Knowledge that Transforms

Dividend Taxes and Firm Valuation: New Evidence By Alan J. Auerbach and Kevin A. Hassett * The Jobs and Growth Tax Relief Act of 2003 (JGTRA03) reduced the tax rates on dividends, with the highest statutory tax rate of 35 percent falling to 15 percent. An interesting twist on the dividend tax cut was its temporary nature; the provision as passed was effective only through 2008, and (as recent Congressional deliberations have illustrated), the extension its supporters envisioned was by no means certain. This large dividend tax reduction, along with its sunset provision, offers an unusual natural research experiment on the effects of dividend taxation. The theory of dividend taxation suggests three possible scenarios for the effects of the dividend tax reduction. Under the “tax irrelevance” view, the marginal shareholder is a tax-free entity (or a taxable investor who ignores or can offset incremental taxes), and the dividend tax reduction has no effect on equity values or firm behavior. Under the “traditional” view the marginal source of equity finance is new share issuance, and the tax reduction feeds through to the firm’s user cost and stimulates extra capital formation. Share values rise in the short run but, after full adjustment, the higher capital level reduces the marginal revenue product of capital enough to offset the dividend tax reduction, leaving equity prices the same. Under the “new” view, the marginal source of finance is retained earnings and the dividend tax cut is capitalized into the share price of the firm but has no investment effect. Understanding the economic consequences of the dividend tax reduction requires knowledge of the empirical relevance of these competing views. Our previous paper (Auerbach and Hassett 2005) performed an event-study analysis of a large panel of firms to determine how firm attributes affected the valuation response over eight key event dates leading up to the 2003 legislation. Our results, taken together, rejected outright

Technology Improves Learning in Large Principles of Economics Classes: Using Our WITS by Sheryl B. Ball, Catherine Eckel and Christian Rojas. Published in volume 96, issue 2, pages 442-446 of American Economic Review, May 2006

During the World War II and Korean War era, the U.S. military freely distributed cigarettes to overseas personnel and provided low-cost tobacco products on domestic military bases. In fact, even today the military continues to sell subsidized tobacco products on its bases. Using a variety of instrumental variables approaches to deal with nonrandom selection into the military and into smoking, we provide substantial evidence that cohorts with higher military participation rates subsequently suffered more premature mortality. More importantly, we show that a large fraction, 35 to 79 percent, of the excess veteran deaths due to heart disease and lung cancer are attributable to military-induced smoking.

The property rights approach to the theory of the firm suggests that ownership structures are chosen in order to provide ex ante investment incentives, while bargaining is ex post efficient. In contrast, transaction cost economics emphasizes ex post inefficiencies. In the present paper, a party may invest and acquire private information about the default payoff that it can realize on its own. Inefficient rent seeking can overturn prominent implications of the property rights theory. In particular, ownership by party B may be optimal, even though only the indispensable party A makes an investment decision.

After more than a decade of negotiations and planning under the Framework Convention on Climate Change (FCCC), the first binding international agreement to control the emissions of greenhouse gases has come into effect in the Kyoto Protocol. The first budget period of 2008–2012 is at hand. Moreover, the scientific evidence on greenhouse warming strengthens steadily as observational evidence of warming accumulates. The institutional framework of the Protocol has taken hold solidly in the European Union’s Emissions Trading Scheme (ETS), which covers almost half of Europe’s carbon dioxide emissions. Notwithstanding this apparent success, the Kyoto Protocol is widely seen as somewhere between troubled and terminal. Early troubles came with the failure to include the major developing countries along with lack of an agreedupon mechanism to include new countries and extend the agreement to new periods. The major blow came when the United States withdrew from the treaty in 2001. By 2002, the Protocol covered only 30 percent of global emissions, while the hard enforcement mechanism in the ETS accounts for about 8 percent of global emissions. Even if the current Protocol is extended, models indicate that it will have little impact on global temperature change. Unless there is a dramatic breakthrough or a new design, the Protocol threatens to be seen as a monument to institutional overreach. Nations are now beginning to consider the structure of climate-change policies for the period after 2008 to 2012. Some countries, states, cities, companies, and even universities are adopting their own climate-change policies. Are there, in fact, alternatives to the scheme of tradable emissions permits embodied in the Protocol? The fact is that alternative approaches have not had a serious hearing among natural scientists or among policymakers. What are some alternatives? For global public goods, there are three potential approaches: command-and-control regulation, quantity-oriented market approaches, and taxor price-based regimes. Of these, only the tradable-quantity and the price-like regimes have any hope of being reasonably efficient. Under a tradable-quantity approach, an agreement proceeds by setting limits on emissions by different countries. The limits are partially or wholly transferable among countries. This is the approach taken under the Kyoto Protocol. This approach has very limited international experience under existing protocols such as the CFC (chlorofluorocarbon) mechanisms and somewhat broader experience under national trading regimes, such as the U.S. sulfur dioxide regime. A radically different approach is to use harmonized prices, fees, or taxes as a method of coordinating policies among countries. This approach has no international experience in the environmental area, although it has modest experience nationally in such areas as the U.S. tax on ozone-depleting chemicals. On the other hand, the use of harmonized, price-type measures has extensive international experience in fiscal and trade policies, such as with the harmonization of taxes in the European Union and harmonized tariffs in international trade. These thoughts on the structure of international agreements to control global warming should not be regarded as negotiating strategies

Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade: Comment by Jürgen Meckl. Published in volume 96, issue 5, pages 1924-1930 of American Economic Review, December 2006

This paper reports an experiment that elicits subjects' initial responses to 16 dominance-solvable two-person guessing games. The structure is publicly announced except for varying payoff parameters, to which subjects are given free access. Varying the parameters allows very strong separation of the behavior implied by leading decision rules. Subjects' decisions and searches show that most subjects understood the games and sought to maximize payoffs, but many had simplified models of others' decisions that led to systematic deviations from equilibrium. The predictable component of their deviations is well explained by a structural nonequilibrium model of initial responses based on level-k thinking.

Helping Infant Economies Grow: Foundations of Trade Policies for Developing Countries by Bruce Greenwald and Joseph E. Stiglitz. Published in volume 96, issue 2, pages 141-146 of American Economic Review, May 2006

Water utilities are reminiscent of network industries and are characterized by important fixed costs. These factors contribute to a single firm serving an area justifying public intervention on pricing. About one fourth of U.S. water utilities is private and subject to regulation. Regulators are unlikely to be perfectly informed and regulation is unlikely to be costlessly implemented. These inherent imperfections have lead economists to consider the incentive properties of regulatory procedures using the economics of information. See David Baron (1989). The empirical literature on regulation has focused on evaluating the effects of regulation on prices, firms ’ costs, efficiency and innovation in sectors such as airline, electricity and energy as surveyed by Paul Joskow and Nancy Rose (1989). Few of these empirical studies rely on the socalled theory of regulation. Regarding the water industry, there is an abundant literature on residential water demand, firms ’ cost and their efficiency given their public versus private nature. Relying on a model with asymmetric information and a sample of California water utilities, Frank Wolak (1994) assesses the consumer welfare loss due to asymmetric information and shows that the model with asymmetric information provides a superior description of the cost and demand data than the model under perfect

There are substantial differences between open-source projects and traditional innovative efforts in private firms. Private firms usually pay their workers, direct and manage their efforts, and control the output and intellectual property created. In an open-source project, however, a body of original material is made publicly available for others to use, under certain conditions. Contributions to open-source projects are made by a diverse array of individual contributors, and for-profit corporations, who must often agree to make enhancements to the original material widely available for nominal cost. This paper empirically examines the dynamics of contributions to open-source software projects. We show that the share of corporate contributions in a sample of approximately 100 open-source projects between 2001 and 2004 is greater in larger and growing projects.