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I wish to thank G. Flaig, G. Licht, J. Zweimüller, and an anonymous referee for helpful suggestions. Support from the Fonds zur Förderung der wissenschaftlichen Forschung is gratefully acknowledged. The usual caveats apply.     

Corporate social responsibility and the ‘game of catallaxy’: the perspective of constitutional economics

The paper examines the issue of corporate social responsibility (CSR) from the perspective of constitutional economics, focusing on the distinction between a political community’s constitutional choice of the rules of the “market game,” and the market players’ sub-constitutional choice of strategies within these rules. Three versions of CSR-demands are identified and discussed, a “soft,” a “hard”, and a “radical” version. The soft version is concerned with the issue of how “socially responsible” corporations ought to play the market game within existing rules. The hard version is about how the rules of the market ought to be changed in order to induce “socially responsible” corporate behavior. And the radical version questions the compatibility of CSR and the logic of the market game, calling in effect for adopting some alternative economic regime.

Effective Taxation of Top Incomes in Germany

We exploit a dataset that includes the individual tax returns of all taxpayers in the top percentile of the income distribution in Germany to pin down the effective income taxation of households with very high incomes. Taking tax base erosion into account, we find that the top percentile of the income distribution pays an effective average tax rate of 30.5% and contributes more than a quarter of total income tax revenue. Within the top percentile, the effective average tax rate is first increasing, then decreasing, with income. Since the 1990s, effective average tax rates for the German super‐rich have fallen by about a third, with major reductions occurring in the wake of the personal income tax reform of 2001–05. As a result, the concentration of net incomes at the very top of the distribution has strongly increased in Germany.