A Real Option Approach to Sustainable Corporate Tax Behavior

Aggressive tax planning has become a sustainability problem, as governments have to cope with less tax revenue, which is crucial for investments in sustainable development goals. The OECD and the EU authorities have taken several initiatives against aggressive tax planning, such as the Action Plan against BEPS. However, these initiatives lack effectiveness, and aggressive tax planning is still omnipresent. We analyze the fight against aggressive corporate tax planning from a Real Option Theory perspective, in order to find an explanation for the difficult shift of companies’ aggressive tax planning strategies to more sustainable tax behavior. The Real Option Theory shows that, as long as the option to ‘delay’ the investment in sustainable tax behavior has too much value because the benefits of such investment are uncertain, companies will wait. Based on this new understanding, we suggest additional public policy interventions against aggressive tax planning. These interventions aim directly at reducing this real option value (of waiting).

Nonlinearities in Interregional Migration Behavior

Traditional “Marshallian” theories predict a linear relationship between internal migration and regional wage differentials. Using panel data on gross place-to-place migration flows in the United States, we estimate a semiparametric version of the modified gravity model and find evidence of a nonlinear effect of wage differentials in line with alternative theories of interregional migration, including the “option value of waiting” theory, liquidity constraints, and wealth-conditioned immobility. Traditionally, the migration decision process is believed to be mainly composed of two criteria: “whether to move” and “where to move.” However, the empirical evidence of nonlinearity found in this study supports the potential presence of another important decision criterion, “when to move” on interregional migration.

Layoffs in a Recession and Temporary Employment Subsidies when a Recovery is Expected

Sunk firing and hiring costs shelter existent employment. This effect is typically amplified by uncertainty due to an option value of waiting. Thus, if (i) sunk firing costs are high, for example due to an employment protection legislation or due to the loss of firm-specific human capital, or if (ii) (after a future recovery) recruiting a new qualified staff is difficult and recession-related losses are expected to be only transitory, firms have to consider labour hoarding as a relevant strategy. In this environment a moderate temporary employment subsidy will be sufficient to avoid layoffs by firms currently operating at losses. Depending on the size of sunk (re-)hiring costs, cyclical layoffs or even permanent job destruction can be avoided by short run subsidies during the beginning of a recession.

ENVIRONMENTAL INNOVATION, WAR OF ATTRITION AND INVESTMENT GRANTS

The paper analyses the timing of spontaneous environmental innovation when second-mover advantages, arising from the expectation of declining investment costs, increase the option value of waiting created by investment irreversibility and uncertainty about private payoffs. We then focus on the design of public subsidies aimed at bridging the gap between the spontaneous time of technological change and the socially desirable one. Under network externalities and incomplete information about firms' switching costs, auctioning investment grants appears to be a cost-effective way of accelerating pollution abatement, in that it allows targeting grants instead of subsidizing the entire industry indiscriminately.

Real Options, Conflicting Valuations, and Favoritism

In this paper, limited managerial capacity gives rise to a timing option: agents can implement projects now-or-later. Because each agent cares only about the project he implements, while the principal cares about the projects undertaken in aggregate, the timing option may be valued differently by the principal and the agents. Under a fair assignment rule (one that treats the agents symmetrically), these conflicting valuations result in agents sometimes not implementing the principal's desired projects. We identify conditions under which the optimal assignment rule necessarily exhibits favoritism. Favoritism is beneficial because it provides appropriate incentives to the unfavored agent by reducing his option value of waiting.