| Economic Research Journal (Monthly) Vol.45 No.9 September, 2010 |
| • Ownership Nature of Ultimate Controller, Debtrelated Tax Shields and Capital Structure |
| Institution is an important factor of capital structure. Most listed firms in the Chinese market are controlled directly or indirectly by the state, which provides a unique opportunity to study capital structure theory. Corporate income tax reform was introduced in 2008. We firstly study the effect of the exogenous corporate income tax law change on capital structure. Based on this, we further study the effect of different ownership nature of Ultimate Controller on the relation between debt-related tax shields and capital structure. The results of empirical tests suggest: After the tax reform, firms with tax rate reduced during the tax reform significantly decrease the debt level, but firms with tax rate increased during the tax reform significantly raise the debt level; "Investment-related tax shields" has a negative relation with capital structure, which supports "substitution effect". Further study based on ownership nature of ultimate controller suggests: Non-state-owned firms raise the debt level much more than state-owned firms in firms with tax rate increased during the tax reform, and Non-state-owned firms decrease the debt level much more than state-owned firms in firms with tax rate reduced during the tax reform. The results suggest that non-state-owned firms are more aggressive than state-owned firms. Our paper not only support the traditional theory on debt-related tax shields, but also find ownership nature of ultimate controller has effect on tax shields. Apart from this, our results reveal the effect of corporate income tax reform on firms’ capital structure. |
| …………………………Wang Yuetang, Wang Liangliang and Peng Yang122 |
| • Higher Education Expansion and Employment of University Graduates |
| This paper examines the effect of management’s political connections on the sensitivity of management compensation to the firm performance and the effect on the employee allocation efficiency. It finds that for state-owned enterprises SOEs with politically connected management, their management compensations are less sensitive to the performance and they employ too many employees, compared to SOEs without political connections. It also finds that for non-state-owned enterprises NSOEs with politically connected management, their management compensations are more sensitive to the performance and their employee allocation is more efficient than those of NSOEs without political connections. These findings show that SOEs and NSOEs have different objective to hire politically connected management, and they use different compensation scheme to achieve their goals. |
| …………………………Wu Yaowu and Zhao Quan93 |
| • Technical Progress, Return to Education and Income Inequality in China |
| This paper establishes a general equilibrium model based on the framework of Skill-Biased Technical Change to illustrate that change in return to education is the main source of rising income inequality in China since early 1990s. The model shows that the total effect of education on income inequality can be decomposed into factor price effect and factor composition effect. While the former widens the magnitude of income inequality, the latter tends to narrow it. However, the total effect is still the rising of inequality. Using newly developed RIF regression techniques, our empirical results indicate that the model’s predictions are highly consistent with the data. |
| …………………………Xu Shu79 |
| • Political Connections, Compensation Incentive, and Employee Allocation Efficiency |
| Using DID Diff in Diffs method and its extended form Diff in Diff in Diffs under a "treatment—control" framework, this paper evaluates the impacts of higher education expansion policy, introduced in 1999, on the performance of college/university graduates in the labor market. The results indicate that higher education expansion has reduced labor force participation rate of the college/university graduates, increased their unemployment rate and brought down their wage rate, despite the fact of rapid economy growth and growing job opportunities during that period. Hence, the higher education expansion policy led to the negative effect on the market. |
| …………………………Liu Huilong, Zhang Min, Wang Yaping and Wu Liansheng109 |
| • VAT Tax Reform and Its Negative Impact on Employment in China: A CGE Analysis |
| It is commonly considered by most scholars and previous literatures that the VAT tax reform from the production type to consumption type will promote economic growth and benefit the Chinese economy. However, this change in the VAT tax system would also cause a distortion in the relative factor prices, causing substituting labor with capital, and creating a negative impact on the labor market and employment. Our analysis based on a CGE model with a Keynesian macroeconomic closure and flexible endogenous investment finds that the VAT tax change in China would result in a very minor increase in GDP 0.128% but a great loss of employment of 4.44 million. An alternative policy of a uniform VAT tax rate cut for both labor and fixed capital consumption by 2% at the same government budgetary cost will lead to a much better outcome in employment and GDP growth. |
| …………………………Chen Ye, Gene Hsin Chang, Kou Enhui and Liu Ming29 |
| • Competitive Price Discrimination by Purchasedhistory with Switching Cost and Network Effects |
| In this paper, we develop a two-stage game model to study the business practice of price discrimination by consumers’ purchased-history in a duopoly market. We show that switching cost is the main reason for price discrimination. In the symmetric subgame perfect equilibrium outcome of the two staged competition, we find that firms will induce rivals’ consumers to switch by offering price discount in the second period, and compete fiercely in the first period in order to capture higher market shares, network effects will result in strong competition between the two firms in two periods. Warfare analysis shows that an increase in network effects leads to lower profits and higher consumer surplus as well as higher social welfare, while the presence of switching costs reduces social welfare. Comparing with uniform pricing, discriminatory pricing by consumers’ purchasing history will decrease social welfare. Therefore, public policy should aim at reducing switching cost, need not be concerned with network effects, and should restrict competing firms from using the business strategy of price discrimination. |
| …………………………Jiang Chuanhai55 |
| • Expectation, Speculation and Urban Housing Price Volatility in China |
| Based on the housing stock adjustment model, the paper investigates the impact of the expectation and its speculation upon housing prices. The theoretical model illustrates that the higher is the rational expectation housing price, the rampant is the speculation and the greater is the housing price volatility. The increase of the lagged housing price will give rise to the depreciation of current housing price, should the consumption demand dominates the aggregate demand. The increase of the lagged housing price, however, will lead to the escalation of current housing price provided that speculative demand dominates the aggregate demand. Using the data of 35 major cities in China from 1996 through 2007, the paper shows that the expectation and its speculation are testified to have a greater influence on the housing price volatility. The other findings include: the role of the economic fundamentals is more important than that of expectation, but it does not imply that the housing price volatilities in some cities will not derived from the expectation and speculation; the impact of the lagged housing price is greater than that of the forward housing price, which means the role of adaptive expectation is more important than that of rational expectation; the actual interest rate has the greatest impact on housing price volatility, which indicates that interest policies exacerbate housing price volatility; the role of household income is more significant than that of developing cost; the population growth will facilitate the housing price volatility; the housing price volatility does not vary across cities. |
| …………………………Kuang Weida67 |
| • A Pure Theory of Tax Rights Trade: Interregional, Intertemporal Trade and the Standardization of TaxSystem |
| The rise and fall of tax rights trade is a complex historical process. This study explores the origins of tax rights trade, the tax burden effect and productivity effect, the relationship between tax rights trade and fiscal decentralization, and so on. Under the pressurized fiscal system, vertical tax competition by the top down tax collection targeting results in informal tax cooperation between grass-root governments, which improves the welfare of both traders though it is just a local Pareto improvement. With standardization of tax system, the marginal revenue of tax targeting is diminishing, which indicates tax rights trade will tend to disappear. |
| …………………………Tang Yugang and Guan Fengli43 |
| • International Trade，FDI，Industry Structure and International Business Cycle Co-movements |
| This thesis examines the impacts of international trade, foreign direct investment and industry structure on business cycle co-movements between China and its major trade partners, and investigates the principal transmission factors of business cycle co-movements and the contributions of these factors to China’s economic growth in the context of economic globalization. Through empirical study of 27 trade partners during 1990—2008 using OLS, the results show: bilateral trade intensity has stronger effect than FDI. Bilateral trade intensity, FDI and industry structure similarity are positively correlated with GDP co-movement between China and its developing partners. The thesis also points out that although labor and domestic investment still are the main forces of economic growth in China, bilateral trade intensity and FDI have been significant factors of international business cycle co-movements and China economic growth. International business cycle convergence in economic globalization results in international economic policy coordination to be a crucial issue. |
| …………………………Cheng Huifang and Cen Lijun17 |
| • Economics of Incorporating Fairness: Theory and Evidence |
| Traditional economic theories have always assumed that all people are exclusively pursuing their material self-interest. But it is not always true in fact. In many cases, the motivation of fairness often affects people’s behavior. In the last decade, some scholars began trying to incorporating fairness into the analytical framework of economics with the rise of experimental economics. This paper primarily sums up systematically the questions of the motivation of fairness in behavioral experiments, as well as the biological basis of fairness preference and economic models of incorporating fairness. Then I compare and evaluate the two types of economic models of incorporating fairness, and discuss the relationship between them and economic models with other-regarding preferences from a broad perspective. Finally, the tendency of leading to a unified human behavioral science of such researches is also analyzed and discussed. |
| …………………………Wei Qian137 |
| • Asymmetric Effects of Chinas Nonlinear Monetary Policy in the Open Economy |
| This paper tests nonlinearity of a VAR model of open economy, finding strong evidence supporting nonlinearity of China’s monetary policy. By LSTVAR model, we find that under low-growth regime, both positive and negative shocks of credit have asymmetric effects on product as well as interest rate on price. Under high-growth regime, both shocks have asymmetric effects on product, as well as money, interest rate and credit on price. Within different economic regimes, as for positive shocks, product effect of money and credit has asymmetry as well as price effect of interest rate and credit. As for negative shocks, both product and price effect of credit have asymmetry. Further, within low-growth regime both expanding product effect of credit and price effect of money and credit are stronger. Within high-growth regime both contracting product effect of money and price effect of money and credit are stronger. At last, we use financial accelerator theory to explain the asymmetric effects. |
| …………………………Wang Liyong, Zhang Daiqiang and Liu Wenge4 |
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