This paper reconsiders the effects of taxation on risky assets, recognizing the importance of variations in asset prices. We show that earlier analyses which assumed that depreciation rates are constant and that the future price of capital goods is known with certainty are very misleading, as guides to the effects of corporate taxes. We then examine the concept of economic depreciation in a risky environment, and show that depreciation allowances, if set ex-ante, should be adjusted to take account of future asset price risk. Some empirical calculations suggest that these adjustments are large, and have important implications for the burdens of, and non-neutralities in, the corporate income tax.

This paper reconsiders the effects of taxation on risky assets, recognizing the importance of variations in asset prices. We show that earlier analyses that assumed that depreciation rates are constant and that the future price of capital goods is known with certainty are very misleading as guides to the effects of corporate taxes. We then examine the concept of economic depreciation in a risky environment and show that depreciation allowances, if set ex ante, should be adjusted to take account of future asset price risk. Some empirical calculations suggest that these adjustments are large and have important implications for the burdens of, and nonneutralities in, the corporation income tax.

We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether to enter the bidding. The sequential process is always more efficient. But preemptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry—precisely because of its inefficiency—it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc. (JEL D44, G34, L13)

We develop a model in which firms set impersonal salary levels before matching with workers. Wages fall relative to any competitive equilibrium while profits rise almost as much, implying little inefficiency. Furthermore, the best firms gain the most from the system while wages become compressed. In light of our results, we discuss the performance of alternative institutions and the recent antitrust case against the National Resident Matching Program.

In recent years, economists have increasingly debated whether multilateral development banks, such as the World Bank, should switch from making subsidized loans to giving outright grants. It is no small question. The combined loans of the World Bank Group and brethren regional entities such as the Asian and Inter-American Development Banks, approach $300 billion. Their funds constitute a main channel through which rich country governments provide assistance to developing country governments. In Bulow and Rogoff (1990), we first developed the case for a shift to outright grants. We argued that under the status quo, a vastly disproportionate share of aid goes to middle income countries via disguised interest subsidies, rather than to the poorest countries. We also argued that a shift to grants would protect donor banks from sometimes having to play a “bad cop” role when trying to collect net repayments rather than fully rolling over loans. The “Meltzer Commission” (International Financial Institution Advisory Commission, 2000) report on government sponsored international lending institutions famously took a similar view. Supporters of the status quo often argue that development bank loans to middle income countries are in fact highly profitable, and are essential for allowing institutions like the World Bank to subsidize aid to poor countries. We shall argue that the Bank’s profitability is an accounting artifice that greatly underestimates the risks of the Bank’s portfolio. Another argument for loans is that multilateral development banks have a superior enforcement technology that helps international debt markets to function more efficiently. Thus loans allow financially strapped governments, including in middle-income countries, to borrow more than they could otherwise. We will argue that this benefit, too, is an illusion. In those cases when official lending does expand a developing country government’s borrowing capacity, it effectively enables the government to commit the country to repayment levels beyond that supported by domestic political consensus, creating moral hazard for shortsighted rulers. In theory, better credit access to finance, say, public infrastructure projects can be highly beneficial. In practice, however, the increased risk of debt crisis all too often outweighs any gain ordinary citizens might enjoy from the loans. Furthermore, moral hazard on the part of lenders, who may be able to induce rich countries into subsidizing the bailout of troubled middle-income borrowers, may mean that aggregate lending is excessive even if multilaterals merely displace equivalent private debt. We do not argue for eliminating assistance to middle-income countries. On the contrary, we would favor expanding aid in general, albeit in far greater proportion to the world’s poorest countries. Note that in principle, any country with market access could use grant flows to help defray interest rate costs on loans if it so chose, but development banks would never need to assume a “bad cop” role in enforcing debt.

We model a war of attrition with N + K firms competing for N prizes. In a “natural oligopoly” context, the K − 1 lowest-value firms drop out instantaneously, even though each firm's value is private information to itself. In a “standard setting” context, in which every competitor suffers losses until a standard is chosen, even after giving up on its own preferred alternative, each firm's exit time is independent both of K and of other players' actions. Our results explain how long it takes to form a winning coalition in politics. Solving the model is facilitated by the Revenue Equivalence Theorem. (JEL D43, D44, L13, O30)

Price controls lead to misallocation of goods and encourage rent seeking. The misallocation effect alone ensures that a price control always reduces consumer surplus in an otherwise-competitive market with convex demand if supply is more elastic than demand or with log-convex demand (e.g., constant elasticity) even if supply is inelastic. The same results apply whether rationed goods are allocated by costless lottery or whether costly rent seeking and/or partial decontrol mitigates the inefficiency. Our analysis exploits the observation that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.