nep-eur New Economics Papers
on Microeconomic European Issues
Issue of 2015‒06‒05
23 papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. State Dependence in Welfare Receipt: Transitions before and after a Reform By Regina T. Riphahn; Christoph Wunder
  2. Perceived Group Discrimination among Polish Migrants to Western Europe: Comparing Germany, the Netherlands, the UK and Ireland By McGinnity, Frances; Gijsberts, Merove
  3. How Health Plan Enrollees Value Prices Relative to Supplemental Benefits and Service Quality By Christian Bünnings; Hendrik Schmitz; Harald Tauchmann; Nicolas R. Ziebarth
  4. Coming to work while sick: An economic theory of presenteeism with an application to German data By Hirsch, Boris; Lechmann, Daniel S. J.; Schnabel, Claus
  5. The effect of changes in the statutory minimum working age on educational, labor and health outcomes By Sergi Jiménez-Martín; Judit Vall; Elena del Rey
  6. Labour market adjustments in Europe and the US: How different? By Beyer, Robert C. M.; Smets, Frank
  7. Assessing European competitiveness: the new CompNet microbased database By Lopez-Garcia, Paloma; di Mauro, Filippo
  8. Learning about Job Search: A Field Experiment with Job Seekers in Germany By Altmann, Steffen; Falk, Armin; Jäger, Simon; Zimmermann, Florian
  9. Does Experience Rating Improve Obstetric Practices? Evidence From Geographical Discontinuities in Italy By Sofia Amaral-Garcia; Paola Bertoli; Veronica Grembi
  10. The Changing Returns to Crime: Do Criminals Respond to Prices? By Mirko Draca; Theodore Koutmeridis; Stephen Machin
  11. European firm adjustment during times of economic crisis By Fabiani, Silvia; Lamo, Ana; Messina, Julián; Rõõm, Tairi
  12. Maternal Labour Supply and All-Day Primary Schools in Germany By Jan Marcus; Frauke Peter
  13. Extreme working hours in Western Europe and North America: A new aspect of polarization By Anna S. Burger
  14. A parsimonious fundamental model for wholesale electricity markets - Analysis of the plunge in German futures prices By Thomas Kallabis; Christian Pape; Christoph Weber
  15. Assessing the Sustainable Nature of Housing-Related Taxation Receipts: The Case of Ireland By McQuinn, Kieran; Addison-Smyth, Diarmaid
  16. Networking, context and firm-level innovation: Cooperation through the regional filter in Norway By Fitjar, Rune Dahl; Rodriguez-Pose, Andres
  17. Who is saving privately for retirement and how much? New evidence for Germany By Metzger, Christoph
  18. Ready for Take-off? The Economic Effects of Regional Airport Expansion By Philipp Breidenbach
  19. Location Strategies of Multinationals from Emerging Countries in the EU Regions By Riccardo Crescenzi; Carlo Pietrobelli; Roberta Rabellotti
  20. Exploring price and non-price determinants of trade flows in the largest euro-area countries By Giordano, Claire; Zollino, Francesco
  21. The UK's Productivity Puzzle By Alex Bryson; John Forth
  22. Universal Pre-School Education: The Case of Public Funding with Private Provision By Jo Blanden; Emilia Del Bono; Sandra McNally; Birgitta Rabe
  23. Corporate tax incentives and capital structure: empirical evidence from UK tax returns By Michael P Devereux; Giorgia Maffini; Jing Xing

  1. By: Regina T. Riphahn; Christoph Wunder
    Abstract: We study state dependence in welfare receipt and investigate whether welfare transitions changed after a welfare reform. Using data from the German Socio-Economic Panel, we apply dynamic multinomial logit estimators and find that state dependence in welfare receipt is not a central feature of the German welfare system. We find that welfare transitions changed after the reform: transitions from welfare to employment became more likely and persistence in welfare and inactivity declined. We observe a large relative increase in transitions from employment to welfare. Immigrants’ responsiveness to the labor market situation increased after the reform.
    Keywords: Social assistance, state dependence, unemployment benefit II, immigration, dynamic multinomial logit
    JEL: I38 J61
    Date: 2015
  2. By: McGinnity, Frances; Gijsberts, Merove
    Abstract: Discrimination is a problem for both minority groups and the societies in which they live. Perceived group discrimination reflects the direct experiences of immigrants but is also an indicator of the wider societal context and its level of social cohesion. This paper draws on new longitudinal survey data to examine perceptions of group discrimination among new Polish immigrants to four Western European countries (Ireland, the UK, the Netherlands and Germany). Are there cross-national differences in perceived group discrimination, and how is discrimination related to exposure to, and experiences in, the host country? Perceived discrimination is found to be higher among Polish migrants in the Netherlands in Wave 1 (2011) than in the other three countries; perceptions of discrimination also increased more there between waves of the survey, as well as in the UK. Perceptions of group discrimination are related to some aspects of exposure to the host country (e.g. duration in the country), but are most strongly associated with negative experiences in the host country. Differences in country contexts - attitudinal climate and national discourses - seem to play a strong role in understanding perceived group discrimination among new Polish immigrants in Western Europe.
    Date: 2015–05
  3. By: Christian Bünnings; Hendrik Schmitz; Harald Tauchmann; Nicolas R. Ziebarth
    Abstract: This paper empirically assesses the relative role of health plan prices, service quality and optional benefits in the decision to choose a health plan. We link representative German SOEP panel data from 2007 to 2010 to (i) health plan service quality indicators, (ii) measures of voluntary benefit provision on top of federally mandated benefits, and (iii) health plan prices for almost all German health plans. Mixed logit models incorporate a total of 1,700 health plan choices with more than 50 choice sets for each individual. The findings suggest that, compared to prices, health plan service quality and supplemental benefits play a minor role in making a health plan choice.
    Keywords: Fee-for-service; capitation; mixed payment systems; physician altruism; laboratory experiment
    JEL: D12 H51 I11 I13
    Date: 2015–03
  4. By: Hirsch, Boris; Lechmann, Daniel S. J.; Schnabel, Claus
    Abstract: Presenteeism, i.e. attending work while sick, is widespread and associated with significant costs. Still, economic analyses of this phenomenon are rare. In a theoretical model, we show that presenteeism arises due to differences between workers in (healthrelated) disutility from workplace attendance. As these differences are unobservable by employers, they set wages that incentivise sick workers to attend work. Using a large representative German data set, we test several hypotheses derived from our model. In line with our predictions, we find that bad health status and stressful working conditions are positively related to presenteeism. Better dismissal protection, captured by higher tenure, is associated with slightly fewer presenteeism days, whereas the role of productivity and skills is inconclusive.
    Keywords: presenteeism,absenteeism,sick leave,Germany
    JEL: I19 J22
    Date: 2015
  5. By: Sergi Jiménez-Martín; Judit Vall; Elena del Rey
    Abstract: In this paper we explore the effects of a labor market reform that changed the statutory minimum working age in Spain in 1980. In particular, the reform raised the statutory minimum working age from 14 to 16 years old, while the minimum age for attaining compulsory education was kept at 14 until 1990. To study the effects of this change, we exploit the different incentives faced by individuals born at various times of the year before and after the reform. We show that, for individuals born at the beginning of the year, the probabilities of finishing both the compulsory and the post-compulsory education level increased after the reform. In addition, we find that the reform decreases mortality while young (16-25) for both genders while it increases mortality for middle age women (26-40). We provide evidence to proof that the latter increase is partly explained by the deterioration of the health habits of affected women. Together, these results help explain the closing age gap in life expectancy between women and men in Spain.
    Date: 2015–06
  6. By: Beyer, Robert C. M.; Smets, Frank
    Abstract: We compare the labour market response to region-specific shocks in Europe and the US and to national shocks in Europe and investigate changes over time. We employ a multi-level factor model to decompose regional labour market variables and then estimate the dynamic response of the employment level, the employment rate and the participation rate using the region-specific variables and the country factors. We find that both in Europe and the US labour mobility accounts for about 50% of the long run adjustment to region-specific labour demand shocks and only a little more in the US than in Europe, where adjustment takes twice as long. In Europe labour mobility is a less important adjustment mechanism in response to country-specific labour demand shocks that cause stronger and more persistent reactions of the employment and the participation rate. However, we detect a convergence of the adjustment processes in Europe and the US, reflecting both a fall in interstate migration in the US and a rise in the role of migration in Europe. Finally, we show that part of the difference between Europe and the US in previous studies may be due to the use of different data sources. JEL Classification: F2, J6, R23, R30
    Keywords: European integration, labour mobility, migration, regional labour markets
    Date: 2015–03
  7. By: Lopez-Garcia, Paloma; di Mauro, Filippo
    Abstract: Drawing from confidential firm-level balance sheets for 17 European countries (13 Euro-Area), the paper documents the newly expanded database of cross-country comparable competitiveness-related indicators built by the Competitiveness Research Network (CompNet). The new database provides information on the distribution of labour productivity, TFP, ULC or size of firms in detailed 2-digit industries but also within broad macrosectors or considering the full economy. Most importantly, the expanded database includes detailed information on critical determinants of competitiveness such as the financial position of the firm, its exporting intensity, employment creation or price-cost margins. Both the distribution of all those variables, within each industry, but also their joint analysis with the productivity of the firm provides critical insights to both policy-makers and researchers regarding aggregate trends dynamics. The current database comprises 17 EU countries, with information for 56 industries, including both manufacturing and services, over the period 1995-2012. The paper aims at analysing the structure and characteristics of this novel database, pointing out a number of results that are relevant to study productivity developments and its drivers. For instance, by using covariances between productivity and employment the paper shows that the drop in employment which occurred during the recent crisis appears to have had “cleansing effects” on EU economies, as it seems to have accelerated resource reallocation towards the most productive firms, particularly in economies under stress. Lastly, this paper will be complemented by four forthcoming papers, each providing an in-depth description and methodological overview of each of the main groups of CompNet indicators (financial, trade-related, product and labour market). JEL Classification: L11, L25, D24, O4, O57
    Keywords: allocative efficiency, competitiveness, cross country analysis, firm-level data, productivity and size distribution, total factor productivity
    Date: 2015–03
  8. By: Altmann, Steffen; Falk, Armin; Jäger, Simon; Zimmermann, Florian
    Abstract: We conduct a large-scale field experiment in the German labor market to investigate how information provision affects job seekers’ employment prospects and labor market outcomes. Individuals assigned to the treatment group of our experiment received a brochure that informed them about job search strategies and the consequences of unemployment, and motivated them to actively look for new employment. We study the causal impact of the brochure by comparing labor market outcomes of treated and untreated job seekers in administrative data containing comprehensive information on individuals’ employment status and earnings. While our treatment yields overall positive effects, these tend to be concentrated among job seekers who are at risk of being unemployed for an extended period of time. Specifically, the treatment effects in our overall sample are moderately positive but mostly insignificant. At the same time, we do observe pronounced and statistically significant effects for individuals who exhibit an increased risk of long-term unemployment. For this group, the brochure increases employment and earnings in the year after the intervention by roughly 4%. Given the low cost of the intervention, our findings indicate that targeted information provision can be a highly effective policy tool in the labor market.
    Keywords: Field Experiment; Job Search; Unemployment
    JEL: D8 J64
    Date: 2015–05
  9. By: Sofia Amaral-Garcia; Paola Bertoli; Veronica Grembi
    Abstract: Using data from 2002 to 2009 inpatient discharge records on deliveries in the Italian region of Piedmont, we assess the impact of an increase in malpractice pressure on obstetric practices, as identified by the introduction of experience-rated malpractice liability insurance. Our identification strategy exploits the exogenous location of public hospitals in court districts with and without schedules for noneconomic damages. We perform difference-in- differences and difference-in-discontinuities analyses. We find that the increase in medical malpractice pressure is associated with a decrease in the probability of performing a C-section from 2.3 to 3.7 percentage points (7% to 11.6% at the mean value of C-section) with no consequences for a broadly defined measure of complications or neonatal outcomes. We show that these results are robust to the different methodologies and can be explained by a reduction in the discretion of obstetric decision making rather than by patient cream skimming.
    Keywords: experience rating; difference-in-discontinuities; scheduled damages; medical liability insurance; C-sections;
    JEL: K13 K32 I13
    Date: 2015–05
  10. By: Mirko Draca; Theodore Koutmeridis; Stephen Machin
    Abstract: In economic models of crime individuals respond to changes in the potential value of criminal opportunities. We analyse this issue by estimating crime-price elasticities from detailed data on criminal incidents in London between 2002 and 2012. The unique data feature we exploit is a detailed classification of what goods were stolen in reported theft, robbery and burglary incidents. We first consider a panel of consumer goods covering the majority of market goods stolen in the crime incidents and find evidence of significant positive price elasticities. We then study a particular group of crimes that have risen sharply recently as world prices for them have risen, namely commodity related goods (jewellery, fuel and metal crimes), finding sizable elasticities when we instrument local UK prices by exogenous shifts in global commodity prices. Finally, we show that changes in the prices of loot from crime have played a role in explaining recent crime trends.
    Keywords: Crime, goods prices, metal crime, commodity prices
    JEL: K42
    Date: 2015–06
  11. By: Fabiani, Silvia; Lamo, Ana; Messina, Julián; Rõõm, Tairi
    Abstract: This paper exploits a unique cross-country, firm-level survey to study the responses of European firms to the sharp demand and credit contraction triggered by the global Great Recession of 2009. The analysis reveals that cost reduction—particularly labour cost reduction through the adjustment of quantities rather than prices—was the prevailing strategy that firms had adopted by summer 2009. Remarkably, not even during the worst postwar recession did employers cut base wages to reduce costs. Different combinations of adjustment strategies are apparent, and the particular choices of labour costs adjustments depend substantially on countries’ institutional settings. JEL Classification: J30, J32, J33, J51
    Keywords: demand and credit shocks, employment, European Union, firm survey, labour costs, margins, wage cuts
    Date: 2015–04
  12. By: Jan Marcus; Frauke Peter
    Abstract: The economic literature provides vast evidence of how public provision of day care for children below school age increases the labour force participation of mothers. The causal effect of all-day schooling in primary school on maternal supply has been examined less since morning-only schooling is less common in developed countries. The present article summarises the findings of (mostly) economic studies on the impact of all-day schooling (Ganztagsschulen) on maternal employment, with a special focus on Germany.
    Date: 2015
  13. By: Anna S. Burger
    Abstract: This paper analyzes the trends and root causes of extreme working hours in sixteen Western European countries, Canada, and the United States between 1970 and 2010. Earlier literature has revealed increasing trends in extreme working hours in the United States and recognized the negative repercussions of this new aspect of labor market polarization. As European average working hours have declined over the past decades, scholars have turned little attention to the analysis of extreme working hours in European countries. First, the article documents diverging patterns of extreme working hours in Western Europe. Whereas the Scandinavian and French ratios of workers with extreme hours remained very low, most other countries in Western Europe exhibit significantly higher ratios of extreme workers after the beginning of the 1990s than in the previous two decades. Second, the article detects the development of two diverging trajectories in the advanced capitalist world: one with a strong and stable labor regulation along with a balanced working hour profile and one with gradual deregulation along with an increasing ratio of long work weeks. Finally, using a series of pooled cross-section OLS estimations, the article tests five specific hypotheses, motivated by theories of the welfare state and political economy theories of globalization. The results provide strong empirical evidence for the notion that patterns of extreme working hours are not inherent in post-industrial development. The article uses data from the author’s extreme working hours standardized meta-database which had been compiled from two large micro data collections: the Luxembourg Income Study database (LIS) and the Multinational Time Use Study (MTUS).
    Keywords: extreme working hours, working hour polarization, working hour inequality, labor regulation, welfare state
    Date: 2015–05
  14. By: Thomas Kallabis; Christian Pape; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)
    Abstract: The German market has seen a plunge in wholesale electricity prices from 2007 until 2014, when base futures prices dropped by more than 40 percent. In this paper we determine the fundamental components of electricity futures prices and quantify their impact on the price drop as well as on operation margins. Our methodology is based on a parsimonious model in which the supply stack is approximated by piecewise linear functions. A fundamental futures price estimate can then be given by averaging up the hourly equilibrium prices over the fu-tures contract’s delivery period. It turns out that the parsimonious model is able to replicate electricity futures prices and discover non-linear dependencies in futures price formation. We quantify which of the factors fuel prices, emission prices, renewable feed-in, conventional generation capacities, and demand developments contributed most to the observed price slide.
    Keywords: Futures Prices, Bid Stack, Fundamental Factors, German Electricity Market, Price Modeling, Efficient Markets, Market Expectations, Piecewise Linear Function, Investment Decision
    JEL: Q43 O10
    Date: 2015–04
  15. By: McQuinn, Kieran; Addison-Smyth, Diarmaid
    Abstract: Even by international standards, Ireland?s fiscal position was particularly affected by the recent financial crisis. As budgetary surpluses quickly gave way to significant deficits post 2007, the deterioration in the Irish public finances culminated in an Excessive Deficit Procedure being launched in 2009 and entry into a formal EU/IMF assistance programme in late 2010. Much of this deterioration was caused by the sudden and sharp decline in the Irish housing market as property-related taxes dried up. In this paper we quantify the extent of housing related tax windfall gains and losses. We find that at various times over the past three decades, there have been instances where dis-equilibrium in the Irish housing market has had significant implications for the associated taxation receipts. Examining taxation aggregates in this manner can be seen as an important complement to recent policy responses aimed at improving fiscal governance.
    Date: 2015–05
  16. By: Fitjar, Rune Dahl; Rodriguez-Pose, Andres
    Abstract: The paper assesses the role for innovation of one aspect which has been generally overlooked by evolutionary economic geography: context. It analyses how context shapes the impact of collaboration on firm-level innovation for 1604 firms located in the five largest city regions of Norway. Specifically, the analysis shows how the benefits to firms of collaborating within regional, national, and international innovation networks are affected by the knowledge endowments of the region within which the firm is located. Using a logit regression analysis, we find, first, that only national and international networking have a significant positive impact on the likelihood of innovation (the former only for process innovation), whereas the regional knowledge endowments have no direct effect. Second, regional cooperation is particularly effective in regions with high investments in R&D, whereas international cooperation is important in regions with an educated workforce – and regional and national collaboration may be ineffective in such cases. We conclude that, in the case of Norway, context is essential in determining the capacity of firms to set up networks and innovate. Regions with an educated workforce can use the resulting absorptive capacity to successfully assimilate knowledge being diffused through global pipelines from faraway places. However, this absorptive capacity is likely to be heavily filtered if regional firms mainly rely on internal connections within Norway.
    Keywords: context; firms; human capital; innovation; interaction; networking; Norway; R&D
    JEL: O31 O32
    Date: 2015–05
  17. By: Metzger, Christoph
    Abstract: Due to demographic change the replacement rates of the German statutory pension scheme will decrease over the next decades. Voluntary savings for retirement will therefore gain more and more relevance in order to maintain one's standard of living during retirement. This article examines the savings behavior for retirement on an individual level in Germany. As a first step the decision to save at all is analyzed, showing that the main determinants for saving are personal income as well as the disposable household income. Furthermore migrants and individuals living in the Eastern part of Germany turn out to be less likely to save additionally privately for retirement. In a second step the chosen gross saving rates are analyzed using a Tobit, a lognormal hurdle model and a Type II Tobit Model. The results suggest that the decisions to save at all and about the saving rate are independent of each other leading to a loss of information if only a standard Tobit model is used. For example personal income increases the probability to save for retirement but decreases the resulting saving rate. Modelling both decisions separately therefore leads to a better understanding of the determinants of saving for old-age.
    Keywords: savings,retirement,life-cycle,two-part model,tobit,exponential type II tobit
    JEL: D14 D91 H31
    Date: 2015
  18. By: Philipp Breidenbach
    Abstract: This paper analyzes whether the expansion of regional airports in Germany caused positive spillover effects on the surrounding economies, exploiting the deregulation of the European aviation market as a quasi-experiment. Such potential spillovers are often used as an argument for the substantial annual subsidies to airports. Previous evaluations often suffer from the problem of reverse causality, since investment decisions are based on the economic conditions of the region. By contrast, the aviation deregulation under the Single European Market-initiative provides an exogenous incentive for investing in the expansion of existing regional airports. A difference-in-differences approach is used to estimate the causal effects of this expansion on regional growth. The results are sobering, though, as there is no evidence for any positive spillover effects.
    Keywords: Banking union; currency union; default; shock absorber; two-tier reinsurance system
    JEL: E42 E50 F3 G21
    Date: 2015–04
  19. By: Riccardo Crescenzi; Carlo Pietrobelli; Roberta Rabellotti
    Abstract: This paper contributes to the current debate in both Economic Geography and International Business on the nature and strategies of Multinational Enterprises (MNEs) from emerging countries (EMNEs). The paper fills a relevant gap in the existing literature by shedding new light on the location strategies of EMNEs at the national and regional level, looking at their investment drivers and systematically comparing them with those of multinationals from advanced countries (AMNEs). The empirical analysis looks at the location choices of MNEs in the European Union (EU-25) regions and unveils that EMNEs follow distinctive location strategies. Their attraction into large regional markets is similar to AMNEs as well as their irresponsiveness to efficiency seeking motives. Conversely, the most knowledge-intensive investments of EMNEs respond mainly to two ‘attraction’ factors: strategic assets (in the form of local technological dynamism) and the agglomeration of foreign investments in the same business functions. In addition, both the national and the regional levels are simultaneously relevant to EMNEs decisions.
    Keywords: multinationals, emerging countries, regions, European Union
    JEL: F21 F23 O33 R12 R58
    Date: 2015–05
  20. By: Giordano, Claire; Zollino, Francesco
    Abstract: Since the mid-2000s price-competitiveness indicators for some euro-area countries have been providing conflicting signals. Against a stability of the producer price (PPI)-based measure, the manufacturing unit labour cost (ULCM)-deflated indicator points to a major competitiveness loss in Italy; we argue that the discrepancy mostly reflects a divergence of ULCM and PPI trends in competitor countries. Owing to the fading representativeness of labour on overall costs, price-based indicators appear to be more appropriate than those based on ULCMs to assess external competitiveness. In Italy ULC-based indicators play a less relevant role relative to price-deflated measures in explaining exports; the opposite holds true for Germany and France, whereas in Spain exports are insensitive to prices. Non-price competitiveness proves important in explaining Italian, German and, in particular, Spanish exports. Imports react to price-competitiveness dynamics only in Italy; considering the participation in global value chains is useful to correctly identify import sensitivity to domestic and foreign demand. JEL Classification: F14, F62
    Keywords: non-price competitiveness, price competitiveness, producer prices, unit labour costs
    Date: 2015–05
  21. By: Alex Bryson; John Forth
    Abstract: The 2008 Great Recession was notable in the UK for three things: the enormity of the output shock; the muted unemployment response; and the very slow rate of recovery. We review the literature which finds most of the decline in productivity is within sector and within firm before presenting new micro-analysis of workplace-level behaviour between 2004 and 2011 to gain insights into the processes that may have contributed to this aggregate picture. We find clear evidence of labour intensification but employers appeared incapable of turning this effort into improved workplace level productivity. Widespread pay freezes and cuts were often initiated in direct response to the recession. Workplace closure rates were little different to those experienced prior to the recession, but there is some evidence of a "cleansing" effect with poorer performing workplaces being more likely to close. There is some evidence of labour "hoarding", especially hoarding of high skilled labour: this h as had no discernible impact on the rate of innovation. There is no impact of recession on either the number of HRM practices workplaces invested in, nor their returns on those investments. There is no evidence that workplaces have benefitted from Britain's "flexible" labour market as indicated by using recruitment channels used by welfare recipients or the use of numerically flexible workers. On the contrary, workplaces with increasing unionisation appeared to benefit in terms of improved workplace performance
    Keywords: Productivity, recession
    JEL: D22 E22 E23 E24 J23 J24 J3
    Date: 2015–05
  22. By: Jo Blanden; Emilia Del Bono; Sandra McNally; Birgitta Rabe
    Abstract: This paper studies the effect of free pre-school education on child outcomes in primary school. We exploit the staggered implementation of free part-time pre-school for three-year-olds across Local Education Authorities in England in the early 2000s. The policy led to small improvements in attainment at age five, with no apparent benefits by age 11. We argue that this is because the expansion of free places largely crowded out privately paid care, with small changes in total participation, and was achieved through an increase in private provision, where quality is lower on average than in the public sector.
    Keywords: Childcare, child outcomes, publicly provided goods
    JEL: I21 I24 H44
    Date: 2015–05
  23. By: Michael P Devereux (Centre for Business Taxation, University of Oxford); Giorgia Maffini (Centre for Business Taxation, University of Oxford); Jing Xing (Shanghai Jiao Tong University)
    Abstract: This paper examines how companies' capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies¡¯ marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives.
    Keywords: Corporate taxation, capital structure, tax returns
    JEL: G3 H2
    Date: 2015

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