Article

Simplified Tax Accounting and the Choice of Legal Form

Taylor & Francis on behalf of the European Accounting Association
European Accounting Review
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Abstract

This study investigates whether the ability to choose simplified methods of tax accounting is an important consideration in legal form decisions. Most European countries provide simplified, cash-based rules of tax accounting for small firms that considerably deviate from their general accrual tax accounting rules. The small business sector is thereby sought to be protected from disproportionally high compliance burdens. Simplified tax accounting, however, is only available for non-corporate businesses. If simplified tax accounting is indeed associated with a net benefit, its (un-)availability can change the relative gain to incorporation. We test this conjecture using data on corporate shares of business in 27 European countries over the period 2004–2010. Exploiting variation in eligibility thresholds for simplified tax accounting over time, the results suggest that small businesses indeed consider the option to choose simplified tax accounting in their choice of legal form.

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... Relief usually consists of provisions for cash accounting methods. See Bergner and Heckemeyer (2017) for more details. ...
... 14 12 A new firm corresponds to an enterprise birth, which occurs when an enterprise begins operations from scratch. More details can be found in table 11. 13 We broadly follow Bergner and Heckemeyer (2017 The number of new firms in a given country i , year t , and industry j is available according to a split by legal form. 15 Specifically, data is available for (i) sole proprietors (SP itj ), subject to personal income tax rates, (ii) private or publicly quoted joint stock companies with limited liability (LL itj ), subject to the corporate tax rate, and (iii) partnerships (PA itj ). ...
... As for nontax costs of setting up a corporation, we add a dummy variable that equals one if simplified tax accounting in the form of accrual relief is available to small unincorporated businesses. Bergner and Heckemeyer (2017) provide this data for 27 countries over 2004-2010. We extend their sample to 1998-2018, assuming the availability of accrual relief to be constant over time, and we add information for Croatia, Iceland, Lithuania, and Romania. ...
... They find consistently that the compliance costs for the small business sector are burdensome in particular due to substantial fixed costs. However, up to our knowledge the effect of simplified cash accounting on the compliance burden of SMEs is investigated only in Eichfelder and Schorn (2012) and Bergner and Heckemeyer (2017). 2 Eichfelder and Schorn (2012) investigate the use of simplified cash accounting as one of several strategies of German businesses to optimize their compliance cost burden. ...
... They find no significant effect of cash-based accounting on firms' compliance costs. In contrast, Bergner and Heckemeyer (2017) find that the availability of simplified cash accounting for non-corporate firms influences the choice of legal form. According to their results, an increase of the eligibility threshold for cash accounting by 100,000 EUR leads to an increase of the non-corporate firm share by about 0.47% points. ...
... However, this difference is not significant. Thus, we cannot confirm expectations that cash-based tax accounting eliminates the need for a professional tax advisor (Bergner and Heckemeyer 2017). ...
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In many countries simplified methods for tax accounting are considered as important step to reduce tax complexity and thereby the compliance cost burden of particularly small businesses. Using two surveys among (1) small businesses and (2) tax advisors, this study examines the effect of cash-based versus accrual accounting on tax and financial accounting compliance cost. While the results of the first study are ambiguous, the second study shows that cash-based accounting is associated with a decrease of external compliance costs of small firms by about 30%. This relative benefit decreases slightly with the size of the business. However, we do not find that the usage of cash-based accounting reduces the demand for professional tax advice.
... For instance, Poland adopted the policy of encouraging investment in shares of SMEs through removing so-called "back-end" taxes, which are the taxes applied to profits made when selling a security [15]. In India, investors benefit from reduced capital gains taxes on SME equity investments [12]. This is done via the cutting of short-term capital gains tax in half, from 30 to 15%, for shares listed of SMEs [52]. ...
... Olaleye, Memba, and Riro [39] state that the available investment allowance under the Nigerian tax system presently are: 10% investment allowance on plant and machinery for business in the agricultural sector; 10% investment allowance on production machinery in use by manufacturing concerns; and 15% investment allowance on plant and machinery acquired as a replacement for obsolete ones. However, it should be noted that separate investment allowance tax relief is available to businesses which are located not less than 20km away from the following facilities on infrastructure costs at the rate stated in table 2. Bergner [12] referred to investment allowances as superdeductions, in contrast to special depreciation schemes, allow the deduction of a fixed percentage of eligible expenditures (e.g., personnel costs, costs of newly acquired assets) or balance sheet positions (e.g., shareholders' equity, special investment reserves) on top of the general allowances provided by the tax code. Unlike the schemes of accelerated depreciation, they decrease overall inter-periodic taxable income and induce a true reduction of tax payments instead of a pure interest advantage [27]. ...
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... Due to statutory requirements regulated by Serbian law, small businesses must keep a double-entry bookkeeping system and produce annual financial accounts. 1 As in most European countries (Bergner & Heckemeyer, 2017), this obligation does not apply to non-corporate micro-businesses (sole traders) who file a request to pay tax on a lump sum income and opt for simplified tax accounting. Nevertheless, most Serbian micro and small businesses use an external accountant's services. ...
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Using a representative sample of 391 Serbian accounting practitioners, we explored the association between their perceptions, attitudes, and characteristics and the tax compliance of their small business clients. The majority of the practitioners surveyed believe they have a moderate to substantial impact on their clients’ tax compliance. However, this perceived influence diminishes as the number of clients increases, underscoring the importance of a personal relationship between practitioners and clients. The results also suggest that this influence is linked to the nature of the clients’ requests, the traits of the accounting practitioners, and whether the AP provides intermediation services. Firms led by male practitioners who have a web presence and a thorough understanding of the IFAC Code of Conduct tend to report a stronger impact. Notably, about three-quarters of the practitioners observed some level of non-compliance among their clients. Our multivariate analysis indicates that firms offering client training are less likely to report non-compliance. The study further investigates additional factors that could affect clients’ tax compliance.
... Consequently, CoPs have different goals, roles, and methods of communication (Kimmerle et al. 2013(Kimmerle et al. ). et al. 2022, tax avoidance (Dyreng et al. 2019;Armstrong et al. 2015;Utomo et al. 2015), methods of tax accounting (Bergner and Heckemeyer 2017), and tax compliance (Hassan et al. 2022;Wahab and Bakar 2021). Studies that focus on collaborating on knowledge among the tax community, especially its processes, are limited to the knowledge management (KM) domain, for example, sharing and communicating knowledge (Setyorini et al. 2019;Hasseldine et al. 2012;Okoh et al. 2021). ...
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This paper presents knowledge collaboration among tax professionals in a tax-knowledge context within Malaysian accounting associations through the conceptual lens of a community of practice. Semi-structured in-depth interviews were conducted with a total of 29 tax professionals. Additionally, data were also gathered from field notes and archival data. The findings revealed that the Malaysian accounting-professional associations reflected a community of practice. Knowledge collaboration occurs among members in this community in order to attain the highest standard of technical and professional competency in tax knowledge and practice. The findings from this study complement and expand previous research on CoP, knowledge management, and collaboration. The findings suggest exploring a better strategy to implement a central repository of knowledge acquired or generated by the members within the community to support the learning lifecycle.
... Kepatuhan dalam melaksanakan kewajiban perpajakan merupakan isu yang sangat penting di indonesia karena wajib pajak yang tidak memenuhi kewajiban perpajakannya akan merugikan negara (Ariyanto et al., 2020). Pada saat perekonomian mengalami kemerosotan secara serentak dan menyeluruh, wajib pajak akan cenderung membayar pajak tidak dengan benar dan jujur; bahkan diduga, wajib pajak telah melakukan praktik penghindaran dan penggelapan pajak demi mengatasi efek dari krisis keuangan (Amah et al., 2021;Bergner & Heckemeyer, 2017;Richardson et al., 2015). Dugaan tersebut sangat ber alasan, mengingat pada saat krisis keuangan hampir seluruh aktivitas bisnis mengalami tekanan finansial yang memungkinkan mereka mengurangi sumber dayanya akibat kesulitan pembiayaan. ...
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... From a macro perspective, there is also evidence that the availability of simplified tax accounting techniques impacts the decision of whether to incorporate or not (Byrd and Richey, 1998;Bergner and Heckemeyer, 2017). Goolsbee (1998) suggests that higher statelevel corporation taxes make legal forms other than C-corporation more attractive to the entrepreneurs (also see Goolsbee, 2004). ...
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... It is very positive that the MET significantly reduces the administrative burden on microenterprises and simplifies the tax calculation (Leibus, 2012 (Bergner, Heckemeyer, 2017). Consequently, the mentioned authors confirm the idea on the necessity of a special tax regime for small enterprises to reduce administrative requirements. ...
... Due to the highest eligibility threshold in the European Union of 2 million EUR, 89% of Polish enterprises do not prepare financial statements. The second highest eligibility threshold of 1.5 million EUR applies in Greece, while the third highest of only 700 000 EUR in Austria (Bergner & Heckemeyer, 2017). ...
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... In many countries, simplified, cash-based forms of accounting are allowed (Bergner & Heckemeyer, 2016). Certain studies have argued that small businesses consider the option to choose simplified tax accounting in their choice of legal status. ...
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This paper identifies tax and nontax factors that influence commercial banks' conversion from taxable C-corporation to nontaxable S-corporation from 1997 to 1999, after a 1996 tax-law change allowed banks to convert to S-corporations for the first time. We find that banks are more likely to convert when conversion saves dividend taxes, avoids alternative minimum taxes, and minimizes state income taxes. Banks are less likely to convert when conversion restricts access to equity capital, nullifies corporate tax loss carry forwards, and creates potential penalty taxes on unrealized gains existing at the conversion date. Banks with significant deferred tax assets are less likely to convert, presumably because the write-off of deferred taxes at conversion decreases regulatory capital and exposes the bank to costly regulatory intervention. We also investigate the strategic choices banks make before converting to S-corporations. Converting banks alter their capital structures, deliberately sell appreciated assets, and strategically set dividends to augment net conversion benefits.
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When laws are complex or ambiguous, compliance and enforcement suffer. In the United States, the federal income tax is a familiar example of this. Often, neither the taxpayer nor the Internal Revenue Service (IRS) can perfectly determine a taxpayer's true tax liability. Uncertainty, ignorance, and burdensome documentation requirements deter some taxpayers from taking advantage of legitimate deductions and credits, whereas others find opportunities for creative tax avoidance in ambiguous provisions. Complexity undermines the IRS's ability to distinguish among intentional evasion, honest misinterpretation of the tax code, and legitimate tax avoidance. This model shows that the IRS cannot always profitably exploit complexity.
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and variability of revenues are important state to policymakers at all levels of govern- Two important characteristics Of ment, the growth and cyclical character- tax systems are the trend growth rate and istics of taxes are of particular concern at cyclical variability of tax revenues. We use the state level, where balanced budgets national aggregate time series data to es- are virtually universally required, bor- timate the trend rate ofgrowth and the de rowing capacity is limited, entitlement viation from trend for several components programs are expanding, and, because of of state general sales and individual in- open state economies, economic cycles are come tax bases. The results indicate great essentially impervious to macroeconomic variety in growth and variability charac- policy. teristics across tax base components. One The growth and variability of taxes are important finding is that growth and not new tax policy concerns, nor have variability are sometimes inversely re- economists been silent on the issues. An lated. Another interesting finding is that, extensive literature has developed that is depending on structural design, income concerned with estimating income elas- taxes can be more stable than sales taxes. ticities of different revenue sources and designating revenue sources as relatively I. Introducdon stable or unstable depending on the size of their estimated income elasticities. (See T RADITIONALeconomicevaluations Wilford, 1965, and Legler and Shapiro, of taxes and tax systems employ three 1968, as examples.) This approach com- criteria-equity, efficiency, and simplic- bines in one measure what to policymak- ity. Two additional characteristics of ers are two concerns in the choice of rev- taxes-long-run or trend rate Of growth enue structure: the responsiveness or long- in revenue and its variability over the run rate of growth of revenues and the business cycle-are given only limited at- stability or variability of revenues over tention in the applied public finance tra- the cycle. Other researchers (See Wil- dition. These two characteristics are of liams et al., 1973; White, 1983; and Fox great importance to policymakers who and Campbell, 1984) have recognized and must devise revenue systems that can both estimated the differences between secular support expenditure programs over the and cyclical behavior of revenues. Most long run and provide stable streams Of researchers conclude that "responsive- revenue even as the underlying economy ness is a double edged sword" (Ladd and varies with the business cycle. Weist, 1991), in other words, that a trade- The purposes of this paper are to define off exists between higher growth (respon- the growth and variability criteria, to siveness) and higher cyclical variability. evaluate the components of the two major Studies that estimate income elastici- sources of state tax revenues-the indi- ties for state individual income taxes and vidual income tax and the general sales state general sales taxes find that income tax-using these criteria, and to interpret taxes are more elastic, and thus less sta- our results for policymakers. While growth ble by the traditional interpretation, than are sales taxes.' Thus, if a state has a *LakeForestCollege,LakeForest,IL 60045and heavy reliance on the individual income institute of Government and PublicAffairs,Univer- tax, its tax structure is viewed as being sity ofIllinois,Chicago,IL 60607.
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This paper covers the use (and abuse) of presumptive taxes in general. In this paper, we define more precisely the intended objectives of such systems. We review two simplified regimes - those in Ukraine and Russia. We also analyze the implications of these special regimes in terms of their impact on economic efficiency, equity, and overall tax administration and compliance. This paper provides a discussion of the critical problem of developing an exit strategy from such special regimes as well as some alternative policies that may prove more promising paths to taxing the HTT.
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In 2001, the IRS issued a ruling allowing firms to engage in nontaxable real estate investment trust (REIT) spin-offs. In a REIT spin-off, a corporation places real estate assets into a subsidiary, which it then distributes to shareholders as a REIT. A nontaxable spin-off triggers no immediate taxation of unrealized gains and the future earnings of REIT generally are not subject to corporate level taxation; the earnings are instead taxed at the investor level. REIT spin-offs thus provide a means to avoid the double-taxation of at least some part of corporate earnings. The ruling was promptly followed by a large REIT spin-off of timber properties by Georgia-Pacific and there has been much speculation about how many and what kinds of firms will follow. Given that the total real estate held in the corporate sector is in the trillions of dollars, the potential revenue loss is of serious concern. This paper simulates the effects of the REIT spin-off fueling by analyzing the actual real estate holdings of over 4,000 publicly traded companies. Specifically, we estimate the potential tax benefits for each firm and for each industry, both in absolute terms and compared to market value, to determine the types of firms and industries most likely to restructure as a result of the ruling. The calculations take into account the related impact of likely reductions in debt levels on corporate taxes, as well as the likely increase in investor level taxes from the requirement that REITs pay out nearly all of their income each year as dividends. The results suggest that the benefits to REIT spin-offs are heavily concentrated in a few industries and that while there may be a subset of firms for which REIT spin-offs would provide substantial tax benefits, in the aggregate, revenue losses are likely to be modest.
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We analyze survey responses from nearly 600 tax executives to better understand corporate decisions about real investment location and profit repatriation. Our evidence indicates that avoiding financial accounting income tax expense is as important as avoiding cash income taxes when corporations decide where to locate operations and whether to repatriate foreign earnings. This result is important in light of the recent research about whether financial accounting affects investment and in light of the decades of research on foreign investment that examines the role of cash income taxes but heretofore has not investigated the importance of financial reporting effects. Our analysis suggests that financial reporting is an important factor to be considered in the policy debates focused on bringing investment to the United States.
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While generally the impact tax has on patterns of corporate ownership and control has received little attention, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses mainly on historical developments in Britain, where an “outsider/arm’s-length” system of corporate governance began to take shape in the years leading up to World War I and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes do much to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control. The paper also discusses developments in the United States and argues that tax helped to foster the separation of ownership and control that reportedly occurred in larger American companies after World War I.
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By changing the relative gain to incorporation, corporate taxation can play an important role in a firm's choice of organizational form. General equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation. This paper estimates the impact of taxes on organizational form using data from 1900–1939. The results indicate that the effect of taxes is significant but small. A corporate rate increase of 0.10 raises the non-corporate share of capital 0.002–0.03. The implied deadweight loss of the corporate income tax is around 5–10% of revenue.
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The purpose of this study is to expand on the work of Riahi-Belkaoiu [Riahi-Belkaoiu, A. (2004). Relationship between tax compliance internationally and selected determinants of tax morale. Journal of International Accounting, Auditing and Taxation, 13, 135–143] and systematically investigate, on a cross-country basis, many of the key determinants of tax evasion identified by Jackson and Milliron [Jackson, B. R., & Milliron, V. C. (1986). Tax compliance research: findings, problems and prospects. Journal of Accounting Literature, 5, 125–165]. Based on data for 45 countries, the results of the OLS regression analysis show that non-economic determinants have the strongest impact on tax evasion. Specifically, complexity is the most important determinant of tax evasion. Other important determinants of tax evasion are education, income source, fairness and tax morale. Overall, the regression results indicate that the lower the level of complexity and the higher the level of general education, services income source, fairness and tax morale, the lower is the level of tax evasion across countries. These findings remain robust to a broad range of cross-country control variables, an alternative tax evasion measure and various interactions.
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Publicly Traded Partnerships (PTPs), also known as Master Limited Partnerships, are similar to U.S. corporations, yet they are not subject to corporate taxes. Given their mixture of corporate and partnership characteristics, PTPs provide an experiment for studying taxation and firm financial decisions. This paper compares the financial structure and dividend policies of PTPs and corporations in the oil and gas exploration industry. The results are consistent with hypotheses about taxes and financial decisions: controlling for other factors, PTPs pay more dividends and borrow less than similar corporations.
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By taxing the income of corporate firms at a different rate than non-corporate firms, taxes can play an important role in a firm's choice of organizational form. The sensitivity of the organizational form decision to tax rates provides a key indicator of the distortion created by the corporate income tax. This paper uses new cross-sectional data on organizational form choices across states compiled in the Census of Retail Trade to estimate this sensitivity. The results document a significant impact of the relative taxation of corporate to personal income on the share of real economic activity that is done by corporations and that the impact is many times larger than has been found in the previous empirical literature based on time-series data. The results show little impact, however, on the actual operations of firms such as their labor intensity, wages and the like. They do indicate that firms are able to exploit the progressivity of the corporate income tax system by dividing into numerous firms.
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Income from corporate and noncorporate firms is treated very differently under the tax law. In theory, given existing tax law, the noncorporate sector should consist of very profitable firms owned by low-tax-bracket investors and firms with tax losses owned by high-tax-bracket investors. But the degree to which firms change their form of organization in response to taxes, and the resulting excess burden, depends as well on nontax factors. Given the role of taxes, we estimate what size the nontax advantage to incorporating must take in each industry so that the forecasted choices for organizational form, aggregated over investors in different tax brackets, are consistent with the aggregate evidence. While the estimated nontax costs are large in some industries, noncorporate activity tends to be concentrated where the costs are small, leading to little excess burden from the tax distortion to organizational form.
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We survey and interview more than 400 executives to determine the factors that drive reported earnings and disclosure decisions. We find that managers would rather take economic actions that could have negative long-term consequences than make within-GAAP accounting choices to manage earnings. A surprising 78% of our sample admits to sacrificing long-term value to smooth earnings. Managers also work to maintain predictability in earnings and financial disclosures. We also find that managers make voluntary disclosures to reduce information risk and boost stock price but at the same time, try to avoid setting disclosure precedents that will be difficult to maintain.
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This paper uses tax return data to analyze bunching at the kink points of the US income tax schedule. We estimate the compensated elasticity of reported income with respect to (one minus) the marginal tax rate using bunching evidence. We find clear evidence of bunching around the first kink point of the Earned Income Tax Credit but concentrated solely among the self-employed. A simple tax evasion model can account for those results. We find evidence of bunching at the threshold of the first income tax bracket where tax liability starts but no evidence of bunching at any other kink point. (JEL H23, H24, H26)
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The paper analyses the relationship of tax compliance costs and business strategy. Due to instruments, like information technology, simplified cash accounting or outsourcing compliance activities to tax advisers, private businesses have a set of strategies to optimize their tax compliance cost burden. Under the assumption of rational choice a private business should choose a cost-optimal administration strategy. In spite of that we find empirical evidence for small German businesses using only insufficiently the support of external tax advisers. Therefore, a considerable number of small businesses in Germany could reduce their compliance cost burden by a higher degree of outsourcing tax processes. In contrast, we find no significant evidence for a cost reduction by an electronic data interchange with the tax and social insurance authorities or by a simplified cash accounting method for tax purposes. --
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There seems to be no published formulation and solution to the problem: How must "income" be defined if present discounted valuations of all assets, and therefore all optimization decisions, are to be independent of the tax rate each person is subject to?
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Much of our understanding of corporations builds on the idea that managers, when they are not closely monitored, will pursue goals that are not in shareholders' interests. But what goals would managers pursue? This paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences. We use plant-level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws. We find that when managers are insulated from takeovers, worker wages (especially those of white-collar workers) rise. The destruction of old plants falls, but the creation of new plants also falls. Finally, overall productivity and profitability decline in response to these laws. Our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life.
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I. Introduction, 589.—II. The model, 590.—III. The controlled economy, 592.—IV. Competitive behavior, 593.—V. Optimal factor taxation, 596.—VI. The nature of optimal taxes, 602.—VII. Optimal capital taxation, 605.—VIII. Bequests and the discount rate, 609.—IX. Conclusion, 610.
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We develop attractive functional forms and simple quasi-likelihood estimation methods for regression models with a fractional dependent variable. Compared with log-odds type procedures, there is no difficulty in recovering the regression function for the fractional variable, and there is no need to use ad hoc transformations to handle data at the extreme values of zero and one. We also offer some new, robust specification tests by nesting the logit or probit function in a more general functional form. We apply these methods to a data set of employee participation rates in 401(k) pension plans. Copyright 1996 by John Wiley & Sons, Ltd.
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