When to Appease and When to Punish: Hitler, Putin, and Hamas

David K. Levine& Lee E. Ohanian in this paper discuss when to appease and punish:

Much has been written about deterrence, the process of committing to punish an adversary to prevent an attack. But in sufficiently rich environments where attacks evolve over time, formulating a strategy involves not only deterrence but also appeasement, the less costly process of not responding to an attack.

This paper develops a model that integrates these two processes to analyze the equilibrium time paths of attacks, punishment, and appeasement.

We study an environment in which a small attack is launched and can be followed by a larger attack. There are pooling and separating equilibria. The pooling equilibrium turns the common intuition that appeasement is a sign of weakness, inviting subsequent attacks, on its head, because appeasement is a sign of strength in the pooling case. In contrast, the separating equilibrium captures the common intuition that appeasement is a sign of weakness, but only because deterrence in this equilibrium fails.

We interpret several episodes of aggression, appeasement, and deterrence: Neville Chamberlain’s responses to Hitler, Putin’s invasion of Ukraine, Israel’s response to Hamas, Turkey’s invasion of Cyprus, and Serbia’s attacks in Kosovo.

Findings:

Why digital transactions aren’t a silver bullet for tax compliance: Evidence from Uruguay

Anne Brockmeyer and Magaly Sáenz Somarriba in this interesting research from Uruguay show digital transactions are not a panacea for tax compliance:

Electronic payment technologies have long been hailed as a way to formalise transactions, increase tax compliance, and strengthen state capacity. This column examines the effect of financial incentives on the take-up of such technologies among firms and consumers in Uruguay, and on the tax compliance of firms. In response to a VAT rebate for paying with a debit or credit card, consumers increased their use of such cards, but firms’ use of point-of-sales terminals did not increase and tax compliance was not affected.

Why firms did not increase POS?

The number of firms with at least one point-of-sale (POS) terminal did not increase when the rebates were introduced. Only firms that already had a POS prior to the reform increased POS usage, by using a larger number of POS terminals.

These results are consistent with the fact that using a POS is costly for firms that are not yet fully tax compliant. Previously unreported cash transactions can be revealed through the POS’s digital paper trail. Indeed, in monthly event studies, we find that VAT liabilities increase sharply when firms use a POS terminal for the first time.

We also show that small subsidies for POS usage and reductions in card fees did little to incentivise POS adoption. The results imply that much larger financial incentives, or a mandate may be needed to spur extensive margin POS adoption.

 

RBI@90

Happy 90th RBI. The central bank turns 90 years today.