B07
Regulation and Taxation of Financial Markets
Discussion Papers

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Discussion Paper No. 345
November 1, 2022

Redistribution and Unemployment Insurance

Authors:
Ferey, Antoine (LMU Munich)
Abstract:
This paper analyzes the interactions between redistribution and unemployment insurance policies and their implications for the optimal design of tax-benefit systems. In a setting where individuals with different earnings abilities are exposed to unemployment risk on the labor market, I characterize the optimal income tax schedule and the optimal unemployment benefit schedule in terms of empirically estimable sufficient statistics. I provide a Pareto-efficiency condition for tax-benefit systems that implies a tight link between optimal redistribution and optimal unemployment insurance: the steeper the profile of income taxes is, the flatter the profile of unemployment benefits should be, and vice versa. Optimal replacement rates are therefore monotonically decreasing with earnings, from 1 at the bottom of the earnings distribution to 0 at the top, and redistribution through unemployment benefits is efficient. Empirical applications show that these interactions between redistribution and unemployment insurance have important quantitative implications.
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Discussion Paper No. 336
September 9, 2022

Attracting Profit Shifting or Fostering Innovation? On Patent Boxes and R&D Subsidies

Authors:
Haufler, Andreas (LMU Munich and CESifo)
Schindler, Dirk (Erasmus University Rotterdam)
Abstract:
Many countries have introduced patent box regimes in recent years, offering a reduced tax rate to businesses for their IP-related income. In this paper, we analyze the effects of patent box regimes when countries can simultaneously use patent boxes and R&D subsidies to promote innovation. We show that when countries set their tax policies non-cooperatively, innovation is fostered, at the margin, only by the R&D subsidy, whereas the patent box tax rate is targeted at attracting international profit shifting. In equilibrium, patent box regimes emerge endogenously under policy competition, but never under policy coordination. We also compare the competition for mobile patents with the competition for mobile R&D units and show that enforcing a nexus principle is likely to reduce the aggressiveness of patent box regimes.
Keywords:
corporate taxation; profit shifting; patent boxes; R&D tax credits; tax competition
JEL-Classification:
H25; H87; F23
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Discussion Paper No. 335
September 9, 2022

Incentives, Globalization, and Redistribution

Authors:
Ferey, Antoine (LMU Munich and CESifo)
Haufler, Andreas (LMU Munich and CESifo)
Perroni, Carlo (University of Warwick and CESifo)
Abstract:
We offer a new explanation for why taxes have become less redistributive in many countries in parallel with an increase in income concentration. When performance-based contracts are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted. Taxation reduces after-tax income inequality but undermines performance-based contracts, lowering effort and raising pre-tax income differentials. Product market integration can widen the spread of project returns and make contract choices more responsive to changes in the level of taxation, resulting in a lower optimal income tax rate even when individuals are not inter-jurisdictionally mobile.
Keywords:
performance contracts; market integration; redistributive taxation
JEL-Classification:
D63; F15; H21
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Discussion Paper No. 323
April 13, 2022

Inattention and the Taxation Bias

Authors:
Boccanfuso, Jérémy (University of Bologna)
Ferey, Antoine (LMU Munich)
Abstract:
This paper shows that agent inattention to taxes generates a time-inconsistency problem in the choice of tax policy. In equilibrium, inattention leads to inefficiently high tax rates and a taxation bias emerges. Combining structural and sufficient statistics approaches, we quantify the magnitude and the welfare effects of this policy distortion for US income tax rates, and find that the taxation bias is large, alters the progressivity of income taxes, and significantly reduces social welfare. Overall, our findings shed new light on the policy and welfare implications of inattention and misperceptions.
Keywords:
inattention; misperceptions; optimal taxation; policy distortions
JEL-Classification:
D03; H21
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Discussion Paper No. 318
February 14, 2022

Taxing Mobile and Overconfident Top Earners

Authors:
Haufler, Andreas (LMU Munich and CESifo)
Nishimura, Yukihiro (Osaka University and CESifo)
Abstract:
We set up a simple model of tax competition for mobile, highly-skilled and overconfident managers. Firms endogenously choose the compensation scheme for managers, which consists of a fixed wage and a bonus payment in the high state. Managers are overconfident about the probability of the high state and hence of receiving the bonus, whereas firms and governments are not. When governments maximize tax revenues, we show that overconfidence unambiguously reduces the bonus tax rate that governments set in the non-cooperative tax equilibrium, while increasing tax revenues. When the government objective incorporates the welfare of resident managers, however, bonus taxes also serve a corrective role and may rise in equilibrium when overconfidence is increased.
Keywords:
overconfidence; bonus taxes; tax competition; migration
JEL-Classification:
H20; H87; G28
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Discussion Paper No. 312
January 20, 2022

Intertemporal Consumption and Debt Aversion: A Replication and Extension

Authors:
Ahrens, Steffen (FU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Meissner, Thomas (Maastricht University)
Abstract:
We replicate Meissner (2016) where debt aversion was reported for the first time in an intertemporal consumption and saving problem. While Meissner (2016) uses a German sample, our subjects are US undergraduate students. All of the main findings from the original study replicate with similar effect sizes. Additionally, we extend the original analysis by correlating a new individual index of debt aversion on individual characteristics such as gender, cognitive ability, and risk aversion. The findings suggest that gender and risk aversion are not correlated with debt aversion. However, cognitive ability is positively correlated with debt aversion. Overall, this paper confirms the importance of debt aversion in intertemporal consumption problems and validates the approach of Meissner (2016).
Keywords:
debt aversion; replication; experiment
JEL-Classification:
C91; D84; G11; G41
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Discussion Paper No. 290
October 31, 2021

Regulatory and Bailout Decisions in a Banking Union

Authors:
Haufler, Andreas (LMU Munich and CESifo)
Abstract:
We model a banking union of two countries whose banking sectors differ in their average probability of failure and externalities between the two countries arise from cross-border bank ownership. The two countries face (i) a regulatory (super- visory) decision of which banks are to be shut down before they can go bankrupt, and (ii) a bailout decision of who pays for banks that have failed despite regu- latory oversight. Each of these choices can either be taken in a centralized or in a decentralized way. In our benchmark model the two countries always agree on a centralized regulation policy. In contrast, bailout policies are centralized only when international spillovers from cross-border bank ownership are strong, and banking sectors are highly profitable.
Keywords:
banking union; bank regulation; bailout policies
JEL-Classification:
G28; F33; H87
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Discussion Paper No. 283
May 26, 2021

Overconfidence and the Political and Financial Behavior of a Representative Sample

Authors:
Ahrens, Steffen (FU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Kassner, Bernhard (LMU Munich)
Abstract:

We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of eliciting overconfidence that is simple to understand, quick to implement, and captures respondents' excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one's judgment is correlated with lower portfolio diversification, larger stock price forecasting errors, and more extreme political views. Additionally, we find that overconfidence is correlated with voting absenteeism. These results appear to validate our method and show how overconfidence is a bias that permeates several aspects of peoples' life.

Keywords:
overconfidence; soep; survey
JEL-Classification:
C83; D91; G41
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Discussion Paper No. 256
September 7, 2020

Coordination under Loss Contracts

Author:

Ahrens, Steffen (TU Berlin)
Bitter, Lea (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)

Abstract:

In this paper we study the effects that loss contracts—prepayments that can be clawbacked later—have on group coordination when there is strategic uncertainty. We compare the choices made by experimental subjects in a minimum effort game. In control sessions, incentives are formulated as a classic gain contract, while in treatment sessions, incentives are framed as an isomorphic loss contract. Our results show that loss contracts reduce the minimum efforts of groups and worsen coordination between group members, both leading to lower payoffs. However, these results depend strongly on the group’s gender composition; groups with a larger proportion of women are better at coordinating and exert more effort.

Keywords:

strategic uncertainty; loss aversion; coordination; contract design; framing; experiment

JEL-Classification:

C91; D84; G11; G41

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Discussion Paper No. 210
December 9, 2019

Risk-Taking under Limited Liability: Quantifying the Role of Motivated Beliefs

Author:

Bosch-Rosa, Ciril (TU Berlin)
Gietl, Daniel (LMU Munich)
Heinemann, Frank (TU Berlin)

Abstract:

This paper investigates whether limited liability affects risk-taking through motivated beliefs. To do so, we run a within-subject experiment in which subjects invest in a risky asset under full or limited liability. In both cases, before the investment is made, subjects observe a noisy signal that indicates whether the investment will succeed or fail. They then state the likelihood of the investment's success and decide how much to invest. Our results show a strong effect of limited liability on both the investment decision and the formation of motivated beliefs. Compared to subjects under full liability, subjects under limited liability not only invest larger amounts but are also significantly more optimistic about the success of their investments. Finally, we show that more than one-third of the increase in investment under limited liability can be explained through motivated beliefs.

Keywords:

limited liability; motivated beliefs; experiment

JEL-Classification:

C91; D84; G11; G41

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