WHY DO UNDERGROUND REDUCING POLICIES OFTEN FAIL THEIR SCOPE? SOME ANSWERS FROM THE ITALIAN EXPERIENCE

Several European countries, facing a sizeable underground economy, often adopt underground reducing policies mainly based on incentives in the tax-benefit system. Since empirical evidence manifests a substantial failure of such policies, we construct a simple model to indicate the crucial aspects of this failure. To this end we consider a tax-evading firm, allocating work in the official and underground sector, where it is not taxed. With a view to reducing underground employment, the government may decide to launch an amnesty for past social security non-compliance, while providing fiscal incentives for new hiring in order to encourage a process of worker regularization. Allowing for endogenous enforcement, we find that the reputation of policy-makers in combating tax evasion proves crucial in determining the success of such a policy.     

Tax Riots

This paper considers an optimal taxation environment where household income is private information, and the government randomly audits and punishes households found to be underreporting. We prove that the optimal mechanism derived using standard mechanism design techniques has a bad equilibrium (a tax riot) where households underreport their incomes, precisely because other households are expected to do so as well. We then consider three alternative approaches to designing a tax scheme when one is worried about bad equilibria.     

Debt Maturity, Risk, and Asymmetric Information

We test the implications of Flannery's (1986) and Diamond's (1991) models concerning the effects of risk and asymmetric information in determining debt maturity, and we examine the overall importance of informational asymmetries in debt maturity choices. We employ data on over 6,000 commercial loans from 53 large U.S. banks. Our results for low‐risk firms are consistent with the predictions of both theoretical models, but our findings for high‐risk firms conflict with the predictions of Diamond's model and with much of the empirical literature. Our findings also suggest a strong quantitative role for asymmetric information in explaining debt maturity.     

Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading

Trading systems differ in their degree of transparency, here defined as the extent to which market makers can observe the size and direction of the current order flow. We investigate whether greater transparency enhances market liquidity by reducing the opportunities for taking advantage of uninformed participants. We compare the price formation process in several stylized trading systems with different degrees of transparency: various types of auction markets and a stylized dealer market. We find that greater transparency generates lower trading costs for uninformed traders on average, although not necessarily for every size of trade.     

JOINT PRODUCTION AND GRAVITATION

This paper considers the problem of determining the new systemof production that will be utilised when, starting with a givenset of methods of production, a new set becomes available whichis more profitable than the original. The question is examinedin the context of joint production and seeks to model the processof gravitation to a new system of production in order to providean answer to the question of which system will be used.     

THE JOB CREATION EFFECT OF R&D EXPENDITURES*

In this study we use a unique database covering 25 manufacturing and service sectors for 15 European countries over the period 1996–2005, for a total of 2,295 observations, and apply GMM‐SYS panel estimations of a demand‐for‐labour equation augmented with technology. We find that R&D expenditure – fostering product innovation – have a job‐creating effect, in accordance with the previous theoretical and empirical literature discussed in the paper. Interestingly enough, the labour‐friendly nature of R&D emerges in both the flow and the stock specifications. These findings provide further justification for the European Lisbon targets.     

The Important Thing Is Not (Always) Winning but Taking Part: Funding Public Goods with Contests

This paper considers a public good game with heterogeneous endowments and incomplete information affected by extreme free riding. I overcome this problem through the implementation of a deterministic contest in which several prizes may be awarded. I identify a monotone equilibrium, in which the contribution is strictly increasing in the endowment. I prove that it is optimal for the social planner to set the last prize equal to zero, but otherwise total expected contribution is invariant to the prize structure. Finally, I show that private provision via a contest Pareto‐dominates public provision and is higher than the total contribution raised through a lottery.     

Identity Work: Sustaining Transnational Collective Action at General Motors Europe

What are the conditions under which transnational collective action is initiated and sustained? This article presents a case study of General Motors Europe, where labor leaders have mobilized the workforce and bargained with management at the transnational level repeatedly over more than a decade as a response to management whipsawing and threats of plant closures. In contrast to structuralist interest‐based theories of union behavior, we identify a process of “identity work” that was necessary to sustain transnational worker cooperation.