This paper presents a model of optimal tax-motivated intertemporal income shifting given a quadratic cost function that relates the costs associated with shifting income to the amount of income shifted. By formally modeling the income-shifting decision, we: (1) show how parameter estimates of the income-shifting cost function can be extracted from a linear regression where a proxy for income shifted is the dependent variable, (2) provide insight into prior tax-motivated income-shifting research, and (3) clarify the interpretation of independent variables that capture the interaction between tax incentives and nontax costs. We then provide an empirical application of our method for quantifying the costs to shift federal taxable income by investigating the income-shifting behavior of firms in the property and casualty (P&C) insurance industry following the Tax Reform Act of 1986. Our results suggest that the parameters of the cost function are negatively related to firm size, the cost to shift a significant amount of income is nontrivial, and the marginal cost to shift income increases as more income is shifted.

We use a unique firm-level panel data set of multinational parents and their foreign affiliates to analyze whether profits are shared across borders within multinational firms. Using both fixed-effects and generalized method-of-moments estimators, affiliate wage levels are estimated to respond to both affiliate and parent profitability. The elasticity of affiliate wages to parent profits per worker is approximately 0.03, which can explain over 20 percent of the observed variation in affiliate wages. These results reveal a previously ignored aspect of labor-market rent sharing. They also reveal an important micro-level linkage with potential macro-level implications. International rent sharing can transmit economic conditions across national borders, and can thereby provide an implicit cross-country risk-sharing mechanism.

ABSTRACT We test the theoretical equivalence of credit default swap (CDS) prices and credit spreads derived by Duffie (1999) , finding support for the parity relation as an equilibrium condition. We also find two forms of deviation from parity. First, for three firms, CDS prices are substantially higher than credit spreads for long periods of time, arising from combinations of imperfections in the contract specification of CDSs and measurement errors in computing the credit spread. Second, we find short‐lived deviations from parity for all other companies due to a lead for CDS prices over credit spreads in the price discovery process.

Fear and Greed in Financial Markets: A Clinical Study of Day-Traders by Andrew W. Lo, Dmitry V. Repin and Brett N. Steenbarger. Published in volume 95, issue 2, pages 352-359 of American Economic Review, May 2005

by the Harvard Olin Center for Law, Economics, and Business. 1 The value of a statistical life (VSL) plays the central role in regulatory decisions affecting risks to life and health. Economists continue to try to improve the accuracy and concomitant usefulness of benefit assessments by examining whether the typically calculated VSL understates the average benefits of life-saving government regulations and whether the heterogeneity in individual VSLs should influence policy. Here we examine empirically the importance of two possible omitted variables that could affect the estimates of VSL based on the typical wage equation, relative position in the wage distribution and relative age within the life-cycle pattern of consumption. We find that ignoring the worker’s relative position in the wage distribution does not affect VSL as conventionally computed, but that ignoring workers ’ planned consumption undervalues VSL by perhaps 20 percent. Our results have implications for the economic understanding of the compensating wage differential process as well as for policy. The modest effect of adding measures of relative economic position to the canonical hedonic wage regression suggests that workers taking risky jobs make their decisions based on their personal wage-risk tradeoff rather than their status or relative economic position. In contrast, the worker’s relative position within the personal life cycle pattern of consumption is a driving force that affects the temporal trajectory of VSLs over the life cycle and is a promising way to consider distributional consequences of policy simply. Appropriate VSL assessments should not downweight the risks to older citizens compared to the young because the effect of age on the level of planned consumption may outweigh or dampen the effect of age in shortening people’s remaining future lifetimes. 2

Farley W. Grubb's recent papers on the early U.S. monetary system would be important contributions to the common currency area literature were not most of their historical assertions questionable and their key assumption—that the medium of exchange can be inferred from the unit of account—dubious. We contend that after 1781 most Americans eschewed government paper money in favor of fullbodied coins and convertible bank liabilities and that, contrary to Grubb's claim, bankers did not foist the constitutional clause banning state emissions onto an unsuspecting public.

ABSTRACT We study merger and acquisition (M&A) payment choices of European bidders for publicly and privately held targets in the 1997–2000 period. Europe is an ideal venue for studying the importance of corporate governance in making M&A payment choices, given the large number of closely held firms and the wide range of capital markets, institutional settings, laws, and regulations. The tradeoff between corporate governance concerns and debt financing constraints is found to have a large bearing on the bidder's payment choice. Consistent with earlier evidence, we find that several deal and target characteristics significantly affect the method of payment choice.

Two alternative approaches are used in audit practice to provide quantitative materiality assessments about proposed audit adjustments. The cumulative approach compares to net income the total amount of misstatement existing at the end of the current period, while the current-period approach compares to net income the amount of misstatement added in the current period. Depending on the relation between total misstatement and current-period misstatement, either the cumulative approach or the current-period approach can calculate higher quantitative materiality. This paper reports an experiment that varies materiality approach between auditors by providing auditors with either the current-period or cumulative formats used by their firm to summarize proposed audit adjustments. Results indicate that, across a variety of experimental contexts (varying misstatement size, subjectivity, precision, and income effect, and varying whether auditors document effects on their client's quality of earnings), auditors are more likely to require their client to book the misstatement under the approach that makes the misstatement appear more material. These results suggest that standard setters mandate that auditors require adjustment whenever a misstatement is material under either approach.

ABSTRACT We show in this article that bank failures can be contagious. Unlike earlier work where contagion stems from depositor panics or contractual links between banks, we argue that bank failures can shrink the common pool of liquidity, creating, or exacerbating aggregate liquidity shortages. This could lead to a contagion of failures and a total meltdown of the system. Given the costs of a meltdown, there is a possible role for government intervention. Unfortunately, liquidity and solvency problems interact and can cause each other, making it hard to determine the cause of a crisis. We propose a robust sequence of intervention.

Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach by Wolfram Schlenker, W. Michael Hanemann and Anthony C. Fisher. Published in volume 95, issue 1, pages 395-406 of American Economic Review, March 2005