Economics

Corporate Inversions and Economic Performance

Corporate Inversions and Economic Performance

Rao, Nirupama.
07/11/2015

This paper assesses the economic factors associated with corporate inversions, including the 48 inversions that have occurred since the analysis of Desai and Hines (2002). The analysis presented here is observational, not causal, as it examines how the business activities of firms that chose to invert changed after expatriation. In addition to statistically assessing the equity market’s reaction to inversion announcements, this paper examines how firms alter their patterns of employment and investment after inversion. In particular, the paper follows how the foreign shares of an inverting firm’s employment and investment change following inversion, relative to comparable non-inverting firms. The behavior of inverting firms following expatriation is assessed going back to 1980 as well as only after the 2004 policy change. The results suggest that inverting firms have higher shares of the employees and capital expenditures located abroad after inversion relative to changes experienced by similar non-inverting firms. Further, these increases are not attributable to one-time changes due to the inclusion of a new foreign partner’s existing workforce and ongoing investments; foreign shares of employment and investment are higher two and more years after inversion relative to the first year just after inversion when any one-time increases would register.

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays
Journal of Money, Credit and Banking, forthcoming.

Sewin Chan, Andrew Haughwout, Andrew Hayashi and Wilbert van der Klaauw
06/01/2015

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and HELOCs at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage non-recourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for both housing and non-housing debts. Our analysis highlights the interconnectedness of debt repayment decisions.

Do Homeowners Mark to Market? A Comparison of Self-reported and Market-based Home Value Estimates During the Housing Boom and Bust

Do Homeowners Mark to Market? A Comparison of Self-reported and Market-based Home Value Estimates During the Housing Boom and Bust
Real Estate Economics, forthcoming.

Sewin Chan, Sam Dastrup & Ingrid Gould Ellen
06/01/2015

This paper examines homeowners’ self-reported values in the American Housing Survey and the Health and Retirement Study from the start of the recent housing price run-ups through recent price declines. We compare zip code level market-based estimates of housing prices to those derived from homeowners’ self-reported values. We show that there are systematic differences which vary with market conditions and the amount of equity owners hold in their homes. When prices have fallen, homeowners systematically state that their homes are worth more than market estimates suggest, and homeowners with little or no equity in their homes state values above the market estimates to a greater degree. Over time, homeowners appear to adjust their assessments to be more in line with past market trends, but only slowly. Our results suggest that underwater borrowers are likely to understate their losses and either may not be aware that their mortgages are underwater or underestimate the degree to which they are.

How Mortgage Finance Affects the Urban Landscape

How Mortgage Finance Affects the Urban Landscape
In Handbook of Regional and Urban Economics, Volume 5B, edited by Gilles Duranton, J. Vernon Henderson and William C. Strange. United Kingdom: North Holland, 2015.

Sewin Chan, Andrew Haughwout & Joseph Tracy
06/01/2015

This chapter considers the structure of mortgage finance in the United States and its role in shaping patterns of homeownership, the nature of the housing stock, and the organization of residential activity. We start by providing some background on the design features of mortgage contracts that distinguish them from other loans and that have important implications for issues presented in the rest of the chapter. We then explain how mortgage finance interacts with public policy, particularly tax policy, to influence a household's decision to own or rent and how shifts in the demand for owner-occupied housing are translated into housing prices and quantities, given the unusual nature of housing supply. We consider the distribution of mortgage credit in terms of access and price, by race, ethnicity, and income, and over the life cycle, with particular attention to the role of recent innovations such as nonprime mortgage securitization and reverse mortgages. The extent of negative equity has been unprecedented in the past decade, and we discuss its impact on strategic default, housing turnover, and housing investment. We describe spatial patterns in foreclosure and summarize the evidence for foreclosure spillovers in urban neighborhoods. Finally, we offer some thoughts on future innovations in mortgage finance.

Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems

Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems
In Richard Bird and Jorge Martinez Vazquez, eds. Taxation and Development: The Weakest Link. (Cheltenham, UK and Northampton, MA: Edward Elgar, 2014).

Paul Smoke
11/26/2014

Ensuring adequate subnational revenues is a core concern of fiscal decentralization. Available empirical evidence suggests that subnational revenue generation in developing countries rarely meets needs and expectations, even where conventional advice has been or seems to have been followed. Are mainstream principles inappropriate, or are they just poorly applied? This chapter argues that both factors are often at play. Basic principles can be challenging to use, ignore certain critical factors, and say nothing about implementing the often demanding reforms they call for. The chapter outlines and illustrates common factors and dynamics at play and suggests how policy analysts might use and move beyond the mainstream principles to define more pragmatic and sustainable paths to subnational revenue reforms.

Credit is Not a Right [REVISED]

Credit is Not a Right [REVISED]
Forthcoming in volume edited by Tom Sorell and Luis Cabrera: Microfinance, Rights, and Global Justice. Cambridge University Press.

Gershman, John and Jonathan Morduch
09/15/2014

Muhammad Yunus, the microcredit pioneer, has proposed that access to credit should be a human right. We approach the question by drawing on fieldwork and empirical scholarship in political science and economics. Evidence shows that access to credit may be powerful for some people some of the time, but it is not powerful for everyone all of the time, and in some cases it can do damage. Yunus’s claim for the power of credit access has yet to be widely verified, and most rigorous studies find microcredit impacts that fall far short of the kinds of empirical assertions on which his proposal rests. We discuss ways that expanding the domain of rights can diminish the power of existing rights, and we argue for a right to non-discrimination in credit access, rather than a right to credit access itself.

 

Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade

Do Tax Credits Stimulate R&D Spending? The Effect of the R&D Tax Credit in its First Decade
Revise & Resubmit ~ Journal of Public Economics

Rao, Nirupama S.
03/08/2014

This paper examines the impact of the R&D tax credit between 1981-1991 using confidential IRS data from corporate tax returns. The key advances on previous work are an instrumental variables strategy based on tax law changes that addresses the simultaneity between R&D spending and its user cost and the use of new confidential data. Estimates imply that a ten percent reduction in the user cost of R&D leads the average firm to increase its research intensity—the ratio of R&D spending to sales—by 11 percent in the short-run. Long-run estimates imply that firms do face adjustment costs and further increase spending over the longer-run. Analysis of the components of qualified research shows that wages and supplies account for the bulk of the increase in research spending. Comparisons of the elasticity across firms of different sizes, industries, tax status, multi-national status and credit history are also made. Neither small nor young firms appear more responsive in the static analysis but the dynamic model reveals stronger short-run responses, suggesting that they may face lower adjustment costs or liquidity constraints in financing R&D. Long-run and retiming analyses show no evidence that firms allocate their qualified research spending over time to maximize their R&D tax credits. Elasticities of qualified and total research intensities from a smaller sample suggest firms respond to user cost changes largely by increasing their qualified spending, meaning that what R&D the federal credit deems qualified research is an important margin on which the credit affects firm behavior.

The Foreclosure Crisis and Community Development: Exploring the Foreclosed Stock in Hard-Hit Neighborhoods

The Foreclosure Crisis and Community Development: Exploring the Foreclosed Stock in Hard-Hit Neighborhoods
Housing Studies, forthcoming

Ingrid Gould Ellen, Josiah Madar, and Max Weselcouch
03/06/2014

As the foreclosure crisis continues, many communities are faced with a glut of properties that have completed the foreclosure process and are now owned by banks or other mortgage lenders. These properties, referred to as “real estate owned (REO),” often sit vacant for extended periods and, recent studies suggest, depress neighboring property values. They also impose significant costs on local governments, which must try to address the risk of crime, fire, and blight that vacant buildings pose. In addition, many worry that REO properties sold to unscrupulous short-term investors hasten neighborhood decline.

In this article we shed new light on the “REO problem” by studying the stock of REO properties at the neighborhood level in three urban areas: Fulton County, Georgia (which includes Atlanta), Miami-Dade County, Florida, and New York City. Using a combination of longitudinal administrative data sets on foreclosure filings, auction sales, and property transactions provided by local government sources, we identify every property transfer into REO ownership in recent years and all subsequent transfers of these properties. To explore the ongoing neighborhood and community development challenges, we divide census tracts into four groups based on their concentrations of REO properties as of the end of 2011. We then compare these neighborhood types across several dimensions. Because we use a uniform methodology for all three areas, we are also able to compare neighborhood groups across jurisdictions with the metrics we calculate.

We find several neighborhoods in Fulton County and Miami-Dade County with extremely high concentrations of REO properties as of the end of 2011, including some tracts with more than 100 REO properties. In New York City, however, REO concentrations are generally much lower, and no census tract had more than 12 REO properties. In all three jurisdictions, the neighborhoods with relatively high concentrations of REO properties are generally not the most distressed areas of their regions in terms of poverty and unemployment, but are still high-poverty and potentially vulnerable. Moreover, they are disproportionately black, highlighting the uneven impact the foreclosure crisis may be having on communities. Importantly, we find that that the number of REO properties in the hardest-hit neighborhoods of each area was declining as of the end of 2012 (or 2011, our latest year of data in Miami-Dade County), generally in line with the countywide or citywide trend in REO inventories, and that investors did not account for an appreciably higher proportion of purchasers of REO properties in the hardest-hit neighborhoods. Furthermore, few of the properties that were purchased by investors appear to have been “flipped” within a short period. On the other hand, we also find that those REO properties that remained in these cities as of the end of 2012 or 2011 (including those in hard-hit neighborhoods) had been in REO for a longer duration than was typical one year earlier, so the composition of the REO stock may shifting towards more problematic properties. Additionally, in Fulton County’s hardest-hit tracts REO properties made up about 40 percent of all sales in 2012, so were likely still exerting significant downward pressure on housing prices. Finally while the National Stabilization Program (NSP) may be improving neighborhoods in other ways, we find that only a negligible share of the REO sales in the hardest-hit tracts of Fulton and Miami-Dade Counties in 2010 and 2011 were to non-profit entities and developers using NSP funds.

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