Discussion Paper No. 30
November 3, 2021
The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment
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Our study analyzes the effect of the capital gains tax on the individual investment decisions of venture capitalists. By doing so, we are able to study the decisions for a sample of 76,852 funding rounds in 32 countries from 2000 to 2012. Our results support the predictions of the theoretical model that higher capital gains tax rates are associated with fewer start- ups financed and a lower probability of receiving follow-up funding. However, the results concerning the effect on the probability of success of start-ups show that a higher tax burden is associated with a higher probability of eventual start-up success.
Keywords:
venture capital; capital gains tax; selection effect; follow-up funding; innovation;
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Discussion Paper No. 29
The Organization of Knowledge in Multinational Firms
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This paper provides the first in-depth study of the organization of knowledge in multi- national firms. In the theory, knowledge is a costly input for firms that they can acquire at their headquarters or their production plants. Communication costs impede the ac- cess of the plants to headquarter knowledge. The model shows that multinational firms systematically acquire more knowledge at both their foreign and domestic plants than non-multinationals if their foreign plants face higher communication costs with head- quarters than their domestic plants. This theoretical prediction helps understand why multinational firms pay higher wages to workers than non-multinational firms, and why their sales decrease across space. The empirical analyses show that higher communication costs indeed decrease multinational firms’ foreign sales. Consistent with model-specific comparative statics, the decrease is stronger in sectors with less predictable production processes. Novel data on corporate transferees allow shedding light on one tool of multi- national firms’ organization of knowledge.
Keywords:
multinational firm; knowledge hierarchy; organization; geography of FDI; multinational wage premium; corporate transferees;
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Discussion Paper No. 28
Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?
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We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hid- den liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illus- trate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
Keywords:
hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book;
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Discussion Paper No. 27
Ex-Post Optimal Knapsack Procurement
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We consider a budget-constrained mechanism designer who selects an optimal set of projects to maximize her utility. Projects may differ in their value for the designer, and their cost is private information. In this allocation problem, the quantity of procured projects is endogenously determined by the mechanism. The designer faces ex-post constraints: The participation and budget constraints must hold for each possible outcome, while the mechanism must be strategy proof. We identify settings in which the class of optimal mechanisms has a deferred acceptance auction representation which allows an implementation with a descending-clock auction. Only in the case of symmetric projects do price clocks descend synchronously such that the cheapest projects are implemented. The case in which values or costs are asymmetrically distributed features a novel tradeoff between quantity and quality. The reason is that guaranteeing allocation to the most favorable projects under strategy proofness comes at the cost of a diminished expected number of conducted projects.
Keywords:
mechanism design; knapsack; budget; procurement; auction; deferred acceptance auctions;
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Discussion Paper No. 26
Can a Bonus Overcome Moral Hazard? An Experiment on Voluntary Payments, Competition, and Reputation in Markets for Expert Services
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Interactions between players with private information and opposed interests are often prone to bad advice and inefficient outcomes, e.g. markets for financial or health care services. In a deception game we investigate experimentally which factors could improve advice quality. Besides advisor competition and identifiability we add the possibility for clients to make a voluntary payment, a bonus, after observing advice quality. We observe a positive effect on the rate of truthful advice when the bonus creates multiple opportunities to reciprocate, that is, when the bonus is combined with identifiability (leading to several client-advisor interactions over the course of the game) or competition (allowing one advisor to have several clients who may reciprocate within one period).
Keywords:
asymmetric information; principal-agent; expert services; deception game; sender-receiver game; reciprocity; reputation; experiments; voluntary payment; competition;
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Discussion Paper No. 20
The Employment Effects of Countercyclical Infrastructure Investments
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We estimate the causal impact of a sizable German infrastructure investment program on employment at the county level. The program focused on improving the energy efficiency of school buildings, making it possible to use the number of schools as an instrument for investments. We find that the program was effective, creating one job for one year for each €25’000 of investments. The employment gains reached their peak after nine months and dropped to zero quickly after the program’s completion. The reductions in unemployment amounted to two-thirds of the job creation, and employment grew predominately in the construction and non-tradable industries.
Keywords:
infrastructure investments; job creation; employment dynamics; countercyclical fiscal policy;
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Discussion Paper No. 19
The 2016 Nobel Memorial Prize in Contract Theory
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Oliver Hart and Bengt Holmström were awarded the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for their fundamental contributions to contract theory. This article offers a short summary and discussion of their path breaking work.
Keywords:
contract theory; nobel prize; optimal incentive schemes; incomplete contracts;
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Discussion Paper No. 18
Relative Consumption Preferences and Public Provision of Private Goods
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This paper shows that the public provision of private goods may be justified on pure efficiency grounds in an environment where individuals have relative con- sumption concerns. By providing private goods, governments directly intervene in the consumption structure, and thereby have an instrument to correct for the ex- cessive consumption of positional goods. We identify sufficient conditions when the public provision of private goods is always Pareto-improving, even when (linear) consumption taxes are available. In fact, with the public provision of private goods, there are cases where first-best allocations can be achieved, and a luxury tax on the positional good is redundant.
Keywords:
public provision; social preferences; status-seeking;
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Discussion Paper No. 17
Sender-Receiver Games with Cooperation
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We consider generalized sender-receiver games in which the sender also has a decision to make, but this decision does not directly a§ect the receiver. We introduce speciÖc perfect Bayesian equilibria, in which the players agree on a joint decision after that a message has been sent (ìtalk and cooperate equilibrium,î TCE). We establish that a TCE exists provided that the receiver has a ìuniform punishment decisionî (UPD) against the sender.
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Discussion Paper No. 16
Matching Donations Without Crowding Out?
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Is there a way of matching donations that avoids crowding out? We introduce a novel matching method where the matched amount is allocated to a different project, present some simple theoretical considerations that predict reduced crowding out or crowding in (depending on the degree of substitutability between the two projects) and present evidence from a large- scale natural field experiment and a laboratory experiment. Similar to findings in the literature, conventional matching for the same project results in partial crowding out in the field experiment and, as predicted, crowding out is reduced under the novel matching scheme. The lab experiment provides more fine-tuned evidence for the change in crowding and yields further support for the theory: the novel matching method works best when the two projects are complements rather than substitutes.
Keywords:
charitable giving; matched fundraising; natural field experiment;
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