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on Contract Theory and Applications |
| By: | Szalay, Dezso; Yokeeswaran, Venuga |
| Abstract: | We study a model of managerial incentive problems where a manager chooses the first two moments of his firm's profit distribution - mean and volatility - along an efficient frontier. Assuming that managers differ with respect to their marginal cost of effort and their risk aversion we explore our model's comparative statics predictions in full detail. If managers' preference parameters are commonly known and associated, then a positive correlation between expected returns, volatility of profits, and incentives is the natural outcome. Allowing in addition for adverse selection with respect to the managers' preference parameters does not change the predicted correlation if the variation in observed contracts is not too large. Moreover, observed incentive schemes reflect exclusion of some manager types. Neglecting the endogeneity of risk in empirical studies biases estimates towards zero. |
| Keywords: | Managerial incentive problems; multidimensional heterogeneity; multidimensional screening |
| JEL: | D82 J33 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10312&r=cta |
| By: | Eeckhout, Jan (University College London); Guner, Nezih (MOVE, Barcelona) |
| Abstract: | We analyze the role of optimal income taxation across different local labor markets. Should labor in large cities be taxed differently than in small cities? We find that a planner who needs to raise revenue and is constrained by free mobility of labor across cities does not choose equal taxes for cities of different sizes. The optimal tax schedule is location specific and tax differences between large and small cities depend on the level of government spending and on the concentration of housing wealth. Our estimates for the US imply higher marginal rates in big cities, but lower than what is observed. Simulating the US economy under the optimal tax schedule, there are large effects on population mobility: the fraction of population in the 5 largest cities grows by 8.0% with 3.5% of the country-wide population moving to bigger cities. The welfare gains however are smaller. Aggregate consumption goes up by 1.53%. This is due to the fact that much of the output gains are spent on the increased costs of housing construction in bigger cities. Aggregate housing consumption goes down by 1.75%. |
| Keywords: | misallocation, taxation, population mobility, city size, general equilibrium |
| JEL: | H21 J61 R12 R13 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8781&r=cta |
| By: | Christopher Phelan; Aldo Rustichini |
| Abstract: | Inherent in the definition of Pareto efficiency is the idea that, in dynamic environments, an individual is indexed by the history of events up to his birth (rather than, as usual, the date of birth). Here, we explore the implications of this natural formulation. The set of Pareto efficient allocations that is consistent with this view is potentially larger than those considered so far in the literature. We show that the set of allocations is strictly larger because we do not require individuals to have insurance motives of the Harsanyi-Rawls type regarding risks on their own type realization. We do, however, maintain the insurance motives of parents toward their children. Even in our more general framework, efficiency criteria impose substantial restrictions on the set of allocations. Interestingly, the restrictions are of a new nature. Our different, more natural view has some important policy implications. The first is that some policy criteria (for example, the progressive nature of taxes) cannot be defended on efficiency grounds, once the Harsanyi-Rawlsian insurance criterion is rejected as being normatively unsound. Second, we show that the condition of imposing no taxes of any kind, coupled with each agent owning his own production, results in a Pareto efficient allocation. |
| JEL: | D6 E24 H21 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20883&r=cta |
| By: | Landier, Augustin; Sraer, David; Thesmar, David |
| Abstract: | We show that banks' cash flow exposure to interest rate risk, or income gap, plays a crucial role in their lending behavior following monetary policy shocks. In a first step, we show that the sensitivity of bank profits to interest rates increases significantly with their income gap, even when banks use interest rate derivatives. In a second step, we show that the income gap also predicts the sensitivity of bank lending to interest rates, both for commercial & industrial loans and for mortgages. Quantitatively, a 100 basis point increase in the Fed funds rate leads a bank at the 75th percentile of the income gap distribution to increase lending by about 1.6 percentage points annually relative to a bank at the 25th percentile. We conclude that banks' exposure to interest rate risk is an important determinant of the bank-level intensity of the lending channel. |
| Keywords: | bank lending; interest rate risk; monetary policy |
| JEL: | E44 E52 G21 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10300&r=cta |
| By: | Bruno Lanz; Sebastian Rausch |
| Abstract: | We study whether to auction or to freely distribute emissions allowances when some firms participating in emissions trading are subject to price regulation. We show that free allowances allocated to price-regulated firms effectively act as a subsidy to output, distort consumer choices, and generally induce higher output and emissions by price-regulated firms. This provides a cost-effectiveness argument for an auction-based allocation of allowances (or equivalently an emissions tax). For real-world economies such as the Unites States, in which about 20 percent of total carbon dioxide emissions are generated by price-regulated electricity producers, our quantitative analysis suggests that free allowances increase economy-wide welfare costs of the policy by 40-80 percent relative to an auction. Given large disparities in regional welfare impacts, we show that the inefficiencies are mainly driven by the emissions intensity of electricity producers in regions with a high degree of price regulation. |
| Keywords: | Tradable Pollution Permits; Climate policy; Auctioning; Free Allocation; Price Regulation; Electricity Generation. |
| JEL: | C6 D4 D5 Q4 Q5 |
| Date: | 2015–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:gii:ciesrp:cies_rp_34&r=cta |
| By: | Chiara Fumagalli (Università Bocconi, CSEF and CEPR); Massimo Motta (ICREA-Universitat Pompeu Fabra and Barcelona Graduate School of Economics) |
| Abstract: | Recent cases in the US (Meritor, Eisai) and in the EU (Intel ) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts. |
| Keywords: | Market-share discounts, Inefficient foreclosure, Exclusive dealing |
| JEL: | K21 L41 |
| Date: | 2015–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:385&r=cta |
| By: | Salvador Balle (Universitat de les Illes Balears); Lucia Mangiavacchi (Universitat de les Illes Balears); Luca Piccoli (Universitat de les Illes Balears); Amedeo Spadaro (Universitat de les Illes Balears) |
| Abstract: | The present work studies optimal taxation of labour income when taxpayers are allowed to evade taxes. The analysis is conducted within a general non-linear tax framework, providing a characterisation of the solution for risk-neutral and risk-averse agents. For risk-neutral agents the optimal government choice is to enforce no evasion and to apply the original Mirrlees' rule for the optimal tax schedule. The no evasion condition is precisely determined by a combination of a sufficiently large penalty and a constant auditing probability. Similar results hold for risk-averse agents. Our findings imply that a government aiming at maximizing social welfare should always enforce no evasion and provide simple rules to pursue this objective. |
| Keywords: | Tax Evasion, Optimal Taxation, Social Welfare |
| JEL: | D31 H21 H26 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ubi:deawps:68&r=cta |