Distortionary Effects Research Articles

Distortionary effects of PPP loans on business competition

We study the effects of PPP loans on business competition. We start by introducing temporary cash subsidies into a model of monopolistic competition with differentiated products and heterogeneous production costs. We test the predictions of our model in a sample of U.S. airport hotels for which we observe daily demand, prices, output, and profits. Consistent with model predictions, less profitable businesses were more likely to apply for PPP loans. Businesses with active PPP loans reduced prices, boosting output and profits relative to non-PPP competitors. Those relative differences were reversed once PPP loans expired. We calculate that, for every dollar of PPP subsidies, PPP hotels earned 72.4 cents in extra profits and non-PPP competitors lost 71.4 cents in aggregate. Our results suggest that the PPP initiative distorted competition, imposing significant costs on businesses that chose to forgo these loans.

Domestic Competition, Trade Openness and Entrepreneurial Culture: Canonical Correlation Analysis

Abstract The paper analyses canonical correlations between domestic competition, trade openness and entrepreneurial culture. The research covered 141 countries ranked by World Competitiveness Index in 2019. Canonical correlation analysis is applied to find relationship between two canonical variables. The first canonical variable includes sub-indexes from Domestic competition and Trade openness pillars. The second variable contains sub-indexes from Entrepreneurial culture pillar. The results of the analysis showed there is a strong, positive, statistically significant canonical correlation between these canonical variables with a Pearson coefficient of 0.86. The linear regression analysis is also applied. The regression analysis shows that the variable Distortive effects of taxes and subsidies on competition is the most important for all dependent variables. The extent of market dominance, Competition in services and Border clearance efficiency are important, but not as much as taxes and subsidies. It confirms that regulation of domestic competition and trade openness are supreme for entrepreneurial culture.

Legal Issues in the European Unions Anti-Cross Border Subsidy Measures: A Study

This article provides a panoramic overview of the "Foreign Subsidies Regulation" that passed on June 30, 2022 and officially took effect throughout the European Union on July 13, 2023. It conducts a deep analysis of the Foreign Subsidies Regulation through the background analysis and discusses why is the Foreign Subsidies Regulation made. Then the basic provisions of the Foreign Subsidies Regulations are discussed in detail from the aspects of the definition of foreign subsidies, distortive effects, review procedures of foreign subsidies, and implementing agencies. In future, most of the non-EU companies doing business in Europe could be subject to the European Commission's new rules on foreign subsidies. Then this article provides an objective analysis of access for companies investing in Europe. By discussing the possible influence, this article identifies strategies for non-EU countries' companies investing in Europe from four aspects:compliance management, corporate mergers and acquisitions and investment, public procurement and corporate financing. Hope the suggestions in this article can be helpful.

Demography, Economy and Policy Choices: The Three Corners of the Pension Conundrum

Abstract NDC (notional defined contribution) pension systems are usually considered the best in the PAYGO (pay-as-you-go) category: they mimic funding, seem to be well balanced, and have very limited distortionary effects on the labour market. In this paper, after highlighting of few of their weaknesses, I suggest an alternative solution to the pension problem: IPAYGO, or improved PAYGO. Its guiding principle, “everything is relative”, is applied consistently to both the economic and the demographic part of the problem: this makes the system viable in all possible demographic and economic scenarios. Depending on a few explicit policy (parametric) choices, IPAYGO may take very different shapes, and adapt to national preferences, such as early or late retirement, generous or limited pension benefits, and greater or lesser emphasis on actuarial equity. A properly designed IPAYGO, even in its basic form (the only one discussed here), can tackle issues such as inequities deriving from differential mortality (with the richer living longer), pension-induced low fertility, and quasi-capital gains and losses. While IPAYGO is conceived to be an operative instrument, it can also be used to evaluate existing pensions systems, and the phase a population is going through, with a novel measure of the so-called “demographic bonus” (or “malus”).

Self-Defense and Political Rage

This Article considers how American political polarization and the substantive issues driving it raise unique challenges for adjudicating self-defense claims in contexts of political protest. We live in an age where roughly a quarter of the population believes it is at least sometimes justifiable to use violence in defense of political positions, making political partisans somewhat more likely to pose a genuine threat of bodily harm to opponents. Furthermore, the psychological literature shows that people are more likely to perceive threats from people with whom they politically disagree and that juries tend to evaluate reasonableness claims according to their own political positions. All three of these phenomena create challenges for the rule of law due to the increased risk that factually similar cases will turn out differently and that the justice system will merely recreate the monomaniacal, us-versus-them polarization of society at large. This Article surveys the relevant political science and psychological literature on partisanship and reasoning and proposes two interrelated solutions: one pragmatic, at the level of individual trials, and the other cultural, at the level of social discourse. It suggests that judges import what we know about the distortive effects of partisanship into the courtroom through the use of court-appointed psychological experts and jury instructions. Both have shown some success—if tailored precisely to the facts of a specific case—in correcting some forms of juror bias and reasoning errors. This Article further argues that incorporating these processes into the adjudication of politicized self-defense claims will have a broader, expressive value for society as a whole. Trials provide a model for truth-finding, which, for better or for worse, impacts how private citizens evaluate culpability in their day-to-day lives. If trials draw even some people’s attention to the ways in which partisan thinking can generate or justify acts of violence, they may be a force for moderation in how people deal with their political disagreements, which will have benefits far beyond the courtroom.

Use and Abuse of the Concept of ‘Excess Burden’ in the Theory of Public Finance

Optimal tax theory assigns two roles to the measure of excess burden, one to compare the costs of alternative tax instruments, the other to measure the deadweight loss of specific tax instruments, which presumably correspond to the welfare costs of their distortionary effects. This paper claims that the deadweight loss provides misleading measures of welfare costs from tax distortions, because it requires to make unverified assumptions to equate costs to distortions and ensure that the deadweight loss is greater than zero. Taxes other than the lump-sum tax and tax-induced changes in relative prices cannot generally be assumed to be distortionary.

Population aging, artificial intelligence and mismatch of labor resources: evidence from China

ABSTRACT In the future, population ageing will represent the basic national condition of China in the long term. Therefore, it is essential to explore the changes in the supply of the working population and its impact influence on the effective allocation of labour resources in the context of population ageing, while evaluating the governance efficacy of AI. The study findings indicate that population ageing significantly exacerbates the mismatch of labour resources, whereas the application of AI mitigates the adverse impacts of population ageing on labour resource allocation. Additionally, the distortionary effects of population ageing on the allocation of labour resources are greater in regions with high average education levels and regions with more extensively segmented markets, while the moderating effects of AI are reported to be more effective. Thus, the proposed findings extend a theoretical basis for improving the efficiency of labour resource allocation from the perspective of population ageing.

Minimising the distortive effects of diffraction on magnetic STEM-DPC imaging of monocrystalline thin films

Minimising the distortive effects of diffraction on magnetic STEM-DPC imaging of monocrystalline thin films

The politics of redistribution and sovereign default

This paper studies how distributional and electoral concerns shape sovereign default incentives within a quantitative model of sovereign debt with heterogeneous agents and non-linear income taxation. The small open economy is characterized by a two-party system in which the left-wing party has a larger preference for redistribution than the right-wing party. Political turnover is the endogenous outcome of the electoral process. Fiscal policy faces a tradeoff: On the one hand, the government has incentives to finance its spending via external debt to avoid distortionary income taxation. On the other hand, the accumulation of external debt raises the cost of borrowing. Quantitative findings suggest that the left-wing party implements a more progressive income tax, is more prone to default, and has a lower electoral support than the right-wing party due to worse borrowing conditions and the distortionary effects of income taxation. In equilibrium, electoral uncertainty raises sovereign default risk.

The distortionary effects of unconstrained for-profit carbon dioxide removal and the need for early governance intervention

Carbon Dioxide Removal (CDR) is an emerging activity with extremely limited deployment to date, but which is mathematically required to achieve net (rather than true) zero or negative anthropogenic contribution to climate change. The required scale of CDR, however, depends on decisions about what activities will be allowed to emit greenhouse gases – the “residual emissions” that must be compensated via CDR. Simultaneously, CDR’s availability is limited by resource needs and feasibility, much like conventional depletable resources. Governance and institutions, especially related to how CDR is allocated and paid for, will fundamentally shape CDR efforts, including by structurally incentivizing particular approaches and monitoring, reporting, and verification (MRV) objectives. We argue that the emerging tendency toward market-based, unconstrained, and for-profit CDR presents fundamental and predictable risks for climate and justice goals. Such a model incentivizes growth in profitable compensatory removal applications, effectively allocating limited resources based on ability to pay rather than public good, while also increasing the amount of CDR required to meet global climate targets. “Luxury” removals that could otherwise be mitigated not only displace, but actively disincentivize deployment for compensatory removals in high priority but low wealth applications, and for drawdown. Meeting these needs would likely become a socialized cost. Markets also establish unit-level property rights that require specific kinds of MRV that are misaligned with climate outcomes and face incentives for poor quality verification. We describe the need, development context, function, and resource limitations of CDR, then characterize the major challenges with the emerging unconstrained, for-profit governance model. We argue that instead implementing CDR as a centrally planned sector, with publicly deliberated and adaptable volumetric targets integrated with other climate action, could enable more just and effective outcomes.

Encouragement and distortionary effects of conditional cash transfers

Conditional cash transfer (CCT) programs aim to reduce poverty or advance social goals by encouraging desirable behavior that recipients under-invest in. An unintended consequence of conditionality may be the distortion of recipients’ behavior in ways that lower welfare. We first illustrate a range of potential distortions arising from CCT programs around the world. We then show that in the simple case where a CCT causes low return participants to select into a behavior, and social returns and private perceived returns are aligned, transfer size plays an important role: the larger the transfer, the stronger the distortion becomes, implying that (i) there is an optimal transfer size for such CCTs, and (ii) unconditional cash transfers (UCTs) may be better than CCTs when the transfer amount is large. We provide empirical evidence consistent with these claims by studying a cash transfer program conditional on seasonal labor migration in rural Indonesia. In line with theory, we show that when the transfer size exceeds the amount required for travel expenses, distortionary effects dominate and migration earnings decrease.

Liquidity regulation and banks: Theory and evidence

This paper theoretically and empirically investigates the effects of liquidity regulation on the banking system. We document that the current quantity-based liquidity rule has reduced banks' liquidity risks. However, the mandated liquidity buffer appears to crowd out bank lending and lead to a migration of liquidity risks to banks that are not subject to liquidity regulation. These findings motivate a model of liquidity regulation with endogenous liquidity premiums and heterogeneous banks. The model shows that the current liquidity rule can improve upon the unregulated equilibrium but can also have distortionary effects because of the dual role of the liquidity buffer as an implicit tax and a costly mitigator of liquidity risks. The fixed quantity mandate can interact with the uncertain liquidity demand, amplifying the volatility in the liquidity premium. A central bank committed liquidity facility could improve the current quantity-based regulation by introducing a price-based mechanism.

How Does Environmental Tax Influence the Scale and Efficiency of Green Investment among China’s Heavily Polluting Enterprises?

This paper investigates the impact of environmental tax on corporate green investment behavior using archival data from China’s A-share-listed companies. We took advantage of the quasi-natural experiment based on China’s environmental “fee-to-tax” reform and employed the difference-in-differences (DID) method. This study goes beyond the existing studies by integrating the scale of green investment with the financial circumstances of the firms to comprehensively assess the effectiveness of green investment. Using the refined Richardson residual econometric model, we accurately measured the green investment efficiency, expanding the policy evaluation of the environmental fee-to-tax transition beyond the investment scale to include efficiency. Our findings indicated that the environmental tax promotes green investment, especially among state-owned firms, firms with fewer financial constraints, and those operating in regions with weaker environmental governance. However, we discovered a trade-off between the growth in the green investment scale and the efficiency of such investments, suggesting a decrease in efficiency due to the tax. Further investigation revealed that corporate agency issues contributed to the heterogeneity in the impact of the environmental tax on green investment efficiency, with firms facing severe agency problems and experiencing more misuse of green investment. This implied that addressing agency issues could alleviate the distortionary effects of the environmental tax on green investment efficiency.

Energy market integration: Harmonizing tariff recourse policies in East Africa

This study uses pattern-matching to analyze the tariff recourse policies employed by East African Community (EAC) countries to cushion the distortionary effects of high tariffs. We describe the various tariff recourse policies adopted across the EAC domestic markets and assess their level of regional harmonization given the different market structures each member state operates. We found a sharp disparity in the tariff recourse policies adopted across the EAC. We recommend that EAC countries prioritize reforms that create linear market liberalization and competition growth as part of an overall strategy for accelerating electricity market integration.

Motivational Optimism and Short-Term Investment Efficiency

ABSTRACT We explore whether managers’ strong desire for good performance distorts their expectations and, consequently, corporate investment efficiency. We find that managers overweight favorable information and underweight unfavorable information, resulting in optimistic earnings guidance. We construct an ex ante measure of optimism and show that greater optimism is associated with a lower inventory investment efficiency: Managers overinvest in inventory, resulting in lower inventory turnover and increased incidence and severity of inventory writedowns. We also find motivational optimism influences firms’ financial reporting and is associated with an increased incidence of financial misreporting. Our results are consistent with the psychology theory of motivated reasoning, which emphasizes the distortive effects of preferences on beliefs and judgments. JEL Classifications: M41; D91; G41; G31.

Closing the regulatory gap – answers (and new questions) from the Foreign Subsidies Regulation

This article discusses the way in which the Foreign Subsidies Regulation (FSR) attempts to close a regulatory gap left between EU State aid rules, WTO anti-subsidy rules and foreign direct investment (FDI) monitoring rules. In particular, it presents key similarities and differences in the substantive assessment undertaken by the Commission in State aid control, and that which it may be expected to apply under the FSR, from the economics perspective. While the Commission is likely to apply very similar tools to those of State aid control in order to determine whether a foreign financial contribution confers a benefit on an undertaking (i.e. the market economy operator principle), there are also a number of ways in which the assessment under the FSR may be expected to differ from State aid practice. Specifically, the FSR is likely to require a more in-depth assessment of the distortive effects of foreign subsidies. This will require a novel approach to developing and testing ‘theories of harm’, taking inspiration from State aid, trade defence and merger control. Finally, the broader scope of the ‘balancing test’ (weighing up positive and negative effects of subsidies) compared to State aid, while likely necessary to match the closer focus on distortive effects of the aid, raises new question on its application by the Commission in practice.

The role of third parties in the enforcement of the Foreign Subsidies Regulation: complaints, participation, judicial review and private enforcement

This article analyses the role of third parties in the enforcement of the Foreign Subsidy Regulation (FSR). It focuses on competitors, customers, and suppliers – market participants directly affected by distortive foreign subsidies – as a special form of third parties. Third parties might have a vested interest in the enforcement of the FSR against subsidy beneficiaries because they could be affected by the distortive effects of foreign subsidies. Third parties may also be of value in the FSR enforcement through detection, involvement in Commission procedures, or through private enforcement measures. Consequently, the article investigates complaints, participation in Commission FSR proceedings, judicial review, and private enforcement in national courts. It draws some conclusions and comparisons with third party enforcement in other areas of EU law, notably EU State aid, competition, merger control and trade law, but it works out the unique approach for third party enforcement of the FSR. Despite the FSR’s gap-filling function, it deviates significantly from third party enforcement in other areas of EU law, as it only provides limited options for such third-party enforcement.

Foreign subsidies and financial contributions: much fine-tuning ahead

The Foreign Subsidies Regulation, which came into force on 12 January 2023, constitutes the missing piece to protecting the internal market from the distortive effects of public intervention and bridges a glaring regulatory gap. However, although tackling distortions of competition caused by non-EU countries’ public intervention has always been widely recognized as a worthy objective, the complexities and administrative burden deriving from Commission-designed tools have been broadly and harshly criticized. Even though more conceptually interesting topics are on the table, the present contribution focuses on the issue that seems to be the most controversial in the current phase: the quantity and type of information required in the notification process with regard to foreign subsidies/financial contributions received by the notifying undertaking in the previous three years. Indeed, the Commission requires all foreign financial contributions to be listed (with few exceptions) in the context of concentrations and public procurement procedures. Therefore, after a brief overview of the Foreign Subsidies Regulation, the contribution analyses the rationale and related risks of the Commission’s choice to require the notification of foreign financial contributions rather than foreign subsidies, it evaluates the possible alternative paths proposed during the public consultation and it concludes by proposing a reasonably balanced solution.

The skewing effect of outcome evidence

Behaviours are primarily regulated to reduce the risks of a negative outcome to others. This article discusses the use of outcomes as evidence of violations of a legal standard (outcome evidence). The current debate over outcome evidence centres around limited rationality. Opponents argue that factfinders’ estimations are distorted by hindsight bias, while supporters argue that factfinders properly update the probability of fault, given information about the outcome. The article adopts the rationality assumptions and argues that factfinders should nevertheless disregard outcome evidence in most cases unless the outcome can provide evidence that works for or against the defendant or when the law creates inefficient incentives to comply with the legal standard, then using adverse outcomes as evidence may help solve the problem of undercompliance. The article further shows that when evidence cannot be excluded, changes to the law governing primary behaviour are warranted to account for the distortionary effect of outcome evidence.

Investment Obligations and Levies on VOD Media Service Providers and Cultural Policies of Member States

Digital video streaming platforms that provide on-demand services are subject to financial contributions stemming from media policy regulations in different countries, including the majority of EU Member States. In particular, such financial obligations include direct investments in European media works or indirect levies for national film funds. In 2018, the European Union revised the Audiovisual Media Services Directive, extending the scope of the financial obligations to cover not only the domestic media service providers established in the country that requires financial contribution but also foreign media service providers targeting the audience in this state. The provision was transposed (or is considered to be transposed) in the domestic legislation of at least 14 EU Member States. Yet, the technical design of the respective domestic provisions significantly varies, which can lead to distortive effects on investments and trade in the European Union, including due to the risk of double imposition of financial obligations by several Member States on the same income. In this article, the authors analyse tax-related issues regarding financial obligations, namely how certain well-established cross-border tax mechanisms can enhance the legislative AVMSD framework to achieve a better balance between the societal policy goal of promoting European culture, on one hand, and respecting economic rights in the implementation of the financial obligations for audiovisual media service providers under article 13(2) of the AVMSD on the other. From an international tax perspective, the authors analyse whether financial obligations, in particular the levy for national film funds, can be regarded as an earmarked tax on business income, its compatibility with double tax treaties, as well as whether it is covered by the commitment of the OECD Inclusive Framework Members to remove the unilateral measures similar to digital services taxes (DSTs) for the purposes of OECD Pillar One.