How Polarization and Political Instability affect Learning through Experimentation

In a multiperiod setting, decision-makers can learn about the consequences of their decisions through experimentation. In this paper we examine how in a two-party system polarization and political instability affect learning through experimentation. We distinguish two cases: the decision to be made is not salient and does not affect the outcome of the following elections (exogenous elections) and the decision is salient and the election outcome depends on it (endogenous elections). We show that while the possibility of learning increases activism, the existence of political instability distorts learning. Furthermore, in contrast to the existing literature, we demonstrate that, when elections are exogenous, polarization between political parties does not always decrease active learning. In the case with endogenous elections we find that electoral concerns may induce candidates not to experiment, even if the majority of voters prefers activism

The Tax Treatment of Interest Expenditures of Multinational Enterprises

This paper analyses the national tax treatment of interest expenditures of multinational enterprises in a non- cooperative world. It is shown that the international tax system generally leads to distortions in the capital decisions of multinational firms. In contrast to the existing literature on the tax treatment of the expenditures of multinationals, it is found that the form and size of distortions can differ per country depending on the stake a country has in the multinational. Furthermore, internationalisation of the firm's operations and ownership is demonstrated to lead to less generous interest deduction rules of individual countries and in the limit may result in no deduction allowance at all

Environmental Policy Choice under Uncertainty

Market-based instruments are believed to create more efficient incentives for firms to adopt new technologies than command-and-control policies. We compare the effects of a direct technology regulation and of an adoption subsidy under asymmetric information about the costs of technological advances in pollution control. We show that the policy maker may want to commit to her policy. The reason is that uncertainty about adoption costs induces the policy maker to set subsidy levels that increase over time; firms, expecting higher subsidies in the future, postpone investment. Direct regulation offers a commitment possibility that allows to prevent firms from postponing investment

The Optimal Degree of Polarization

In the literature on electoral politics full convergence of policy platforms is usually regarded as socially optimal. The reason is that risk-averse voters prefer a sure middle-of-the-road policy to a lottery of two extremes with the same expectation. In this paper we study the normative implications of convergence in a simple model of electoral competition, in which parties are uncertain about voters' preferences. We show that if political parties have incomplete information about voters' preferences, the voters may prefer some degree of policy divergence. The intuition is that policy divergence enables voters to correct policies that are based on a wrong perception of their desires