Multinationals, tax competition and outside options

We analyse tax competition when a multinational firm has invested in two countries but also has an outside option, e.g., towards a third country. An interesting finding is that more attractive outside options for firms may constitute a win-win situation; the firm as well as its present host countries may gain when this occurs. The reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition. An implication of the result is that better outside options for multinational firms may reduce the gains from host countries’ policy coordination and thus reduce those countries’incentives to coordinate their policies. Also, with a development where outside options become more accessible, the perceived costs of tax competition, e.g., in terms of underprovision of public goods, may be overestimated. Our findings may also have implications for international negotiations, since it provides an argument for mutual reduction of entry barriers, as this may improve outside options.Tax competition; mobility; common agency; countervailing incentives

Distorted Performance Measures and Dynamic Incentives

Incentive contracts must typically be based on performance measures that do not exactly match agents’ true contribution to principals’ objectives. Such misalignment may impose difficulties for effective incentive design. We analyze to what extent implicit dynamic incentives such as career concerns and ratchet effects alleviate or aggravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects, that stronger ratchet effects or more distortion may increase optimal monetary incentives, and that bureaucratic promotion rules may be optimal.Search; Learning; Information and Knowledge; Communication; Belief; Compensation Packages; Payment Methods; Labor Management.

Tournaments with prize-setting agents

In many tournaments it is the contestants themselves who determine reward allocation. Labor-union members bargain over wage distribution, and many firms allow self-managed teams to freely determine internal resource allocation, incentive structure, and division of labour. We analyze, and test experimentally, a rank-order tournament where heterogenous agents determine the spread between winner prize and looser prize. We investigate the relationship between prize spread, uncertainty (i.e. noise between e¤ort and performance), heterogeneity and effort. The paper challenges well-known results from tournament theory. We find that a large prize spread is associated with low degree of uncertainty and high degree of heterogeneity, and that heterogeneity triggers effort. By and large, our real-effort experiment supports the theoretical predictions.Rank-order tournament; prize spread; ability-difference

Cooperation in knowledge-intensive firms

The extent to which a knowledge-intensive firm should induce cooperation between its employees is analyzed in a model of relational contracting between a firm (principal) and its employees (two agents). The agents can cooperate by helping each other, i.e. provide effort that increases the performance of their peer without affecting their own performance. We extend the existing literature on agent-cooperation by analyzing the implications of incomplete contracts and agent hold-up. A main result is that if the agents’ hold-up power is sufficiently high, then it is suboptimal for the principal to implement cooperation, even if helping effort is productive per se. This implies, contrary to many property rights models, that social surplus may suffer if the investing parties (here the agents) are residual claimants. The model also shows that long-term relationships facilitate cooperation even if the agents cannot monitor or punish each others’ effort choices

Relational incentive contracts for teams of multitasking agents

We analyze optimal relational contracts for a group (team) of multitasking agents with hidden actions. Contracts are based on noisy signals that may be correlated across agents and between tasks. The optimal contract defines a performance measure in the form of an index (a scorecard) for each agent, and awards a bonus to the highest performing agent, provided his or her index exceeds a hurdle. An optimal index generally involves benchmarking against other agents, and this may, in combination with the hurdle requirement, introduce a cooperative element in the otherwise competitive incentive structure. For agents with separate tasks and normally distributed signals, we find that strong correlation (either positive or negative) across agents is beneficial, while larger correlation within each agent's tasks is detrimental for efficiency, and that this has implications for optimal organization of tasks. For agents with common tasks the optimal contract may have features of both tournament and team incentives. The tournament aspect incentivizes an agent to exert effort on his own task, while the hurdle necessary to receive a bonus also incentivizes an agent to help his peers. In our setting this hybrid scheme can only be optimal if signals from agents' tasks are negatively correlated. Otherwise pure team incentives are optimal

Access regulation and cross-border mergers: Is international coordination beneficial?

The international integration of regulated markets poses new challenges for regulatory policy. One question is the implications that the overall international regulatory regime will have for cross-border and/or domestic merger activity. In particular, do non-coordinated policies stimulate cross-border mergers that are overall inefficient, and is this then an argument for international coordination of such policies? The paper addresses this issue in a setting where firms must have access to a transportation network which is controlled by national regulators. The analysis reveals that while non-coordinated regulatory policies may induce cross-border mergers (by allowing the firms in question to play national regulators out against each other), this can nevertheless be overall welfare enhancing compared to market outcomes under coordinated regulation.Access regulation; Endogenous merger; Policy coordination

Cross border mergers and strategic trade policy with two-part taxation: is international policy coordination beneficial?

We analyse how national taxation of firms are likely to affect merger incentives in international markets. In particular, we ask whether non-coordinated trade policies stimulate cross-border mergers that are overall inefficient, and if this is then an argument for international coordination of such policies? We address this issue in a setting where policy makers use two-part tariffs to tax exporting firms. The analysis reveals that while non-coordinated policies may induce cross-border mergers (by allowing the firms in question to play national policy makers out against each other), this can nevertheless be overall welfare enhancing compared to market outcomes under coordinated policy making. -- Das Papier untersucht die möglichen Wirkungen der nationalen Besteuerung auf Anreize für Fusionen in internationalen Märkten. Dabei wird vor allem gefragt, ob unkoordinierte Handelspolitik zu grenzüberschreitenden Fusionen führt, die insgesamt ineffizient sind und ob das für die internationale Koordination der Handelspolitik spricht. Im vorgestellten Modellrahmen nutzen Politikentscheider zweiseitige Zölle um Exportfirmen zu besteuern. Die Untersuchung zeigt, dass zwar nichtkoordinierte Politik grenzüberschreitende Fusionen hervorbringt, indem die beteiligten Firmen ihre nationalen Gesetzgeber gegeneinander ausspielen können; allerdings ist das Ergebnis durchaus wohlfahrtssteigernd im Vergleich zu dem Marktergebnis, das sich aus koordinierter Handelspolitik ergibt.Strategic trade policy,two-part taxation,endogenous merger,policy coordination

Cross-border mergers and strategic trade policy with two-part taxation: is international policy coordination beneficial?

"Das Papier untersucht die möglichen Wirkungen der nationalen Besteuerung auf Anreize für Fusionen in internationalen Märkten. Dabei wird vor allem gefragt, ob unkoordinierte Handelspolitik zu grenzüberschreitenden Fusionen führt, die insgesamt ineffizient sind und ob das für die internationale Koordination der Handelspolitik spricht. Im vorgestellten Modellrahmen nutzen Politikentscheider zweiseitige Zölle um Exportfirmen zu besteuern. Die Untersuchung zeigt, dass zwar nichtkoordinierte Politik grenzüberschreitende Fusionen hervorbringt, indem die beteiligten Firmen ihre nationalen Gesetzgeber gegeneinander ausspielen können; allerdings ist das Ergebnis durchaus wohlfahrtssteigernd im Vergleich zu dem Marktergebnis, das sich aus koordinierter Handelspolitik ergibt." (Autorenreferat)"We analyse how national taxation of firms are likely to affect merger incentives in international markets. In particular, we ask whether non-coordinated trade policies stimulate cross-border mergers that are overall inefficient, and if this is then an argument for international coordination of such policies? We address this issue in a setting where policy makers use two-part tariffs to tax exporting firms. The analysis reveals that while non-coordinated policies may induce cross-border mergers (by allowing the firms in question to play national policy makers out against each other), this can nevertheless be overall welfare enhancing compared to market outcomes under coordinated policy making." (author's abstract

Sharing of endogenous risk in construction

In risk management of complex procurement projects in construction, the buyer has two principal instruments at his disposal: 1) the choice of time and resources put into engineering and design (project specification), thus affecting the level of risk in the project, 2) the sharing of risk, as specified by the incentive contract for the contractor. Each of the instruments implies costs for the buyer. Detailed project specification involves direct planning costs, but the major specification cost is often a time cost, i.e., the reduction in net present value due to the postponement of the project. Risk sharing by the buyer is costly even if the buyer is risk neutral, since lower risk exposure for the contractor implies weaker incentives and thereby higher construction costs. Hence, risk management of procurement projects can for the buyer be perceived as a trade-off between the time costs of project specification and planning and the budget implications of weaker incentives. We model this trade-off in a risk sharing model with endogenous risk