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Systemic risk, coordination failures, and preparedness externalities Applications to tax and accounting policy

Systemic risk, coordination failures, and preparedness externalities Applications to tax and... Purpose – Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause “systemic risk.” This paper seeks to consider the externality in the choice of ex ante risk management policies by individuals and firms, concerned with private risk, not with their contribution to systemic risk. Design/methodology/approach – The implications for debates over fair value accounting are considered. Findings – One consequence is that individuals and firms become overleveraged from a social viewpoint. The recent credit crisis exemplifies the importance of this problem. The US tax system taxes equity more heavily than debt, and therefore exacerbates the bias toward overleveraging. A possible solution is to reduce or eliminate taxation of corporate income and capital gains. Preparedness externalities can also cause firms to become too transparent, and thereby subject to financial runs. Originality/value – The paper offers insights into systemic risk, coordination failures, and preparedness externalities, focusing on tax and accounting policy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

Systemic risk, coordination failures, and preparedness externalities Applications to tax and accounting policy

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References (15)

Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
1757-6385
DOI
10.1108/17576380911010245
Publisher site
See Article on Publisher Site

Abstract

Purpose – Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause “systemic risk.” This paper seeks to consider the externality in the choice of ex ante risk management policies by individuals and firms, concerned with private risk, not with their contribution to systemic risk. Design/methodology/approach – The implications for debates over fair value accounting are considered. Findings – One consequence is that individuals and firms become overleveraged from a social viewpoint. The recent credit crisis exemplifies the importance of this problem. The US tax system taxes equity more heavily than debt, and therefore exacerbates the bias toward overleveraging. A possible solution is to reduce or eliminate taxation of corporate income and capital gains. Preparedness externalities can also cause firms to become too transparent, and thereby subject to financial runs. Originality/value – The paper offers insights into systemic risk, coordination failures, and preparedness externalities, focusing on tax and accounting policy.

Journal

Journal of Financial Economic Policy – Emerald Publishing

Published: May 29, 2009

Keywords: Risk analysis; Taxation; Accounting policy; Economic conditions; United States of America

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