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Faculty of Law, Business & Economics

VWL VI: Chair of Empirical Economics – Prof. Dr. Mario Larch

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The research at the Chair of Empirical Economics focuses on microeconometric methods applied to a variety of fields. Specifically, panel econometrics, count data methods, program evaluation methods and spatial econometrics are applied to empirically analyze questions of international trade, international taxation, international migration, public finance, multinational activity and labor market outcomes of trade.

Currently, we work on the following two externally funded projects:

Gravity and unemployment: An empirical analysis of the effects of trade with imperfect labor markets – financed by the german research foundation (DFG) under grant no. 592405

This project aims at quantifying the effects of international trade in the presence of labor market imperfections within a structural gravity framework. Theoretical research suggests the connection between labor market imperfections and trade and shows that trade patterns, gross domestic product (GDP) and welfare will be linked. Whether trade liberalization is indeed desirable needs to be empirically evaluated accounting for imperfections on the labor market. A structural approach thereby allows a deeper insight into channels of trade liberalization as well as counterfactual analysis of policy interventions. However, up to now, empirical evaluations assumed perfect labor markets or relied on reduced form regressions. A structural empirical investigation between trade and labor markets has been neglected so far. Hence, the first stage of the project concentrates on the development of an empirical framework that allows for the evaluation of trade policies in the presence of imperfect labor markets. The following stages use and extend this framework in order to quantify the effects of trade integration. We plan to calculate trade, GDP and welfare effects for a cross-section of OECD countries. Extensions allowing for international migration and effects disentangled by sectors put further light on the micro-structural effects of trade liberalization.

Company births and deaths: Investigating the role of taxation – financed by the economic and social research council (ESRC) under grant no. RES-194-23-0012

This research project aims to evaluate recent reforms to the rates of UK corporation tax. Specifically, it will focus on the impact of successive changes to the starting rate of corporation tax - which was introduced in 1999 at 10%, reduced to zero in 2002 and then abolished in 2006. The aim of the starting rate was to encourage the formation of small new companies which would exhibit entrepreneurial behaviour, which would help stimulate growth in the UK. However, the policy was eventually abandoned, possibly because it achieved more in inducing the shifting of income between the unincorporated and corporate sectors of the economy than in stimulating real economic activity.

However, to date, there have been no systematic attempts to analyse the effects of a low starting rate of corporation tax. This research project aims to address the following three questions.

1. Did the introduction, reduction to zero, and abolition of the starting corporation tax rate affect the rate of new company incorporations, and the rate of company dissolutions?

2. To what extent did newly-created corporations report taxable profits exactly at kink points in the tax rate schedule, such as at £10,000? To what extent did existing corporations follow the same strategy?

3. Is there evidence that companies created in response to the introduction and subsequent reduction in the starting rate undertook more or less investment than comparable existing companies?

In addition, we plan to identify whether the increased number of companies had a significant impact on corporation tax revenues. It is well known that revenues have not fallen as a proportion of GDP despite reductions in rates. To what extent was this due to an increase in the number of companies induced by changes to the starting rate of corporation tax?

To investigate these issues, we will make use of the population of confidential corporation tax return data, newly available at the HMRC Datalab. This allows us to investigate births and deaths of companies. We can also investigate the behaviour of new companies, and compare it to existing companies (as well as to make comparisons by size and sector). We have detailed and precise information on taxable profits, and how they are determined, including detailed information on capital allowances for investment. This unique dataset is therefore ideally suited to the analysis proposed.

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