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This paper uses administrative tax data to estimate top wealth in the United States. We assemble new data that links people to their sources of capital income and develop new methods to estimate the degree of return heterogeneity within asset classes. Disaggregated fixed income data reveal that rich individuals earn much more of their interest income in higher-yielding forms, and have much greater exposure to credit risk. Consequently, in recent years, the interest rate on fixed income at the top is approximately three times higher than the average. Using firm-level characteristics to value firms, we find that twenty percent of total pass-through business wealth accrues to those with losses. We combine this new data on fixed income and pass-through business returns with refined estimates of C-corporation equity, housing, and pension wealth to deliver new capitalized wealth estimates. Our approach---which builds on Saez and Zucman (2016) and Bricker, Henriques, and Hansen (2018)---reduces bias because wealth and rates of return are correlated. From 1989 to 2016, the top 1%, 0.1%, and 0.01% wealth shares increased by 7.6, 5.1, and 3.0 percentage points, respectively, to 31.5%, 15.0%, and 7.0%. While these changes are less dramatic than some prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as either the bottom 90% or the "P90-99" class. We discuss implications for income inequality measures, capital tax policy, and savings behavior. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The accounting for defined-benefit (DB) pension expense in U.S. GAAP involves offsetting pension costs against an expected (rather than actual) return on pension assets. Pensions commentators argue that this expensing model tilts pension portfolios towards riskier assets – as sponsoring firms can benefit from assuming higher expected rates of return on riskier assets (which reduce pension expense and boost reported income), without bearing the cost of higher volatility in reported income. We examine a recent regulatory change in U.S. GAAP, which mandates the relocation of the expected return on pension assets from “above the line” of to “below the line” of operating income. Consistent with this change reducing the financial reporting incentives for risk-taking, we predict and find that a sample of U.S. firms subject to this mandate reduces risk-taking in pension assets following the change, relative to a control sample of Canadian firms not subject to the change. In cross-sectional tests, we find that the reduction in risk-taking is more pronounced in (1) firms where the financial reporting incentives for risk-taking were stronger in the pre-period, and in (2) firms where the regulatory change particularly reduced those benefits. Our findings imply that managers are willing to undertake real actions (i.e., invest in riskier assets) to report favorable operating income, and that these incentives are incremental to the incentives to report favorable net income. They also provide evidence that financial reporting incentives serve as a driver of pension asset allocation decisions.

We define a sentiment indicator that exploits two contrasting views of return predictability, and study its properties. The indicator, which is based on option prices, valuation ratios and interest rates, was unusually high during the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. We interpret it as helping to reveal irrational beliefs about fundamentals. We show that our measure is a leading indicator of detrended volume, and of various other measures associated with financial fragility. We also make two methodological contributions. First, we derive a new valuation-ratio decomposition that is related to the Campbell and Shiller (1988) loglinearization, but which resembles the traditional Gordon growth model more closely and has certain other advantages for our purposes. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.

We study the optimal taxation of risk-free and excess capital income with heterogeneous rates of return, alongside an optimal nonlinear earnings tax. Households can hold three assets: one risk-free, one risky but diversifiable, and one a private investment with idiosyncratic risk whose expected return differs among households. Contrary to expectations, the optimal tax on excess returns to risky assets is ineffective for redistribution, because its effects are annulled by a Domar-Musgrave effect. It assumes only an insurance role, and is positive. The optimal tax on risk-free returns does fulfill a redistributive role, insofar the risk-free returns reveal information about the investors' types beyond what is revealed by the earnings tax base. The optimal nonlinear earnings tax takes the standard Mirrleesian form amended to take account of the stochasticity of capital income tax revenue.

I propose a fast and parsimonious way to estimate the implied rate of return on common equity of single stocks and indexes, resulting from the combination of two easily computable ratios.

Foreign holdings of domestic debt instruments in Nigeria have been increasing. Using data over 2007M1-2019M1, we show that, on average, global factors (global interest rates, oil prices) seem to carry more weight than domestic factors (treasury bills rate and domestic risk) in foreign portfolio invetsors’ decisions in Nigeria. Specifically, we show that foreign participation is, in the long run, positively correlated with oil prices and profitable rates of return on local-currency instruments, but negatively correlated with exchange rate depreciation pressures. In the short run, oil prices, opportunity cost of funds and perception of Nigeria-specific risks also play a role. These results highlight the volatile short-term nature of such flows and call for a package of policy reforms to attract longer term direct investments.

Based on a detailed model of the German tax-benefit system, this paper simulates private and fiscal returns to education for college graduates and college dropouts. Completing a five-year college degree is found to be associated with an internal rate of return (IRR) of 14.2% for gross earnings, 7.4% for disposable income, and 6.6% for the net fiscal contribution. Individuals who drop out of college after two years, and subsequently complete a three-year period of vocational training, are found to have negative IRRs: -0.5% for gross earnings and -5.9% for both disposable income and the net fiscal contribution. In a series of counterfactual experiments, we explore how these returns react to changes in gross earnings, expenditure per student, and the level of income tax payments.

Using data on household balance sheets from the Survey of Consumer Finances and data on macroeconomic rates of return from Jorda et al. (Q J Econ. 134(3):1225–1298, 2019) we construct two alternative series for household rates of return by race from 1989 to 2016. Our estimates suggest a persistent racial gap in the rate of return on assets between 1 and 4 percentage points. The gap in returns remains even after conditioning on demographic factors, labor market factors, credit history, portfolio composition, household attitudes toward savings, financial literacy, and inheritance—suggestive of a role for discrimination. Recentered influence function (RIF) decompositions indicate between 40 and 53%—1.2 to 1.6 percentage points—of the difference in median returns between Black and White households is unexplained by observable characteristics. A standard Oaxaca-Blinder decomposition suggests that differential rates of return can explain up to 14% of the racial wealth gap at the mean. Finally, our data on differential rates of return allow us to effectively rule out explanations for the racial wealth gap based on myopia or excessive time preference. Given observed series for consumption and rates of return, a standard lifecycle model requires Black households to discount the future less than White households in order to match the data.

What is the impact on intra-national trade and regional economic outcomes when the quality and lane-capacity of an existing paved road network is expanded significantly? We investigate this question for the case of Turkey, which undertook a large-scale public investment in roads during the 2000s. Using spatially disaggregated data on road upgrades and domestic transactions, we estimate a large positive impact of reduced travel times on trade as well as local manufacturing employment and wages. A quantitative exercise using a workhorse model of spatial equilibrium implies heterogeneous effects across locations, with aggregate real income gains reaching 2–3% in the long-run. Reductions in travel times increased local employment-to-population ratio but had no effect on local population. We extend the model by endogenizing the labor supply decision to capture this finding. The model-implied elasticity of employment rates to travel time reductions captures about one-third of the empirical elasticity.

According to Homburg’s (2014) comment on Kim and Lee (1997), an ad-valorem property tax on land cannot cause dynamic ineffciency of equilibrium allocations in an overlapping-generations model unless the tax is "confiscatory", i.e., equal to or greater than land rents. With such a tax, Homburg claims, land would be intrinsically worthless and the market for land would be closed. The latter claims are invalid because, as a store of value, land can be traded at a positive price even if the net rate of return on land is negative.

In this paper we develop a general framework to analyze state space models with time-varying system matrices where time variation is driven by the score of the conditional likelihood. We derive a new filter that allows for the simultaneous estimation of the state vector and of the time-varying parameters. We use this method to study the time-varying relationship between the price dividend ratio, expected stock returns and expected dividend growth in the US since 1880. We find a significant increase in the long-run equilibrium value of the price dividend ratio over time, associated with a fall in the long-run expected rate of return on stocks. The latter can be attributed mainly to a decrease in the natural rate of interest, as the long-run risk premium has only slightly fallen.

During the last decade, the Dutch have debated intensively reforming their second-pillar pension scheme. Meanwhile, ten years turned out to be a too short period for pension funds to bring their funding ratios to sound levels, due to among others the worldwide decline of interest rates. Currently, the Dutch government and the social partners have come up with a quite concrete reform plan. The plan includes three main points: i) make the move towards actuarially fair pension accruals, ii) strengthen the link between benefit levels and capital market rates of return and iii) introduce the option to take up part of accrued pension wealth at retirement. This paper reviews and interprets the plan for pension reform.

Currently, there are no convincing proxies for the fundamentals of cryptocurrency assets. We propose a new market-to-fundamental ratio, the price-to-utility (PU) ratio, utilizing unique blockchain accounting methods. We then proxy various fundamental-to-market ratios by Bitcoin historical data and find they have little predictive power for short-term bitcoin returns. However, PU ratio effectively predicts long-term bitcoin returns. We verify PU ratio valuation by unsupervised and supervised machine learning. The valuation method informs investment returns and predicts bull markets effectively. Finally, we present an automated trading strategy advised by the PU ratio that outperforms the conventional buy-and-hold and market-timing strategies.

While discussing the enhancement of the connectivity between Europe and Asia, we explore a new area of cooperation, which is the use of European long-term investment funds in Asia’s infrastructure. We argue that, if Asian countries agree to offer 50% of their spillover revenue to infrastructure investors from Europe, it will increase the rate of return of long-term investment funds, such as pension and insurance funds. This will create a win–win situation for both Asia and Europe, because investment in infrastructure will enhance various spillover benefits and increase the savings in these countries, which will ultimately enhance the economic growth in the Asian countries. On the other hand, idle European funds will generate higher returns from infrastructure investments in Asia, which will also be beneficial for European countries. This approach will reduce the divergence in infrastructure between the two regions and encourage regional connectivity, such as the People’s Republic of China’s Belt and Road Initiative. With some empirical evidence, we also highlight the methods of spillover revenue collection and approaches to share the revenues. It is important for Asian countries to review the approaches and develop some institutional mechanisms to allow private investors in infrastructure. Moreover, Asian and European leaders, for example in the Asia–Europe Meeting, might devise appropriate methods that would allow European long-term investors to invest in Asian infrastructure needs.

There is increasing empirical evidence that people systematically differ in their rates of return on capital. We derive optimal non-linear taxes on labor and capital income in the presence of such return heterogeneity. We allow for two distinct reasons why returns are heterogeneous: because individuals with higher ability obtain higher returns on their savings, and because wealthier individuals achieve higher returns due to scale effects in wealth management. In both cases, a strictly positive tax on capital income is part of a Pareto-efficient dual income tax structure. We write optimal tax rates on capital income in terms of sufficient statistics and find that they are increasing in the degree of return heterogeneity. Numerical simulations for empirically plausible return heterogeneity suggest that optimal marginal tax rates on capital income are positive, substantial, and increasing in capital income.

This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.

China’s Belt and Road Initiative (BRI) is a mechanism through which countries can upgrade connectivity-related infrastructure, including through cross-border projects, complementing traditional sources of finance. An overarching goal of the BRI is to reduce trade costs between China and partner countries, in part by helping to integrate regional markets. The large-scale borrowing associated with BRI projects has given rise to potential debt servicing and sustainability concerns. The rate of return of BRI regional infrastructure projects depends in part on the integrity of public procurement processes and realizing value for money objectives. To date BRI projects financed by Chinese institutions have been largely awarded to Chinese companies. In this paper, we discuss good practices and policy options to enhance transparency of BRI procurement processes and achieve value for money, including through international cooperation among countries participating in the BRI.

In 2017, global investment in renewables and energy efficiency declined by 3% and there is a risk that it will slow further; clearly fossil fuels still dominate energy investment. This could threaten the expansion of green energy needed to provide energy security and meet climate and clean air goals. Several developed and developing economies are still following pro-coal energy policies and the extra CO2 generated by new coal-fired power plants could more than wipe out any reductions in emissions made by other nations. Finance is the engine of development of infrastructure projects, including energy projects. Generally financial institutions show more interest in fossil fuel projects than green projects, mainly because there are still several risks associated with these new technologies and they offer a lower rate of return. If we want to achieve sustainable development goals, we need to open a new file for green projects and scale up the financing of investments that provide environmental benefits, through new financial instruments and new policies, such as green bonds, green banks, carbon market instruments, fiscal policy, green central banking, financial technologies, community-based green funds, etc., which are collectively known as “green finance”.

With reference to funds established for the benefits of the public at large, a university endowment, or other similar sovereign wealth fund, we demonstrate that the optimal extraction rate from the fund is significantly smaller than the expected real rate of return on the underlying fund. We consider the situation where the influx to the fund has stopped, it is in a steady state, and is invested broadly in the international financial markets. The optimal spending rate secures that the fund is a perpetuity, i.e., it will last 'forever', where the real value of the fund after payments is stationary, while spending according to the expected rate of return will deplete the fund with probability 1. Optimal portfolio choice and spending are then inconsistent. Our conclusions are contrary to the recommendations of an expert panel to the Norwegian Government Pension Fund Global, as well as at odds with part of the extant literature on the management of endowments of universities.

This paper presents and discusses the estimates of the present value of corporate profits in the United States from 1984 to 2018. To value the expected income stream, it uses the long-range forecasts of professional forecasters for pre-tax corporate earnings and long-term Treasury note yields, sourced from the Blue Chip Economic Indicators survey. The appraised value of corporate earnings can point in real time at periods where market prices are deviating from valuations implied by expected earnings and interest rates. Market participants' forecasts seem to interpret most of the earnings fluctuations as permanent, underestimating the cyclical fluctuations The over-reaction to transitory shocks and changes in long-term outlook leads to swings in the valuation, in line with swings in the observed market prices.

The growing trend of urban city development requires various infrastructure investments, including water supply, electricity, sanitation, transportation, and other supporting facilities. In facing this challenge, many Asian countries experience significant constraints, particularly on the issues of land acquisition and insufficient financial supply, which potentially create a time delay in infrastructure investment and huge budget deficits. If these infrastructure investments were financed by overseas investors, future exchange rate risks would have to be carried by infrastructure companies. We examine further ways to attract more investment in infrastructure by applying spillover tax revenues. We also present case studies of some innovative financing aspects of Japan and other countries.

Financial repression (legal restrictions on interest rates, credit allocation, capital movements, and other financial operations) was widely used in the past but was largely abandoned in the liberalization wave of the 1990s, as widespread support for interventionist policies gave way to a renewed conception of government as an impartial referee. Financial repression has come back on the agenda with the surge in public debt in the wake of the Global Financial Crisis, and some countries have reintroduced administrative ceilings on interest rates. By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. This study attempts to assess some of these losses by estimating the impact of financial repression on growth using an updated index of interest rate controls covering 90 countries over 45 years. The results suggest that financial repression poses a significant drag on growth, which could amount to 0.4-0.7 percentage points.

Similar to other workers in industrial settings NFL running backs can choose to provide additional work effort with possible negative health consequences. We find that the most informative measure for running backs is yards gained after contact, which not only increases total rushing yards but also increases injuries that can cause subsequent lost income due to future games missed. We econometrically examine the decisions running backs reveal in trading off injury risk against total yards gained and salary in the short run and how the tradeoff appears in the longer run where career length considerations come into play. Our estimates reveal subtle nonlinearities and interpersonal heterogeneity in risky effort and the associated short and long run injury risk and economic payoffs.

This paper studies the impact of a capital-income tax and a wealth tax on investor behavior in an efficient capital market under various assumptions regarding uncertainty and time horizons. We show that investors who face capital taxes have a lower discount rate, but that their willingness to pay for a company’s stock is not affected by these taxes. In a second step, we show that if a company owner increases her required rate of return from the company because of capital taxes, she will harm the company’s market value and thus her own wealth.

This paper estimates private and social returns to investment in education in Turkey, using the 2017 Household Labor Force Survey and alternative methodologies. The analysis uses the 1997 education reform of increasing compulsory education by three years as an instrument. This results in a private rate of return on the order of 16 percent for higher education and a social return of 10 percent. Using the number of children younger than age 15 in the household as an exclusion restriction, the analysis finds that returns to education for females are higher than those for males. Contrary to many findings in other countries, private returns to those working in the public sector are higher than those in the private sector, and private returns to those who followed the vocational track in secondary education are higher than those in the general academic track. The paper discusses the policy implications of the findings.

Prettner (2019) studies the implications of automation for economic growth and the labor share in a variant of the Solow-Swan model. The aggregate production function allows for two types of capital, traditional and automation capital. Traditional capital and labor are imperfect substitutes whereas automation capital and labor are perfect substitutes. In this paper, we point to a flaw in Prettner's analysis that invalidates his main analytical and computational findings. In contrast to Prettner, we argue that both kinds of capital are perfect substitutes as stores of value, and, therefore, must earn the same rate of return in equilibrium. Our computational analysis shows that the model dramatically overestimates the actual decline in the US labor share over the last 50 years.

Real estate—housing in particular—is a less profitable investment in the long run than previously thought. We hand-collect property-level financial data for the institutional real estate portfolios of four large Oxbridge colleges over the period 1901–1983. Gross income yields initially fluctuate around 5%, but then trend downward (upward) for agricultural and residential (commercial) real estate. Long-term real income growth rates are close to zero for all property types. Our findings imply annualized real total returns, net of costs, ranging from approximately 2.3% for residential to 4.5% for agricultural real estate.

In the throes of economic crisis, the Spanish government decided to reintroduce the Wealth Tax, appealing to redistributive motives and its need for greater revenues. This paper studies how individuals reacted to the reintroduction of this tax by drawing on the universe of wealth tax returns submitted to the Catalan Tax Agency between 2011 and 2015. Thus, we exploit the variation in treatment exposure to analyse taxpayers' responses, in terms not only of wealth accumulation, but also of the potential avoidance strategies adopted. Indeed, our results reflect avoidance rather than real responses. They show that while facing higher wealth taxes did not have a negative effect on taxpayers' savings, it did encourage them to change their asset and income composition to take advantage of wealth tax exemptions (mostly business-related) and the existence of a limit on wealth tax liability. This translates into an elasticity of taxable wealth with respect to the net-of-tax rate of return of 0.64, or, put differently, a 0.1 percentage point increase in the average wealth tax rate leads to a reduction in taxable wealth of 3.24% over 4 years. Overall, these avoidance responses are quite marked in terms of tax revenues: they represent a 4-year accumulated revenue loss of 2.6 times the 2011 estimated wealth tax revenues. The existence of such responses mostly related to the design of the wealth tax has relevant policy implications not only in terms of revenues but also insofar as it undermines the tax's redistributive role.

This lecture focuses on the costs of public debt when safe interest rates are low. I develop four arguments.First, I show that the current U.S. situation in which safe interest rates are expected to remain below growth rates for a long time, is more the historical norm than the exception. If the future is like the past, this implies that debt rollovers, that is the issuance of debt without a later increase in taxes may well be feasible. Put bluntly, public debt may have no fiscal cost.Second, even in the absence of fiscal costs, public debt reduces capital accumulation, and may therefore have welfare costs. I show that welfare costs may be smaller than typically assumed. The reason is that the safe rate is the risk-adjusted rate of return to capital. If it is lower than the growth rate, it indicates that the risk-adjusted rate of return to capital is in fact low. The average risky rate however also plays a role. I show how both the average risky rate and the average safe rate determine welfare outcomes.Third, I look at the evidence on the average risky rate, i.e. the average marginal product of capital. While the measured rate of earnings has been and is still quite high, the evidence from asset markets suggests that the marginal product of capital may be lower, with the difference reflecting either mismeasurement of capital or rents. This matters for debt: The lower the marginal product, the lower the welfare cost of debt.Fourth, I discuss a number of arguments against high public debt, and in particular the existence of multiple equilibria where investors believe debt to be risky and, by requiring a risk premium, increase the fiscal burden and make debt effectively more risky. This is a very relevant argument, but it does not have straightforward implications for the appropriate level of debt.My purpose in the lecture is not to argue for more public debt. It is to have a richer discussion of the costs of debt and of fiscal policy than is currently the case. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

High-quality infrastructure will boost regional economic development and reduce poverty and income inequality. The spill-over effects created by this high-quality infrastructure will be seen in the form of an increase in gross domestic product and tax revenue in the region. These positive effects can be utilized to address the gap between infrastructure demand and financing. Private-public partnerships (PPP) in infrastructure have been advocated for many years. However, PPP partners, such as insurance and pension funds, have been discouraged by the low rate of return from investing in quality infrastructure projects. This is because the main sources of revenue from infrastructure investment are user charges. This paper aims to provide a new mechanism for government and investors to utilize the spill-over effects of infrastructure projects and share them with infrastructure investors for a better rate of return in order to compensate their risk. This mechanism will motivate stakeholders to design infrastructure with high economic benefits and encourage instruments, such as city infrastructure concepts, hometown investment trusts, land trusts, and the improvement of education and digital literacy, to ensure the infrastructure projects will create positive spill-overs to the region. Hometown investment trust funds can provide financing for start-up businesses along with the new infrastructure investments. Land trusts will solve the issue of owners not wanting to sell their land by giving them the option to keep it and lease the land to infrastructure companies. The landowners can receive long-term rent income, for example for 99 years. In this way, land trusts will smooth the use of land and transfer the usage rights to infrastructure companies.

Pooled annuity products, where the participants share systematic and idiosyncratic mortality risks as well as investment returns and risk, provide an attractive and effective alternative to traditional guaranteed life annuity products. While longevity risk sharing in pooled annuities has received recent attention, incorporating investment risk beyond fixed interest returns is relatively unexplored. Incorporating equity investments has the potential to increase expected annuity payments at the expense of higher variability. We propose and assess a strategy for incorporating equity investments along with managed-volatility for pooled annuity funds. We show how the managed volatility strategy improves investment performance, while reducing pooled annuity income volatility and downside risk, as well as an investment strategy that reduces exposure to investment risk over time. We quantify the impact of pool size when equity investments are included, showing how these products are viable with relatively small pool sizes.

This paper examines whether investment in the agriculture and food sectors in Africa significantly increases overall economic growth and, hence, reduces food and nutrition insecurity. To this end, the study examines the causal link between agricultural growth, food production, quality of governance, and overall economic growth using panel data compiled from 44 African countries for a 53-year period from 1961 to 2014. The estimation result from the fully modified least squares, the panel cointegration, and Granger causality tests suggest that agricultural growth, government commitment, and quality of governance Granger causes overall economic growth. The study also identifies the 10 African countries where investment in the agriculture and food sectors is expected to yield the highest returns and the 10 African countries having the lowest returns in terms of reducing food insecurity and poverty. The result indicates that Botswana, Burkina Faso, Ethiopia, Kenya, Malawi, Mali, Mozambique, Rwanda, Seychelles, and Sierra Leone are the top 10 African countries where such an investment is expected to yield the highest returns. Cameroon, Congo, Egypt, Equatorial Guinea, Eritrea, Gabon, Gambia, Libya, Mauritania, and Somalia are the bottom 10 countries where such investment is expected to yield the lowest return.

Using regulatory data that are free of self-reporting bias for 2007-2016, we decompose investment returns of 455 Dutch pension funds according to their key investment decisions, i.e. asset allocation, market timing and security selection. In extension to existing papers, we also assess the impact of benchmark selection, i.e. the pension funds’ choice for proprietary benchmarks instead of standard benchmarks. Over time, asset allocation explains 39 percent of the variation of pension funds’ returns, whereas benchmark selection, timing and selection explain 11, 9 and 16 percent, respectively. Across pension funds, asset allocation explains on average only 19 percent of the variation in pension fund returns. This is dominated by benchmark selection explaining 33 percent of cross sectional returns. Over time and across pension funds we document that benchmark selection is more important in driving returns than selection and timing.

Fluctuations in the numbers of visitors directly affect the rates of return on tourism business activities. Therefore, maintaining a firm grasp of the relationship between the changes in the numbers of Chinese tourists and international travellers visiting Taiwan is conducive to the formulation of an effective and practical tourism strategy. Although the topic of international visitors to Taiwan is important, existing research has discussed the issue of the travel demand between Chinese tourists and international travellers visiting Taiwan. This paper is the first to examine the spillover effects between the rate of change in the numbers of Chinese tourist arrivals and the rate of change in the numbers of international traveller arrivals. Using daily data for Chinese tourists and international travellers visiting Taiwan over the period from 1 January 2014 to 31 October 2016, together with the Diagonal BEKK model, the paper analyses the co-volatility spillover effects between the rate of change in the numbers of international travellers and the rate of change in the numbers of Chinese tourists visiting Taiwan. The empirical results show that there is no dependency relationship between the rate of change in the numbers of Chinese tourists and the rate of change in the numbers of international travellers visiting Taiwan. However, there is a significant negative co-volatility spillover effect between the rate of change in the numbers of Chinese tourists and the rate of change in the numbers of international travellers. The empirical findings suggest that Taiwan should abandon its development strategy of focusing only on a single market, namely China, and to be pro-active in encouraging visits by international travellers to Taiwan for sightseeing purposes, thereby increasing the willingness of international travellers to visit Taiwan. Moreover, with the reduction in the numbers of Chinese tour groups visiting Taiwan, and increases in the numbers of individual travellers, the Taiwan Government should change its previous travel policies of mainly attracting Chinese tour group travellers and actively promoting in-depth tourism among international tourists, by developing tourism that focuses on the special characteristics of different localities. In this way, the government can enhance the quality of Taiwan’s tourism, and also attract travellers with high spending power.

In Germany, R&D subsidies are an important tool to support innovation in the private sector. This paper studies the welfare effects of R&D subsidies distributed through the German federal government’s thematic R&D programs between 1994 and 2011. The analysis is based on a structural model of the R&D subsidy process which allows to estimate the benefits of R&D subsides to the German economy. The model takes into account heterogeneous application costs of firms and identifies the effect of the subsidy on the federal government’s utility as well as on firm profits. Assuming a welfare-maximizing federal government, the estimated average social rate of return is 34% for Germany in the period 1994 to 2011. Thereby effects on firm profits are similar to effects on spillovers to the rest of the German economy. Besides results show that the subsidy rate decision in Germany remained remarkably stable over time, and that application costs as well as the marginal profitability of subsidized R&D projects are lower after the year 2000 compared to the years before.

This paper examines the deployment of a natural gas pipeline in a developing region where the rate-of-return (RoR) regulation has been implemented to attract investment. We assume that the pipeline firm considers the proven demand emanating from a few large industrial sites but ignores the eventual rise of other domestic-oriented uses. We first assess the magnitude of the overcapitalization generated ex ante at the planning stage by the application of RoR regulation (i.e., the Averch-Johnson effect). We then analyze the ex-post situation when the enlarged domestic demand materializes. We prove that the allowable rate of return can be set to obtain ex ante the degree of overcapitalization needed ex post to serve the enlarged demand in a costefficient manner. We finally discuss whether RoR regulation can fulfill two public policy objectives: optimally building ahead of proven demand and protecting society from monopoly prices.

We use data on Indian stock portfolios to show that return heterogeneity is the primary contributor to increasing inequality of wealth held in risky assets by Indian individual investors. Return heterogeneity increases equity wealth inequality through two main channels, both of which are related to the prevalence of undiversified accounts that own relatively few stocks. First, some undiversified portfolios randomly do well, while others randomly do poorly. Second, larger accounts diversify more effectively and thereby earn higher average log returns even though their average simple returns are no higher than those of smaller accounts.

We propose a dynamic portfolio choice model with the mean-variance criterion for log-returns. The model yields time-consistent portfolio policies and is analytically tractable even under some incomplete market settings. The portfolio policies conform with conventional investment wisdom (e.g. richer people should invest more absolute amount of money in risky assets; the longer investment time horizon, the more proportional amount of money should be invested in risky assets; and for long-term investment, people should not short sell major stock indices whose returns are higher than the risk-free rate), and the model provides a direct link with the CRRA utility maximization in a complete market.

This paper describes, and where possible tentatively quantifies, likely tax spillovers from the U.S. corporate income tax reform that was part of the broader 2017 tax reform. It calculates effective tax rates under various assumptions, showing among other findings, how the interest limitation and the Foreign Derived Intangible Income provision can raise or reduce rates. It tentatively estimates that under constant policies elsewhere, the rate cut will reduce tax revenue from multinationals in other countries by on average 1.6 to 5.2 percent. If other countries react in line with historical reaction functions, the revenue loss from multinationals rises to an average of 4.5 to 13.5 percent. The paper also discusses profit-shifting, real location, and policy reactions from the more complex features of the reform.

The number of Chinese tourists visiting Taiwan has been closely related to the political relationship across the Taiwan Strait. The occurrence of political events and disasters or accidents have had, and will continue to have, a huge impact on the Taiwan tourism market. To date, there has been relatively little empirical research conducted on this issue. In this paper, tourists are characterized as being involved in one of three types of tourism: group tourism (group-type), individual tourism (individual-type), and medical cosmetology (medical-type). We use McAleer’s (2015) fundamental equation in tourism finance to examine the correlation that exists between the rate of change in the number of tourists and the rate of return on tourism. Second, we use the event study method to observe whether the numbers of tourists have changed abnormally before and after the occurrence of major events on both sides of the Strait. Three different types of conditional variance models, namely, GARCH (1,1), GJR (1,1) and EGARCH (1,1), are used to estimate the abnormal rate of change in the number of tourists. The empirical results concerning the major events affecting the changes in the numbers of tourists from China to Taiwan are economically significant, and confirm which types of tourists are most likely to be affected by such major events.

Between 1950 and 2017, world average life expectancy increased from below-50 to above-70, while the fertility rate dropped from 5 to about 2.5. We develop and calibrate an analytic climate-economy model with overlapping generations to study the effect of such demographic change on capital markets and optimal climate policies. Our model replicates findings from the OLG-demography literature, such as a rise in households’ savings, and a declining rate of return to capital. We also find that demographic change raises the social cost of carbon, at 2020, from 28 euro/tCO2 in a model that abstracts from demography, to 94 euro/tCO2 in our calibrated model.

This paper has used the Arbitrage Theorem under binomial case to show that in a complete market with no transaction costs and no arbitrage, for any asset, the current spot price is a function of the risk-free interest rate, the future possible prices and their probabilities. These probabilities are the actual world probabilities, not the so-called risk-neutral probabilities. The paper also proves that for the levered firm, (i) under riskless debt, increasing the debt-equity ratio increases the variance of the rate of return on equity and has no effect on the rate of return on debt; and (ii) under risky debt, increasing the debt-equity ratio increases the variance of the rate of return on debt but does not affect the probability density function of the rate of return on equity. With the actual world probabilities, it can be shown that changes in the debt-equity ratio do not affect the expected rate of return on the equity of the levered firm. These findings refute the Modigliani-Miller second proposition that the expected rate of return on the equity of the levered firm increases in proportion to the debt-equity ratio. With the actual world probabilities, it is also found that increasing the variance of the underlying asset price may either increase or decrease the option prices.

It is well-known that public pension plans exhibit substantial cross-subsidies, both within cohorts, e.g. from early leavers to those who retire at the “sweet spot”, and across cohorts, through unfunded liabilities. However, the cross-subsidies within and across cohorts have never been provided in an integrated format. This paper provides such a framework, based on the gaps between normal cost rates for individuals and the uniform contribution rates for the cohort. Since the unfunded liabilities and associated cross-subsidies across cohorts derive from overly optimistic actuarial assumptions, we focus on the historically most important such assumption, the rate of return. We present two main findings. First, an overly optimistic assumed return understates the degree of redistribution within the cohort. Second, persisting with an overly optimistic assumed return leads to steady-state contribution rates that exceed the true normal cost (let alone the low-balled rate), i.e. cross-subsidies from the current cohort to past cohorts. Using the case of California, we show how that negative cross-subsidy can easily swamp all positive cross-subsidies within the cohort, as contributions exceed the value of benefits received by even the most favored individuals – those who retire at the “sweet spot.”

Debt sustainability is fundamentally a probabilistic concept: Debt is rarely sustainable with probability one. We propose an index of external debt sustainability that reflects this uncertainty. Namely we construct the index as the probability that, at the current exchange rate, net external debt is equal to or less than the present value of net exports. Constructing this index involves three steps: (1) deriving the distribution of the present value of net exports at the current exchange rate; (2) deriving the distribution of exchange rates associated with the condition that, for each realization, the present discounted value of net exports is at least equal to the value of current net debt; and (3) assessing where the current exchange rate stands in the distribution of exchange rates and thus the probability that debt is sustainable. Having shown how this can be done, we then compute the index for two countries, the United States and Chile. Our main conclusion is the large degree of uncertainty implied by the presence of large gross asset and liability positions, together with uncertainty about rates of return on these assets and liabilities. The size of the distribution of exchange rate adjustments implies that one should be careful in concluding that debt is or is not sustainable at the current exchange rate and that strong measures are potentially needed to reestablish sustainability. Exchange rates that appear overvalued in the baseline may still imply a reasonably high probability that debt is sustainable at the current exchange rate; symmetrically, exchange rates that appear undervalued in the baseline may still come with a reasonably low probability that debt is unsustainable at the current exchange rate.

The purpose of this paper is to assess the impact of asset and liability management on the profitability of listed banks in Ghana. Multiple linear regression has been applied by taking ROA as the dependent variable, and TAS (the total asset) and TLT (the total liability) representing the asset and liability mix of the banks as the independent variables together with gross domestic product and interest rates also representing the economic factors. The model used in this study hypothesized that the rate of return on earning assets is positive, and the rate of cost on liabilities is negative. The robust panel regression analysis with random effect result showed that total assets affects profitability positively, while total liabilities mainly saving and fixed deposits and other liabilities and credit balances have significant and negative effect on commercial banks profitability. With regard to the macroeconomic variables, interest rate had no significant effect on commercial banks profitability. As a result, the study recommends that commercial banks should focus on increasing public awareness to mobilize more savings and fixed deposits and this will enhance their performance in their provision of loans and advances to customers.

Using the new Bureau of Economic Analysis (BEA) Integrated Macroeconomic Accounts as well as other BEA data, we construct productivity accounts for two key sectors of the US economy: the Corporate Nonfinancial Sector (Sector 1) and the Noncorporate Nonfinancial Sector (Sector 2). Calculating user costs of capital based on, alternatively, ex post and predicted asset price inflation rates, we provide alternative estimates for capital services and Total Factor Productivity growth for the two sectors. Rates of return on assets employed are also reported for both sectors. In addition, we compare rates of return on assets employed and TFP growth rates when the land and inventory components are withdrawn from the asset base. Finally, implications for labour and capital shares from using alternative income concepts are explored.

In 2016, Russia's stock market, in terms of its rates of return, set a world record among all the other stock markets. Over that year, the RTS Index gained 52.3%, and the MICEX Index –26.8% (Fig. 1). The faster growth rate of the RTS Index, which reflects the price of shares in US dollar terms, can be explained by the ruble's strengthening in 2016. The other forces behind the growth of the Russian stock indexes were the rising oil prices, the inflow of non-residents' money in response to the strengthening ruble and the stably high key interest rate, and investor expectations of recovery economic growth.

Larry Summers’ re-use of the phrase appears justified in the present global economic climate since many factors contribute to comparatively poor OECD economic performance and weakening macroeconomic policy instruments. Some are measurement issues and others might be seen as the downsides of globalisation, which has integrated financial markets and redirected growth from the advanced toward the emerging economies. Yet measurable rates of return on investment do appear to be impaired by rises in perceived investment risks, institutionalised risk aversion, increased ageing and dependency, declining shares of government spending in public investment and R&D with rising shares of these directed to health, the retention of trade distortions, new concentration in industrial structure and a slower rate of human capital accumulation, not to mention an unexpected global abundance of fossil fuels and a slower Chinese economy. The information and literature supporting these concerns is reviewed and implications for global and Australian policy are inferred.

This paper uses a simulated public pension system to examine the sensitivity of actuarial input changes on funding ratios and contribution requirements. We examine instantaneous and lagged effects, marginal and interactive effects, and effects under different funding conditions and demographic profiles. The findings emphasize the difficulty of conducting cross-sectional analyses of public pension systems and point to several important considerations for future research. The paper found that: • Discount rates, salary growth rates, cost methods, and mortality tables all influence funding ratios and contribution requirements. Without considering these effects, comparisons of funding ratios across pension systems will produce biased results. • The discount rate assumption is the most influential actuarial input on funding ratios and contribution requirements. We show that a plan can postpone required contributions by raising its discount rate assumption, but its funding condition deteriorates in the long run. In contrast, if a plan reduces its discount rate by one percentage point, and its investment returns continue at the level that was previously assumed, it will take approximately seven years for the funding ratio to return to its original level and an even longer time period for the ARC to return to its original level (though the exact length of time depends on investment returns and the baseline discount rate assumption). • The effects of actuarial inputs greatly depend on plan characteristics such as demographic profiles and asset levels, and also interactions with other actuarial inputs. Because of the interactive effects, it is difficult to standardize funding ratios or pension obligations by only controlling for a single actuarial input. With better data on plan characteristics (such as information on mortality tables and age distributions), simulations could be used to standardize pension liabilities. In the absence of that information, improved consistency in financial reporting (such as requiring a single cost method) is an effective way to facilitate better comparisons of financial conditions across pension plans. The policy implications of the findings are: • The valuation (or measurement) of public pension liabilities and contribution requirements is highly sensitive to the choice of several actuarial assumptions, which should be considered when assessing the financial condition of public pension systems. • The sensitivity of liability and contribution requirement valuations to actuarial assumptions and methods depends on the demographic profile of pension participants. • Making more optimistic assumptions reduces the liability and contribution valuations in the short term, but, over time, more optimistic assumptions can have substantive and harmful effects on pension liabilities and contribution requirements.

This paper revisits the optimal distribution of income model in Fair (1971). This model is the same as in Mirrlees (1971) except that education is also a decision variable and tax rates are restricted to lie on a tax function. In the current paper the tax-rate restriction is relaxed. As in Fair (1971), a numerical method is used. The current method uses the DFP algorithm with numeric derivatives. Because no analytic derivatives have to be taken, it is easy to change assumptions and functional forms and run alternative experiments. Gini coefficients are computed, which provides a metric for comparing the redistributive effects under different assumptions. Ten optimal marginal tax rates are computed per experiment corresponding to ten tax brackets.The sensitivity of the results to the four main assumptions of the model are examined: 1) the form of the social welfare function that the government maximizes, 2) the form of the utility function that each individual maximizes, 3) the distribution of ability across individuals, and 4) the rate of return to education. The changes in the Gini coefficient from before-tax income to after-tax income for the experiments are compared to actual changes from various countries. Experiments using a lognormal distribution of ability match the data better than those using a lognormal distribution with a Pareto tail --- there is less actual redistribution than a Pareto tail implies. The numerical approach in this paper has advantages over the use of analytic expressions. When functional forms are changed, it may be easier to run a new numerical experiment then use an analytic expression, which can be complicated. Also, although not done in this paper, individual heterogeneity is straightforward to handle. The coding can have a different utility function for each individual. And different assumptions about education can be easily incorporated. The approach also shows the problematic nature of assuming a quasi-linear utility function --- a utility function with no income effects.