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Firm leverage and wealth inequality
Bakota, Ivo
2020 - English
This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. The analysis focuses on the particular change in firm leverage that occurred in the U.S. during the 1980s, when firm leverage increased significantly, and subsequently has been dropping since the early 1990s. In the benchmark model, an increase in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. An increase in firm leverage increases average after-tax returns on savings, as firm debt has beneficial tax treatment. This increases the saving rates of all households, and disproportionately increases the saving rates of relatively poorer households. Consequently, the model implies that the increase in firm leverage did not contribute to rising inequality in the U.S. in the 1980s, but rather the opposite, that the reduction in leverage from the early 1990s to 2008 has contributed to rising wealth inequality. Furthermore, I show that if the model abstracts from beneficial tax treatment of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. This is consistent with the previous result in the literature showing that the Modigliani-Miller theorem approximately holds in the heterogeneous agents model with imperfect markets.
Keywords:
portfolio choice; heterogeneous agents; life-cycle
Fulltext is available at external website.
Firm leverage and wealth inequality
This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous ...
Redistributive capital taxation revisited
Kina, Ö.; Slavík, Ctirad; Yazici, H.
2020 - English
This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is significantly higher than the optimal rate of 48% in an identically calibrated model without capital-skill complementarity. The skill premium falls from 1.9 to 1.67 along the transition following the optimal reform in the capital-skill complementarity model, implying substantial indirect redistribution from skilled to unskilled workers. These results show that a government that cares about redistribution should take into account capital-skill complementarity in production when setting the tax rate on capital income.
Keywords:
capital taxation; capital-skill complementarity; inequality
Fulltext is available at external website.
Redistributive capital taxation revisited
This paper shows that capital-skill complementarity provides a quantitatively significant rationale to tax capital for redistributive governments. The optimal capital income tax rate is 60%, which is ...
Tax reforms and inter-temporal shifting of corporate income: evidence from tax records in Slovakia
Bukovina, J.; Lichard, Tomáš; Palguta, J.; Žúdel, B.
2020 - English
We use administrative tax return data for all corporations in Slovakia to demonstrate how policies facilitating inter-temporal income shifting result in elevated corporate income tax (CIT) elasticity estimates. Our strategy exploits kinks in the statutory tax schedules and policy reforms of tax carry-forwards. If inter-temporal shifting is neglected, our bunching estimates imply CIT elasticity of up to 0.65, suggesting a highly sensitive tax base with respect to the marginal tax rate. However, we show that CIT elasticity drops at least 21.2-49.1% when we remove the inter-temporal shifting component. This correction significantly reduces the estimated marginal excess burden of corporate taxation.
Keywords:
corporate income tax; elasticity; inter-temporal profit shifting
Fulltext is available at external website.
Tax reforms and inter-temporal shifting of corporate income: evidence from tax records in Slovakia
We use administrative tax return data for all corporations in Slovakia to demonstrate how policies facilitating inter-temporal income shifting result in elevated corporate income tax (CIT) elasticity ...
Corporate profitability and the global persistence of corruption
Ferris, S. P.; Hanousek, Jan; Trešl, Jiří
2020 - English
We examine the persistence of corporate corruption for a sample of privately-held firms from 12 Central and Eastern European countries over the period 2001 to 2015. Creating a proxy for corporate corruption based on a firm’s internal inefficiency, we find that corruption enhances a firm’s profitability. A channel analysis further reveals that inflating staff costs is the most common approach by which firms divert funds to finance corruption. We conclude that corruption persists because of its ability to improve a firm’s return on assets, which we refer to as the Corporate Advantage Hypothesis.
Keywords:
corruption; inefficiency; performance
Fulltext is available at external website.
Corporate profitability and the global persistence of corruption
We examine the persistence of corporate corruption for a sample of privately-held firms from 12 Central and Eastern European countries over the period 2001 to 2015. Creating a proxy for corporate ...
M&A activity and the capital structure of target firms
Flannery, M. J.; Hanousek, Jan; Shamshur, Anastasiya; Trešl, Jiří
2020 - English
Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly – within a year of the acquisition. The typical over-levered firm adjusts its debtto-assets ratio from 34.4% in the year before acquisition to 20% in the year after. (The adjustment is smaller, but still quite rapid, for targets that had been under-leveraged.) These adjustments occur primarily through debt issuances or retirements. We also investigate whether target firms’ pre-merger leverage contributes to the probability of them being acquired. We find that firms further away from their optimal leverage are more likely to be acquired: for an average firm, an increase in the absolute leverage deviation from 1% to 10% of total assets increases the probability of being acquired by 4.1% to 5.6% (The larger effect applies to overleveraged firms.) Overall, our results provide support for the trade-off theory of capital structure and suggest that financial synergies have a significant role in the typical European acquisition decision.
Keywords:
M&A; target capital structure; leverage deficit
Fulltext is available at external website.
M&A activity and the capital structure of target firms
Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite ...
Short-time work and related measures to mitigate the consequences of a (partial) economic shutdown
Mittag, Nikolas; Pertold, Filip
2020 - English
The objective of this document is to provide a basic foundation to think about the merits, alternatives and policy design choices of short-time work policies. The first section characterizes the motivation for short-term work and the types of costs that it can help to reduce or cause. The second section briefly overviews key policy alternatives and their merits, to lay out where short-time work has the potential to be useful, and what alternative tools can amend or replace it. This is followed by an overview of short-time work policies from the last recession and key lessons learned from that experience. The document closes with an overview of short-time work policies already enacted in response to the current economic situation. The main aim of this document is to draw general policy conclusions for the current situation in the Czech Republic based on the reviews and considerations in the first two sections. Section 3 will attempt to do so. Readers who are primarily interested in specific policies or those familiar with the literature on short-time work may want to go straight to Section 3.
Keywords:
COVID-19; Czech Republic
Available in digital repository of the ASCR
Short-time work and related measures to mitigate the consequences of a (partial) economic shutdown
The objective of this document is to provide a basic foundation to think about the merits, alternatives and policy design choices of short-time work policies. The first section characterizes the ...
Capital income taxation with portfolio choice
Bakota, Ivo
2020 - English
This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various households hold portfolios with a starkly different risk levels. In particular, poor households primarily save in safe assets, while rich households often invest a substantially higher share of their wealth in (risky) equity. At the same time, equity and safe assets are often taxed at different rates in many tax codes. This is primarily because investments in equity (which are relatively riskier) are taxed both as corporate and personal income, unlike debt, which is tax deductible for corporations. This paper firstly builds a simple theoretical two-period model which shows that the optimal tax wedge between risky and safe assets is increasing in the underlying wealth inequality. Furthermore, I build a quantitative model with a continuum of heterogeneous agents, parsimonious life-cycle, borrowing constraint, aggregate shocks and uninsurable idiosyncratic shocks, in which the government raises revenue by using linear taxes on risky and safe assets. Simulations of quantitative models shows that elimination of differential asset taxation leads to a welfare loss equivalent to a 0.3% permanent reduction in consumption. I find that the optimal tax wedge between taxes on equity and debt is higher than the one in the U.S. tax code.\n
Keywords:
portfolio choice; optimal taxation; redistribution
Fulltext is available at external website.
Capital income taxation with portfolio choice
This paper analyzes redistributional and macroeconomic effects of differential taxation of financial assets with a different risk levels. The redistributive effect stems from the fact that various ...
Firm life cycle and cost of debt
Amin, A.; Bowler, B.; Hasan, M. M.; Lobo, G. L.; Trešl, Jiří
2020 - English
This paper examines the relation between the corporate life cycle and lending spreads. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find that lending spreads follow a U-shape pattern across the life cycle phases. This pattern is in addition to the variation explained by typical controls. In a multivariate analysis, we find that firms in the introduction and decline phases pay lending spreads that are greater than firms in the mature phase (differences of 6 percent and 12 percent, respectively). We explore omitted variables bias and instrumental variable estimation in robustness testing and find that the shape pattern persists. Our findings are consistent with theoretical predictions regarding the relationship between the corporate life cycle and various lending risks.
Keywords:
firm life cycle; cost of debt; bank loans
Fulltext is available at external website.
Firm life cycle and cost of debt
This paper examines the relation between the corporate life cycle and lending spreads. Using a sample of 20,307 firm-loan observations spanning 5,076 publicly traded U.S. firms, we find that lending ...
Private and public IPR protection in a vertically differentiated software duopoly
Žigić, Krešimir; Střelický, J.; Kúnin, Michael
2020 - English
We study the interaction between public and private intellectual property rights (IPR) protection in a duopoly in which software developers offer a product variety of differing quality and compete for heterogeneous users, who have an option to buy a legal version, possibly use an illegal copy, or not buy a product at all. Illegal usage implies violation of IPR and is punishable. A developer may use private IPR protection for his software if the level of piracy is high. An important intermediate step in our analysis addresses firms’ pricing strategies and the analysis of the impact of both private and public IPR protection on these strategies (with monopoly serving as a benchmark case). Last but not least, we make some comparisons with an analogous model based on horizontal product differentiation.
Keywords:
vertically differentiated duopoly; software piracy; Bertrand competition
Fulltext is available at external website.
Private and public IPR protection in a vertically differentiated software duopoly
We study the interaction between public and private intellectual property rights (IPR) protection in a duopoly in which software developers offer a product variety of differing quality and compete for ...
Talent rewards, talent uncertainty, and career tracks
Jeong, Byeongju
2020 - English
I present a model in which (1) a more talent-demanding task increases both rewards for high talent and the penalty for low talent due to a greater fixed cost of production, and (2) individual talent is task-specific and talent updates occur only for tasks near the attempted task, which implies a task-sequence problem in which the initial task constrains subsequent task choices. Rising talent rewards and penalty stemming from a rising scale economy\nmotivate young workers to choose a more talent-demanding task, raise the failure rate (i.e., the probability of the updated talent being lower than the exit threshold), and concentrate income gains in a diminishing fraction of high-talent workers. Rising talent rewards and penalty also increase the share of young workers subject to binding minimum currentincome constraints, thus increasing the dispersion of tasks among young workers. The model sheds light on the rising stratification of careers among young workers and the rising polarization of the residual labor income distribution (i.e., the labor income distribution controlling for observable worker characteristics such as education and age).
Keywords:
career track; talent reward; talent uncertainty
Fulltext is available at external website.
Talent rewards, talent uncertainty, and career tracks
I present a model in which (1) a more talent-demanding task increases both rewards for high talent and the penalty for low talent due to a greater fixed cost of production, and (2) individual talent ...
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