The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands

Following Max Weber, many theories have hypothesized that Protestantism should have favored economic development. With its religious heterogeneity, the Holy Roman Empire presents an ideal testing ground for this hypothesis. Using population figures of 272 cities in the years 1300–1900, I find no effects of Protestantism on economic growth. The finding is precisely estimated, robust to the inclusion of various controls, and does not depend on data selection or small sample size. Protestantism has no effect when interacted with other likely determinants of economic development. Instrumental variables estimates, considering the potential endogeneity of religious choice, are similar to the OLS results

Was Weber Wrong? A Human Capital Theory of Protestant Economic History

Max Weber attributed the higher economic prosperity of Protestant regions to a Protestant work ethic. We provide an alternative theory, where Protestant economies prospered because instruction in reading the Bible generated the human capital crucial to economic prosperity. County-level data from late 19th-century Prussia reveal that Protestantism was indeed associated not only with higher economic prosperity, but also with better education. We find that Protestants’ higher literacy can account for the whole gap in economic prosperity. Results hold when we exploit the initial concentric dispersion of the Reformation to use distance to Wittenberg as an instrument for Protestantism

Taxation and Corporate Risk-Taking

We study whether the corporate tax system provides incentives for risky firm investment. We first model the effects of corporate tax rates and tax loss offset rules on firm risk-taking. Testing the theoretical predictions, we find that firm risk-taking is positively related to the length of tax loss periods. This result occurs because the loss rules shift a portion of investment risk to the government, inducing firms to increase their overall level of risk-taking. Moreover, the corporate tax rate has a positive effect on risk-taking for firms that can expect to use their tax losses, and a negative effect for those that cannot. Thus, the effect of taxes on risky investment decisions varies among firms, and its sign hinges on firm-specific expectations of future tax loss recovery

Liquidity Risk and Monetary Policy

This paper provides a framework to analyse emergency liquidity assistance of central banks on financial markets in response to aggregate and idiosyncratic liquidity shocks. The model combines the microeconomic view of liquidity as the ability to sell assets quickly and at low costs and the macroeconomic view of liquidity as a medium of exchange that influences the aggregate price level of goods. The central bank faces a trade-off between limiting the negative output effects of dramatic asset price declines and more inflation. Furthermore, the anticipation of central bank intervention causes a moral hazard effect with investors. This gives rise to the possibility of an optimal monetary policy under commitment

Regional Tax Coordination and Foreign Direct Investment

This paper analyses the effects of a regionally coordinated corporate income tax in a model with three active countries, one of which is not part of the union, and a globally mobile firm. We show that regional tax coordination can lead to two types of welfare gain. First, for investments that would take place in the union in the absence of coordination, a coordinated tax increase can transfer location rents from the firm to the union. Second, by internalising all of the union’s benefits from foreign direct investment, a coordinated tax reduction can attract more welfare-enhancing investment than when member states act in isolation. Depending on which motive dominates, tax levels may thus rise or fall under regional coordination