Tim Friehe

Cheap Talk About the Detection Probability

This paper analyzes whether the behavior of potential offenders can be guided by information on the actual detection probability transmitted by the policy maker. It is established that, when viewed as a cheap-talk game, the existence of equilibria with information transmission depends on the level of the sanction, the level of costs related to imposing the sanction, and the level of social harm resulting from the offense. In addition, we find that the policy maker (i.e., society as a whole) is not necessarily better off ex ante when more information is transmitted in equilibrium, but that potential offenders always are.

Competitive Pressure and Corporate Crime

Abstract This paper explores the relationship between the intensity of product market competition and firms’ incentives to resort to illegal means to lower their production costs. To this end, our framework combines a crime model à la Becker with a Salop circle. When law enforcement includes a fixed fine for illegal conduct, more intense competition due to a higher number of firms in the industry reduces the prevalence of crime, whereas more intense competition due to better substitutability between products may increase or decrease crime. In contrast, when the fine for corporate crime is proportional to profits, more intense competition unambiguously increases the prevalence of crime. In addition, we discuss the implications of the link between product market competition and corporate crime decisions for market entry and optimal law enforcement and elaborate on the relationship between law enforcement and a firm’s ability to commit to refraining from the use of illegal practices.

General Ability and Specialization : Evidence from Penalty Kicks in Soccer

This article revisits the 2 × 2 penalty kick game and seeks to explain differences in mixed strategies associated with different player types and the relative performance of these player types. The authors show that (a) a kicker’s general ability is a reliable indicator of his success rate, (bi) a kicker’s specialization rate increases with his general ability, and (c) left-footed kickers who present a minority within the total population are characterized by a higher success rate. Consequently, the authors establish that more able kickers show a higher degree of specialization. Their greater specialization, however, has neither an adverse nor a beneficial impact on their success rate. All the theoretical predictions are in line with empirical evidence from the German national soccer league.

Tax Evasion, Investment, and Firm Activity

This paper establishes within an intertemporal framework that firm activity is influenced by tax evasion if firms can invest in their long-term competitiveness. Higher investment raises the firms survival probability, which in turn reduces tax-evasion payoffs, since evaded taxes may also be detected and penalized later on. At the same time, tax evasion in future periods increases future expected profits, making higher investment desirable. Consequently, tax evasion distorts investment, while the latter determines firm activity. Investment in the event of tax evasion may be higher or lower, depending on parameters of tax enforcement.

The Monopolistic Polluter under Environmental Liability Law: Incentives for Abatement and R&D

This article analyzes the output, abatement, and investment decisions made by a monopolistic polluter under environmental liability law. The model applied considers both integrated and end-of-pipe abatement technologies. We find that in the case of fixed technology, in many instances negligence produces more favorable results than strict liability in terms of social welfare. The reason is that output under strict liability is always less than first-best output, whereas output under negligence is not similarly limited. However, this ranking of liability rules may be reversed when technology is endogenous. Under such conditions investment in both integrated and end-of-pipe abatement technologies under negligence is guided by motives foreign to the social planner, whereas the polluter’s calculus under strict liability is similar to that of the social planner.

On the Economics of Contribution Evasion

This paper considers the tax evasion decision when taxes constitute contributions to the financing of social insurance programs, such as un employment insurance. We call this evasion contribution evasion and establish that critical differences exist between contribution evasion and tax evasion, the central difference being that contributions entitle the contributor to future claims. Furthermore, we derive a recomme ndation for the reduction of contribution evasion, referring to the distinction between Bismarckian and Beveridgean social security systems .

“It’s All in the Mix!”- Internalizing externalities with R&D subsidies and environmental liability

Extending previous “tales of two market failures”, we consider a setting in which firms generate environmental externalities and may invest in environmentally friendly technological advancement generating R&D spillovers. We analyze the joint use of environmental liability law and R&D subsidies to internalize the double externality. Two alternative liability rules are considered: strict liability and negligence. In a complete information scenario, the social optimum in terms of emission levels and technical progress may be induced by combining either liability rule with an appropriate R&D subsidy. However, when the policy maker has incomplete information with respect to a firm’s productivity of R&D investments and non-discriminatorily sets a uniform liability rule and a uniform subsidy, only the so-called “double negligence” rule that imposes both an emission and a technology standard can induce the social optimum (if any one). The double negligence rule dominates strict liability with respect to the goal of minimizing social costs under modest conditions, also in cases in which none of the liability rules is capable of inducing first-best behavior among firms. Somewhat counterintuitively, a non-discriminatory double negligence rule can even dominate a (simple as well as double) negligence rule with type-specific norms and compliance-contingent type-specific subsidies.

Profit Shifting Despite Symmetric Tax Rates? A Note on the Role of Tax Enforcement

This paper analyzes a multinational corporation that may use tax evasion and profit shifting as a means to minimize tax liabilities. Our main finding is that profit shifting may occur even when tax rates are the same across countries. This will be the case whenever there is a tax differential in effective tax rates resulting from differences in tax enforcement. In this context, profit shifting occurs to enable tax evasion in a country where tax enforcement is less harsh. Moreover, for a given differential in tax rates, differences in tax enforcement may either accentuate or dampen profit shifting. Importantly, the predictions regarding the direction of profit shifting that would result in our set-up may contrast sharply with those of the preceding literature.

Strategic R&D Investment Under Liability Law

Abstract This paper analyzes the incentives of duopolists to invest in advanced care technology under liability law. We establish that investment incentives under strict liability are in line with the taxonomy of Fudenberg and Tirole (1984), whereas the investment incentives under negligence most likely are not. Indeed, investment incentives under negligence are dependent on the timing of the policy maker’s regulations, whether or not due care is firm specific, and whether or not precautionary measures are durable.

A Note on the Deterrence Effects of the Forfeiture of Illegal Gains

This paper analyzes how the forfeiture of illegal gains impacts the deterrence of illegal acts. We show that when public authorities introduce a claim on illegal gains as part of a sanction it may, counter-intuitively, increase crime in a setting in which criminals may invest in avoidance activities to lower the probability of detection.