This article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short-sale restrictions. The optimal decisions are a function of the investor's age, initial portfolio holdings, and tax basis. Our results capture the trade-off between the diversification benefits and tax costs of trading over an investor's lifetime. The incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor's age. Contrary to standard financial advice, the optimal equity holding increases well into an investor's lifetime in our model due to the forgiveness of capital gains taxes at death.

Jonathan Clarke, Craig Dunbar, Kathleen M. Kahle, Long-Run Performance and Insider Trading in Completed and Canceled Seasoned Equity Offerings, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 4 (Dec., 2001), pp. 415-430

Immigration increased Israel's population by 12 percent between 1990 and 1994, after emigration restrictions were lifted in an unstable Soviet Union. Following the influx, occupations that employed more immigrants had substantially lower native wage growth and slightly lower native employment growth than others. However, because the immigrants' postmigration occupational distribution was influenced by relative labor market conditions across occupations in Israel, Ordinary Least Squares estimates of the immigrants' impact on those conditions are biased. Instrumental Variables estimation, exploiting information on the immigrants' former occupations abroad, suggests no adverse impact of immigration on native outcomes.

School finance equalization has probably affected American schools more than any other reform of the last 30 years. Understanding it is a prerequisite for making optimal social investments in human capital. Yet, it is poorly understood. In this paper I explain why: it differs from conventional redistribution because it is based on property values, which are endogenous to schools' productivity, taste for education, and the school finance system itself. I characterize equalization schemes and show why some "level down" and others "level up." Schemes that strongly level down have unintended consequences: even poor districts can end up worse off. I also show how school finance equalization affects property prices, private school attendance, and student achievement.

Prior to the Tax Reform Act of 1986 (TRA 86), interest paid on all types of household debt was deductible from income before the payment of taxes. In 1986, Congress changed the law to phase out the deductibility of interest over a five-year period.' Congress believed deductibility of interest an incentive to invest in durables rather than assets which produce taxable income and, therefore, an incentive to consume rather than save.... By phasing out the present deductibility of personal Congress intended to eliminate from the prior tax law a significant disincentive to (Joint Committee on Taxation [JCT], 1987 p. 263). The other goal of the provision was to raise $9.6 billion per year in tax revenue by 1991. Because Congress determined that encouraging home ownership is an important policy goal, achieved in part by providing a deduction for residential mortgage interest, it chose to retain the residential mortgage interest deduction (JCT, 1987 pp. 263-64). Thus, mortgage interest was fully deductible for interest paid on debt secured by a taxpayer's first or second residence up to his basis in the residence. The Omnibus Budget Reconciliation Act of 1987 (OBRA 87) changed the law so that interest paid was fully deductible on up to $1 million in acquisition debt and $100,000 in home equity debt.2 Debt is categorized as acquisition debt if it is used for the purchase or improvement of a home; home equity debt includes all other debt secured by a home. By keeping the mortgage interest deduction, Congress may have provided a loophole that some taxpayers could exploit. There was no restriction on the use of home equity debt, and taxpayers who owned homes could borrow against their home equity to pay for the same purchases they had previously funded with loans. Homeowners were given an incentive to shuffle their portfolios away from debt into mortgage debt. The widespread introduction of home equity lines of credit in the mid-1980's, which may have been spurred in part by the change in tax law, provided an inexpensive and flexible method for households to make this shift.3 Measuring the extent of portfolio shuffling is important for understanding whether households view mortgage and debt as close substitutes. Clearly the substitution of mortgage debt for debt undermines the goals of Congress to boost saving and increase revenue. Moreover, homeowners already have substantial tax preferences through the lack of taxes on the imputed income from housing and the preferential tax treatment of capital gains on their principal residence. The ability to use deductible mortgage debt to finance purchases provides homeowners another tax advantage relative to renters. Figure 1 plots the percentage change in * Putnam Investments, One Post Office Square, Bos on, MA 02109 (e-mail: [email protected]). This paper was completed while I was on the staff of the Board of Governors of the Federal Reserve System. Financial support from the Stanford Institute for Economic Policy Research and the Lynde and Harry Bradley Foundation is gratefully acknowledged. I would like to thank John Shoven, Orazio Attanasio, John Pencavel, Tim Bresnahan, Anne Royalty, Doug Bernheim, Al Teplin, Craig Furfine, Martha StarrMcCluer, Raphael Bostic, Len Burman, Julia Coronado, two anonymous referees, seminar participants, and the Financial Institutions Research Review Group for helpful comments. The views expressed in this paper are those of the author and do not necessarily reflect the views of Putnam Investments or the Federal Reserve Board or its staff. 1 In this paper, consumer interest refers to interest paid on loans that are not secured by a residence. 2 Under TRA 86, interest paid on qualified educational and medical debt secured by a home was also deductible, even if this debt exceeded the household's basis. This provision was not renewed in OBRA 87. Under OBRA 87, home equity debt also could not exceed the difference between the fair market value of the home and the amount of acquisition debt, even if this difference was less than $100,000. 3 Of course, homeowners can also increase their mortgage debt by taking out a traditional home equity loan, by taking cash out when refinancing their mortgage, or by taking out a larger mortgage when they Durchase a home.

E-commerce is a hot topic; however, little is known about the actual size and impact of ecommerce in the United States. In part this is because e-commerce is a recent and rapidly evolving phenomenon, but it is also because the measurement of e-commerce presents a number of challenges. Some of these challenges are essentially unique. Others are similar to, or extensions of, old economy measurement challenges.

This paper examines whether firms emerging from conglomerate stock breakups are able to affect the types of financial analysts that cover their firms as well as the quality of information generated about their performance. Our sample comprises 103 focus‐increasing spin‐offs, equity carve‐outs, and targeted stock offerings between 1990 and 1995. We find that, after these transactions, sample firms experience a significant increase in coverage by analysts that specialize in subsidiary firms’ industries, and a 30–50% increase in analyst forecast accuracy for parent and subsidiary firms. The improvement in forecast accuracy is partially attributable to expanded disclosure. However, forecast improvements for specialists exceed those for non‐specialists, leading us to conclude that corporate focus can facilitate improved capital market intermediation by financial analysts with industry expertise.

We examine the performance of 30 professional market timers during 1986–1994. Prior studies have analyzed implicit recommendations from mutual fund returns or explicit recommendations from newsletters. We analyze explicit recommendations executed in customer accounts. Using four tests, three benchmark portfolios, and daily data, we find significant unconditional and conditional ability that is robust with respect to transaction costs and survivorship bias. Relative ability persists and varies with the frequency of recommendation changes. When recommendations of successful timers are observed monthly instead of daily, significant ability generally disappears. Hence, the frequency with which recommendations are observed can change inferences regarding ability.

The PPP puzzle is based on empirical evidence that international price differences for individual goods (LOOP) or baskets of goods (PPP) appear highly persistent or even nonstationary. The present consensus is these price differences have a half-life that is of the order of five years at best, and infinity at worst. This seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons, typically days or weeks. However, current empirics rely on a particular choice of methodology, involving (i) relatively low-frequency monthly, quarterly, or annual data, and (ii) a linear model specification. In fact, these methodological choices are not innocent, and they can be shown to bias analysis towards findings of slow convergence and a random walk. Intuitively, if we suspect that the actual adjustment horizon is of the order of days, then monthly and annual data cannot be expected to reveal it. If we suspect arbitrage costs are high enough to produce a substantial “band of inaction,” then a linear model will fail to support convergence if the process spends considerable time random-walking in that band. Thus, when testing for PPP or LOOP, model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets.