The impact of endogenous tax treaties on foreign direct investment: theory and evidence

Abstract .  This paper investigates the effect of tax treaties on bilateral stocks of outward FDI. For this purpose we employ a numerically solvable general equilibrium model of trade and multinational firms to study the impact of tax treaties on both welfare and outward FDI. The model indicates under which factor endowment configurations countries gain in welfare when implementing a tax treaty. This motivates an empirical specification of the endogenous selection into implementing new tax treaties. Using data of bilateral OECD outward FDI between 1985 and 2000, we find a significant negative impact of newly implemented tax treaties on outward FDI stocks.     

Excess payoff dynamics and other well-behaved evolutionary dynamics

We consider a model of evolution in games in which agents occasionally receive opportunities to switch strategies, choosing between them using a probabilistic rule. Both the rate at which revision opportunities arrive and the probabilities with which each strategy is chosen are functions of current normalized payoffs. We call the aggregate dynamics induced by this model excess payoff dynamics. We show that every excess payoff dynamic is well-behaved: regardless of the underlying game, each excess payoff dynamic admits unique solution trajectories that vary continuously with the initial state, identifies rest points with Nash equilibria, and respects a basic payoff monotonicity property. We show how excess payoff dynamics can be used to construct well-behaved modifications of imitative dynamics, and relate them to two other well-behaved dynamics based on projections.     

Employment shifts, economic reform and the changes in public/private sector wages in Mexico: 1987–1997

Over the last decade, the public sector in Mexico experienced substantial fiscal reform, divestiture of public enterprises, and the elimination of many regulations affecting pay and employment. This study analyzes the changes in the public/private sector differences in wages during the 1987–1997 period. The results from analyzing microdata from the Encuesta Nacional de Empleo Urbano show that relative public sector wages increased from 1987 to 1997. Most of the relative wage increase in the public sector can be explained by increases in the price of skills and by changes in sorting across sectors. The results have important public policy implications since they suggest that public sector workers earn more and their wages have grown faster than those of their private sector counterparts. As such, policies contemplating public sector reform should take into account the effect of these measures on the inter-sectoral income distribution and the overall economic growth. First version received: April 2000/Final version received: December 2000     

A microfoundation for increasing returns in human capital accumulation and the under-participation trap

This paper considers educational investment, wages and hours of market work in an imperfectly competitive labour market with heterogeneous workers and home production. It investigates the degree to which there might be both underemployment in the labour market and underinvestment in education. A central insight is that the ex post participation decision of workers endogeneously generates increasing marginal returns to education. Although equilibrium implies underinvestment in education, optimal policy is not to subsidise education. Instead it is to subsidise labour market participation which we argue might be efficiently targeted as state-provided childcare support.     

Testing separability of public consumption in household decisions

In this paper we propose a sequential strategy, based on the microeconomic approach of the demand theory, in order to test for separability between private and public consumption. The aim of the present work is to verify, using a conditional almost ideal demand system, whether the different components of public consumption exert conditioning effects on the allocative structure of private spending. The empirical estimation of the model and the separability tests are developed for both a demand system in five functional categories of private spending, and for a demand system in six categories, where the private expenditures on those goods and services which can also be offered by the public sector are enclosed in a single functional category. The results of the separability tests, obtained using UK data for the 1974–2000 period, show that public individual consumption plays an important role in modifying consumer choices, while public collective consumption does not affect private consumption behaviours. The relationships between the different components of private spending and public individual consumption are both of substitutability and complementarity; in particular, we find that public individual consumption and the corresponding private expenditures on ‘Health, education, recreation and social protection’ are complements.     

Currency competition: A partial vindication of Hayek

This paper establishes the existence of equilibria for environments in which outside money is issued competitively. Such equilibria are typically believed not to exist because of a classic overissue problem: if money is valued in equilibrium, an issuer produces money until its value is driven to zero. By backward induction, money cannot have value in the first place. This paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes, then only those notes issued up to the threshold will be valued; additional notes will be worthless. This result is very general, applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite. The paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping-generations environment. The results depend on the environment considered, but two general conclusions arise. First, it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist. Second, with competitive issuance, a licensing agency can always improve on pure laissez-faire and achieve the efficient allocation in the long run.     

The macroeconomic consequences of terrorism

We perform an empirical investigation of the macroeconomic consequences of international terrorism and interactions with alternative forms of collective violence. Our analysis is based on a rich unbalanced panel data set with annual observations on 177 countries from 1968 to 2000, which brings together information from the Penn World Table data set, the ITERATE data set for terrorist events, and data sets of external and internal conflict. We explore these data with cross-sectional and panel growth regression analysis and a structural VAR model. We find that, on average, the incidence of terrorism may have an economically significant negative effect on growth, albeit one that is considerably smaller and less persistent than that associated with either external wars or internal conflict. As well, terrorism is associated with a redirection of economic activity away from investment spending and towards government spending. However, our investigation also suggests important differences both regarding the incidence and the economic consequences of terrorism among different sets of countries. In OECD economies, in particular, terrorist incidents are considerably more frequent than in other nations, but the negative influence of these incidents on growth is smaller.     

Macroeconomic consequences of terror: theory and the case of Israel

This paper analyzes the effect of terror on the economy. Terror endangers life such that the value of the future relative to the present is reduced. Hence, due to a rise in terror activity, investment goes down, and in the long run income and consumption go down as well. Governments can offset terror by putting tax revenues into the production of security. Facing a tide in terror, a government that acts optimally increases the proportion of output spent on defense, but does not fully offset the tide. Thus, when terror peaks the long run equilibrium with an optimizing government is of lower output and welfare. Next, we show that this theory of terror and the economy, helps to understand changes in trend and business cycle of the Israeli economy. The estimates show that terror has a large impact on the aggregate economy. Continued terror, at the level of the death toll by about the same size as due to car accidents, is expected to decrease annual consumption per capita by about 5% in 2004. Had Israel not suffered from terror during the last 3 years, we estimate that the output per capita would have been 10% higher than it is today.     

Payment system disruptions and the federal reserve following September 11, 2001

The monetary and payment system consequences of the September 11, 2001, terrorist attacks and the Federal Reserve's response are reviewed. Interbank payment disruptions appear to be a central feature of many US banking crises, and interbank payment disruptions seem likely to recur. Federal Reserve credit extension following September 11 succeeded in massively increasing the supply of banks’ balances to satisfy the disruption-induced increase in demand and thereby ameliorate the effects of the shock. Relatively benign banking conditions helped make Fed credit policy manageable. An interbank payment disruption that coincided with less-favorable banking conditions could be more difficult to manage, given current daylight credit policies. Paying interest on reserves would facilitate improvements in daylight credit policy.