Divergence in credit ratings

During the recent credit crisis credit rating agencies (CRAs) became increas- ingly lax in their rating of structured products, yet increasingly stringent in their rating of corporate bonds. We examine a model in which a CRA operates in both the market for structured products and for corporate debt, and shares a common reputation across the two markets. We find that, as a CRA s reputation becomes good enough, it can be optimal for it to infl ate its ratings with probability one in the structured products market, but in flate its ratings with a probability zero in the corporate bond market

Prospect theory and tax evasion: A reconsideration of the Yitzhaki puzzle [WP]

The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude

Gov-aargh-nance - "even criminals need law and order"

We present a theoretical model postulating that the relationship between crime and governance is "hump-shaped" rather than linearly decreasing. State failure, anarchy and a lack of infrastructure are not conducive for the establishment of any business. This includes illegal businesses, as criminals need protection and markets to convert loot into consumables. At the bottom end of the spectrum, therefore, both legal business and criminal gangs benefit from improved governance, especially when this is delivered informally. With significant improvements in formal governance criminal activities decline. We use data from the International Maritime Bureau to create a new dataset on piracy and find strong and consistent support for this non-linear relationship. The occurrence, persistence and intensity of small-scale maritime crime are well approximated by a quadratic relationship with governance quality. Organised crime benefits from corrupt yet effective bureaucrats, and informally governed areas within countries.

Gov-aargh-nance: "Even Criminals Need Law and Order"

We present a theoretical model postulating that the relationship between crime and governance is "hump-shaped" rather than linearly decreasing. State failure, anarchy and a lack of infrastructure are not conducive for the establishment of any business. This includes illegal businesses, as criminals need protection and markets to convert loot into consumables. At the bottom end of the spectrum, therefore, both legal business and criminal gangs benefit from improved governance, especially when this is delivered informally. With significant improvements in formal governance criminal activities decline. We use data from the International Maritime Bureau to create a new dataset on piracy and find strong and consistent support for this non-linear relationship. The occurrence, persistence and intensity of small-scale maritime crime are well approximated by a quadratic relationship with governance quality. Organised crime benefits from corrupt yet effective bureaucrats, and informally governed areas within countries.Governance, Crime, Piracy, Informal Institutions, Law enforcement

GOV-AARGH-NANCE – “EVEN CRIMINALS NEED LAW AND ORDER”

We present a theoretical model postulating that the relationship between crime and governance is “hump-shaped”, rather than linearly decreasing, when criminals need access to markets. State collapse, violent conflict and a lack of infrastructure are not conducive for the establishment of any business, legal or illegal. At the bottom end of the spectrum, therefore, criminal gangs benefit from improved governance, especially when this is delivered informally. With significant improvements in formal governance criminal activities decline. We use data from the International Maritime Bureau to create a new dataset on piracy and find strong and consistent support for this non-linear relationship.Governance; Crime; Piracy; Informal governance; Law enforcement

Barrgh-gaining with Somali Pirates

Ransoms paid to Somali pirates are drifting upward and negotiation times are increasing, yet there is huge variation in bargaining outcomes across shipowners. We use a unique dataset of 179 Somali hijackings, and an underlying theoretical model of the bargaining process based on detailed interviews with ransom negotiators, to analyze the empirical determinants of ransom amounts and negotiation lengths. We find that ransom amount and negotiation length depend on the observable characteristics of both pirates and ships and on the "reference ransom" established by previous ransom payments for a specific ship type. International naval enforcement efforts have driven up ransom amounts. We also observe a "hump-shape" in ransoms, with relatively low ransoms being paid following both short and very long negotiations, and the highest ransoms paid following intermediate length negotiations

Gov-aargh-nance: "Even Criminals Need Law and Order"

We present a theoretical model postulating that the relationship between crime and governance is "hump-shaped" rather than linearly decreasing. State failure, anarchy and a lack of infrastructure are not conducive for the establishment of any business. This includes illegal businesses, as criminals need protection and markets to convert loot into consumables. At the bottom end of the spectrum, therefore, both legal business and criminal gangs benefit from improved governance, especially when this is delivered informally. With significant improvements in formal governance criminal activities decline. We use data from the International Maritime Bureau to create a new dataset on piracy and find strong and consistent support for this non-linear relationship. The occurrence, persistence and intensity of small-scale maritime crime are well approximated by a quadratic relationship with governance quality. Organised crime benefits from corrupt yet effective bureaucrats, and informally governed areas within countries

Tax evasion and exchange equity: a reference-dependent approach

The standard portfolio model of tax evasion with a public good produces the perverse conclusion that when taxpayers perceive the public good to be under-/overprovided, an increase in the tax rate increases/decreases evasion. The author treats taxpayers as thinking in terms of gains and losses relative to an endogenous reference level, which reflects perceived exchange equity between the value of taxes paid and the value of public goods supplied. With these alternative behavioral assumptions, the author overturns the aforementioned result in a direction consistent with the empirical evidence. The author also finds a role for relative income in determining individual responses to a change in the marginal rate of tax

Mortality and immortality : the Nobel Prize as an experiment into the effect of status upon longevity

It has been known for centuries that the rich and famous have longer lives than the poor and ordinary. Causality, however, remains trenchantly debated. The ideal experiment would be one in which extra status could somehow be dropped upon a sub-sample of individuals while those in a control group of comparable individuals received none. This paper attempts to formulate a test in that spirit. It collects 19th-century birth data on science Nobel Prize winners. Correcting for potential biases, we estimate that winning the Prize, compared to merely being nominated, is associated with between 1 and 2 years of extra longevity

Taxing high-income earners : tax avoidance and mobility

The taxation of high-income earners is of importance to every country and is the subject of a considerable amount of recent academic research. Such high-income earners contribute substantial amounts of tax and generate significant positive spillovers, but are also highly mobile: a 1% increase in the top marginal income tax rate increases outmigrations by around 1.5 to 3%. We review research into taxation of high-income earners to provide a synthesis of existing theoretical and empirical understanding. We offer various avenues for potential future theoretical and empirical research