Quantitative Implications of the Home Bias: Foreign Underinvestment, Domestic Oversaving, and Corrective Taxation / Assaf Razin, Efraim Sadka, Chi-Wa Yuen.

Format:

Book

Author/Creator:

Razin, Assaf.

Contributor:

National Bureau of Economic Research.

Sadka, Efraim.

Yuen, Chi-Wa.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6339.

NBER working paper series no. w6339

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Quantitative Implications of the Home Bias

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

There is strong evidence about a home-court advantage in international portfolio" investment. One explanation for the bias is an information asymmetry between domestic and" foreign investors about the economic performance of domestic firms. This asymmetry causes" two types of distortions: an aggregate production inefficiency and a production-consumption" inefficiency, leading to foreign underinvestment and domestic oversaving respectively. Such" market failures are found to be quite severe, slightly more so with equity flows than with debt" flows. These inefficiencies can nonetheless be corrected by a mix of tax-subsidy instruments consisting of taxes on corporate income and on the capital incomes of both residents and" nonresidents. When only a partial set of instruments is available, however each tax instrument can change radically and may even be reversed although the welfare gains" can be fairly substantial and sometimes close to the first best optimum. This partial set of" instruments appears to be more effective in handling the market failure in the case of equity" flows than in the case of debt flows.

Notes:

Print version record

December 1997.