Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology

This article introduces a new methodology to investigate the effects of the 1986 Tax Reform Act (TRA) on corporate dividend policy. The methodology employs a modified version of Rozeff's (1982) model to control for the potential effect of underlying influential variables. The empirical results show there is no widespread reaction to the 1986 TRA passage on the aggregate level of dividends and only modest support for an industry-related dividend effect. We also find that firm size does not play a significant role in dividend policy reaction to the 1986 TRA.     

Industrial survey sampling

A market researcher designs a probability sample of 1000 business executives. Questionnaires are mailed and ultimately 400 usable replies are received. Is the researcher entitled to say that his 400 respondents still represent a probability sample of the population? If the researcher is to evaluate the results of his survey by using statistical techniques that are valid only in reference to the probability sample, then evidence should be presented to show that the character of probability in the sample as originally designed has not been destroyed through nonresponse. There are very sophisticated methods for evaluating the impact of nonresponse, as well as less technical methods. The researcher reporting survey results owes it to the users of the data to explain the initial design of the sample and, if there is a problem of nonresponse, to explain the procedures that have been used to asses the impact of the nonresponse factor. Unless the sample as ultimately executed can be defended as a probability sample, statistical techniques that assume probability should not be employed in evaluating results.     

The effectiveness of supply-side tax cuts under alternative political models

Conclusion Unless a supply-side tax cut is accompanied by a genuine limit on government spending, there are two relative price effects that need to be taken into consideration. The case for a supply-side tax cut has been based on the relative price shift between consumption versus investment goods. However, investment incentives created by this change in relative prices may be completely stymied by the political response to an accompanying relative price shift between publicly and privately supplied goods. It is the conclusion of this paper that the latter relative price effect will be more important in a political process controlled by the median voter than in one controlled by special interests.Based on the conclusion, it is interesting to speculate that those who model government as responsive to the median voter, [e.g., Meltzer and Richard (1981)] will be less enthusiastic about supply-side tax cuts not accompanied by spending limits than those who model government as controlled by special interests [e.g., Niskanen (1971)]. Another, and possibly safer, conjecture is to reverse directions and conclude that enthusiastic supply-siders will be those who believe that government size is largely determined by the demands of special interests and as a consequence is excessive.     

Cartels,coalitions, and constitutional politics

While every industry desires political protection against the rigors of competition, no industry would see advantage in having that protection generalized to the entire economy. The ideal from the perspective of a given industry is to receive protections for itself, while the remainder of the economy remains competitive. Such a priviledged outcome is not possible, of course, in a broadly democratic regime, and the industry that obtains protections for itself does so by joining into a coalition, explicit or otherwise, which obtains protections for everyone in the coalition. A simple model is developed in which an equilibrium coalition emerges. While it is obviously better for an industry to be in, rather than outside, such an existing coalition, it is shown that even those who are members of a protected coalition may be better off under a constitutional regime that prevents any industry from receiving protections against competition. We thank Ronald Heiner and Robert Tollison for helpful comments on earlier versions of this paper. The standard disclaimer applies. Much of the work on this paper was done while Dwight Lee was the John M. Olin visiting scholar at the Center for the Study of American Business, Washington University.     

Monoline Restrictions, with Applications to Mortgage Insurance and Title Insurance

Insurance firms in the United States generally operate on a multiline basis, meaning that they provide coverage for two or more insurance lines, such as auto and homeowner insurance. Most states, however, require that firms offering mortgage or title insurance operate on a monoline basis, meaning that an insurance firm may provide coverage against only one type of risk. This paper investigates the conditions under which monoline restrictions represent efficient regulatory policy. Monoline requirements are an intriguing issue because multiline insurance firms receive the diversification benefit that the firm’s capital is available to pay insurance claims on any of its lines. The paper shows, however, that the specific features of the mortgage and title insurance lines create a special case in which monoline restrictions may represent efficient regulatory policy.     

‘Inframarginal values and demand: Contra Dwight Lee’: Response to Coelho and McClure

In my paper (Journal of Bioeconomics, 11(1), 1–21, 2009). I reconciled results from happiness studies with demand analysis by assuming that adaptation to a good reduces the value of the inframarginal units of the good to its marginal value. According to Coelho and McClure (Journal of Bioeconomics, 11(3), 2009) this assumption implies that, once adaptation has occurred, a trivial increase in the good’s price will reduce the amount demanded to zero. My response argues that this is not an implication of my analysis since a reduction in the consumption of the good eliminates the adaptation to it, and restores the standard demand curve over the lost consumption.