Tax Aspects of Corporate Pension Funding Policy

This paper explores four models of firms' pension liabilities. All of the models yield the result that if it is the stockholders who gain or lose from a change in the market value of pension fund assets, a pension fund invested entirely in bonds will maximize that gain. If a firm's pension liabilities are considered to be no more than the present value of accrued benefits, then most plans for salaried employees would maximize the pension's value by having their assets entirely in bonds. However, for less well funded plans such as most union plans, holding both stocks and bonds or even all stocks may maximize the value of the firm.. Implicit contracts on the liability side of the pension balance sheet can encourage holding some stock, but implicit contracts on the asset side are likely to encourage increased bond holdings.

Early Retirement Pension Benefits

Early retirement options alter the accrual of pension benefits, increasing the fraction of total benefits accrued in the early years of work. This is true regardless of whether de facto no worker exercises the early retirement option. No currently used actuarial method correctly calculates the cost of an early retirement option. Early retirement options must be considered in calculating age/compensation profiles. Furthermore, the early retirement option can effectively be used to encourage less productive older workers to retire, without the firm having to reduce the nominal salary of such workers.

Sovereign Debt: Is To Forgive To Forget?

International lending to a less-developed country cannot be based on the debtor's reputation for making repayments. That is, loans to LDCs will not be made or repaid unless foreign creditors have legal or other direct sanctions they can exercise against a sovereign debtor who defaults Even if some lending is feasible because of direct sanctions, having a reputation for repayment in no way enhances a small LDC's ability to borrow.

A Constant Recontracting Model of Sovereign Debt

Few sovereign debtors have repudiated their obligations entirely. But despite the significant sanctions at the disposal of lenders, many borrowers have been able to consistently negotiate for reduced repayments. This paper presents a model of the on-going bargaining process that determines repayment levels. We derive a bargaining equilibrium in which countries with large debts achieve negotiated partial default. The ability to credibly threaten more draconian penalties in the event of repudiation may be of no benefit to lenders. Furthermore, unanticipated increases in world interest rates may actually help the borrowers by making lenders more inpatient for a negotiated settlement. Finally, Western governments may be induced to make payments to facilitate reschedulings even though efficient agreements will be reached without their intervention.

Inflation Accounting and Nonfinancial Corporate Profits: Physical Assets

macroeconomics,inflation accounting, nonfinancial corporate profits

The Taxation of Risky Assets

This paper reconsiders the effects of taxation on risky assets, recognizing the importance of variations in asset prices. We show that earlier analyses which assumed that depreciation rates are constant and that the future price of capital goods is known with certainty are very misleading, as guides to the effects of corporate taxes. We then examine the concept of economic depreciation in a risky environment, and show that depreciation allowances, if set ex-ante, should be adjusted to take account of future asset price risk. Some empirical calculations suggest that these adjustments are large, and have important implications for the burdens of, and non-neutralities in, the corporate income tax.

Inflation Accounting and Nonfinancial Corporate Profits: Financial Assets and Liabilities

macroeconomics, inflation accounting, nonfinancial corporate profits

A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment

This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The modelis applied to a wide range of labormarket phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination which will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment.