Forgone Profits Research Articles

Coercion in international tax cooperation: identifying the prerequisites for sanction threats by a great power

ABSTRACTTax cooperation puts offshore centers worse off, as their compensation for forgone profits is a hard political sell, and unlikely to produce the same spillover effects on wages and employment as the attraction of foreign tax base. Coercion by a great power thus seems to be a prerequisite for successful international cooperation in tax matters. Great power status is based on internal market size. Governments become substantially more likely to use this power through sanction threats against tax havens when two factors coincide: (1) domestic constraints preventing a shift of the tax burden to labor and consumption and (2) scope for redistributive cooperation benefitting great power banks or multinationals. Hypotheses are tested in an analysis of tax negotiations at OECD level between 1996 and 2014.

A Reexamination of the Costs of Medical R&D Regulation.

Recent evidence suggests that the economic value of increased health has been enormous, with most of these gains being driven by medical R&D. The R&D process for pharmaceuticals is particularly expensive and time consuming, with well-known studies from the Tufts Center for the Study of Drug Development suggesting that developing a single successful drug costs around $1 billion and takes roughly 12 years. We argue that these estimates are incomplete because they do not incorporate the social costs imposed by the regulatory process, namely the costs to producers in terms of forgone profits and the costs to consumers in terms of delayed access to drugs. In this article, we develop a framework to estimate the social costs imposed by the regulatory process. Under this framework, delays in drug development are socially costly because of reduced consumer surplus (due to delayed access to beneficial therapies), reduced producer variable profits, and increased R&D expenditures. We apply this framework to the case of therapies aimed at treating AIDS, non-Hodgkin's lymphoma, and breast cancer. In each case, we find that the effects of drug delays on consumer surplus and variable producer profits are far larger than the effects on R&D costs. These findings suggest that patients, not firms, would be the primary beneficiaries from any improvements in streamlining the drug development process.

Implications and effectiveness of iterated pricing games in the Brazilian retail market

Retail pricing is often a complex non-zero sum, iterated game played by both analytically sophisticated businesses and strategically primitive ones. Game theory can help retailers avoid, survive, and win pricing wars — but it is undoubtedly not a trivial endeavour. This paper analyses how a tit for tat pricing strategy can be successfully utilised against multiple opponents through an example drawn from the Brazilian gasoline retail market. Although ultimately successful, the pricing strategy adopted by oil companies cost them approximately $15m per year in forgone profits or $214,000 per gas station. A relatively high price to pay in a small countryside city in Brazil.

The Impact of Cyclical Demand Movements on Collusive Behavior

Recent work by Rotemberg and Saloner (1986) investigates the effect of the business cycle on optimal collusive pricing by specifying that demand is subject to i.i.d. shocks. An implication of the i.i.d. assumption is that firms' expectations on future demand are unrelated to the current level of demand. We put forth a model that allows for both the level of current demand and firms' expectations on future demand to change over time; thus it captures two important properties of the business cycle. Our analysis reveals that while the gain to deviating from a collusive agreement is greatest during booms, firms find it most difficult to collude during recessions, as the forgone profits from inducing a price war are relatively low. An implication of this effect for pricing behavior is that at the same level of demand, price is lower when demand is declining than when demand is rising. Consistent with previous theoretical work, we find that firms price countercyclically for a range of values for the discount factor. However, numerical simulations reveal a greater tendency for firms to price countercyclically during recessions than during booms.

The Demand for Labor Market Structure: An Economic Approach

This paper formulates and estimates a model for the determination of employer and union demand for multiemployer (vs. single employer) bargaining units. Utility-maximizing, risk-averse firms and unions are both assumed to weigh the impact of each type of bargaining unit on the expected level and variability of profits and wages, respectively. The model is tested on a 1975 sample of 3,486 individual collective bargaining agreements. Because either party can generally leave a multiemployer unit without the other party's consent, a partially observed bivariate probit model is used to estimate demand for structure. It is found that the forgone profits due to a multiemployer unit (relative to a single-firm unit) lower firm demands for this type of unit, while forgone wages in a multiemployer unit (relative to a single-firm unit) lower union demand for this type of unit.

Choice of Technology in Low-Wage Countries: A Nonneoclassical Approach

Chronic unemployment continues to exist in many less-developed countries despite rapid economic growth and development. Studies have shown that factors in addition to a factor-price ratio may influence the choice of technology. It was found that foreign firms in Brazil tended to obtain their machinery from their home country. They attributed this behavior to the cost of a complete search for a technology that was appropriate for the factor costs these firms faced in Brazil and to the time constraints under which they operated. It was also concluded that these firms did not search for a lower-cost technology until the cost of obtaining additional information equalled the expected reduction in costs from the technologies that might exist, but were not known to the firm. It was concluded that firms in Brazil were not forced to use an appropriate technology, since the competitive environment in Brazil allowed inefficient firms to exist. The competitive behavior of firms in Brazil encouraged their non-optimizing behavior. Two questions present themselves: (1) what is the extent of this noncost-minimizing behavior, and (2) what reward did the owners and managers of these firms receive in exchange for their forgone profits. This paper answers these questions, based onmore » the choice of technology of 400 firms that invested in the light manufacturing sector in Thailand over the period 1962 to 1974. 68 references.« less