Knowledge that Transforms

Tax compliance studies usually focus on the effect of enforce-ment spending on tax evasion. Reliable estimates are difficult to obtain because evasion data are often suspect. This note shows how tax revenues can be used instead of evasion data to estimate the impact of changes in enforcement spending. Applying our method to Chilean data, we find that $1 (USD) of additional enforcement spending increases VAT revenues by $31. Moreover, current levels of spending could increase by 40% and still be within sample values. Hence, a 10% increase in spending could reduce evasion from its current rate of 23% to 20%.

We examine capital adjustment patterns using two large and largely novel plant-level data sets from the manufacturing sectors of Colombia and Mexico. The data suggest that irreversibilities play a more important role than in more-advanced economies. However, we do not find support for the presence of increasing returns in the adjustment cost technology, such as arising from fixed costs. Firms go through periods of inaction and rarely sell capital, but they do not invest at discrete times only. An examination of the dynamic patterns of adjustment of factors differing in their flexibility supports this interpretation.

Experimental data have consistently shown diversity in beliefs as well as in actions among experimental subjects. This paper presents and compares alternative behavioral econometric models for the characterization of player heterogeneity, both between and within subpopulations of players. In particular, two econometric models of diversity within sub-populations of players are investigated, one using a model of computational errors and the other allowing for diversity in prior beliefs around a modal prior for the subpopulation.

The empirical literature on intertemporal labor supply behavior documents that the intertemporal elasticity of substitution of labor supply is very low, with a plausible range of zero to 0.2. Drawing upon the literature on the distribution of instrumental variables (IV) estimators, this paper demonstrates that this conventional wisdom is erroneous because it does not take into account the severe finite sample bias in these estimates that arise from weak instruments. This paper adopts several approaches to adjust for the problems induced by these weak instruments. The empirical results show that, when uncorrected for finite sample bias, the two-stage least-squares (2SLS) estimate of the elasticity is essentially zero, as in most of the previous studies, with its valid confidence interval being open-ended, [−∞, +∞]. However, when corrected for finite sample bias, the estimate becomes approximately 0.5 with a much tighter confidence interval.

We estimate a multistage sequential logit model reflecting the structure of the disability determination process of the Social Security Administration (SSA). The model is estimated using household survey information exact-matched to SSA records on disability adjudications from 1989 to 1993. Under program provisions, different criteria dictate outcomes at different steps of the determination process. We find that, without the multistaged structural approach, effects of many important health, disability, and vocational factors are not readily discernible. As a result, split-sample predictions of overall allowance rates from the sequential model perform considerably better than do those for the conventional allowed/denied logit regression.

An I(2) analysis of inflation and the markup is undertaken for the G7 economies and Australia. We find that the levels of prices and costs are best described as I(2) processes and that, except for Japan, a linear combination of the log levels of prices and costs cointegrate to the markup that is integrated of order 1. It is also shown that the markup in each case co-integrates with inflation and that higher inflation is associated with a lower markup in the long run.

Super-experienced bidders have learned to overcome the winner's curse but still earn less than 50% of Nash equilibrium profits. Subjects deviate from the complicated Nash strategy, employing piecewise-linear bid functions that are capable, in principle, of generating an equilibrium with average profits at or above the Nash benchmark. Thus, limited computational abilities alone cannot account for the reduced earnings. Further, subjects are far from best responding within this family of piecewise-linear bid functions. Alternative factors contributing to these reduced earnings are explored.

Assessing the impact of new technologies on health care costs is an important research area. This paper evaluates two technologies used to treat coronary artery disease. We estimate two separate stochastic frontier models—one for balloon angioplasty patients and one for cardiac bypass surgery patient—using data taken from detailed chart and cost files of a large urban hospital. Cost estimates for the two technologies are purged of inefficiency so that forecasts of the cost consequences of technology shift can be based on ‘best-practice’ production techniques. Learning behavior, physician effects, and patient clinical characteristics are also taken into account. We find that there are potential cost savings associated with making angioplasty a more perfect substitute for bypass surgery, as well as current inefficiency in production.

Why do governments tax exports at rates that are ultimately self-defeating? An answer may lie in the time-inconsistent nature of a low-tax policy. Using a dynamic model of export taxation, I show that the sustainability of a low-tax policy depends on three variables: the ratio of sunk costs to total costs, how heavily future export revenue is discounted, and expected future export earnings. Using data on taxation, leadership duration, and profitability, I test this theory for 32 countries and six crops from Sub-Saharan Africa. These three variables are statistically and economically relevant predictors of tax regime.

Using firm-level data, we estimate the effects of the major wave of 1991 breakups of Czechoslovak state-owned enterprises on the subsequent performance of the ‘master enterprises’ and spun-off divisions. We estimate the performance effects of spinoffs by comparing the performance of enterprises that remained intact throughout the 1990–1992 period to the performance of the master enterprises that experienced spinoffs and the newly spun-off subsidiaries. Our estimates suggest that the breakups had a significant immediate effect on the productive efficiency and on the profitability of industrial firms in 1991, and that the effect became much less significant in 1992. The effect is a negative function of the size of the spinoff, being positive for small to slightly above average-sized spinoffs and negative for very large ones. We cannot reject the hypothesis that the estimated effect was identical for the spun-off subsidiaries and the master enterprises that experienced the spinoffs. Our 1991 estimates suggest that the large firms created under the centrally planned system suffered from inefficiencies that were alleviated by the breakups. The 1992 estimates are consistent with increased competition and the appropriation of profits by managers.