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Phishing in Smooth Waters: The State of Banking Certificates in the US

January 26, 2015 Comments off

Phishing in Smooth Waters: The State of Banking Certificates in the US
Source: Social Science Research Network

A critical component of the solution to online masquerade attacks, in which criminals create false web pages to obtain financial information, is the hierarchy of public key certificates. Masquerade attacks include phishing, pharming, and man-in-the-middle attacks. Public key certificates ideally authenticate the website to the person, before the person authenticates to the website. Public key certificates are typically issued by certificate authorities (CAs).

Banks are the most common target of phishing attacks, so we implemented an empirical study of certificates for depository institutions insured by the Federal Depository Insurance Corporation (FDIC) and compared them to general purpose, non-banking certificates. Our study of websites of FDIC-insured banks found that the current configuration fails to support website authentication. The most common failure is an absence of certificates, meaning that a false certificate would be the only valid-named certificate for that institution. Certificates with incorrect names, incorrectly structured certificates, and shared certificates all plague online banking. The vast majority of banks, especially smaller banks, apparently lack the expertise, support, or incentive to implement certificates correctly.

We document the current state of bank certificates. We compare these with general-purpose certificates (e.g., the top one million websites). We survey the various proposals for the certificate market writ large, including pinning and notaries. We identify how those fit and fail to fit the unique problem of banking certificates. We close with policy and technical recommendations to alter the use of certificates so that these can be a valid basis for consumer trust.

Do Compensation Consultants Enable Higher CEO Pay? New Evidence from Recent Disclosure Rule Changes

January 7, 2015 Comments off

Do Compensation Consultants Enable Higher CEO Pay? New Evidence from Recent Disclosure Rule Changes
Source: Social Science Research Network

In July 2009, the SEC announced additional disclosure rules requiring firms that purchase other services from their compensation consultants to disclose fees paid for both compensation consulting and other services. This exogenous requirement dramatically increased both the turnover of compensation consultants and the number of specialist firms in the industry solely providing executive compensation consulting services. After the rule change, client firms that switched to specialist consultants paid their chief executive officers (CEOs) 9.7% more in median total compensation than a matched sample of firms that remained with multi-service consultants. Compensation consultants retained solely by the board are associated with 12.9% lower median pay levels than a propensity-score matched sample of firms with additional management-retained consultants. Finally, CEOs at firms that start hiring compensation consultants experience a 7.5% increase in median pay relative to a propensity-score matched sample. Overall, our study finds strong empirical evidence for the hiring of compensation consultants as a justification device for higher executive pay.

‘Competitiveness’ Has Nothing to Do With It

January 7, 2015 Comments off

‘Competitiveness’ Has Nothing to Do With It
Source: Social Science Research Network

The recent wave of corporate tax inversions has triggered interest in what motivates these tax-driven transactions now. Corporate executives have argued that inversions are explained by an “anti-competitive” U.S. tax environment, as evidenced by the federal corporate tax statutory rate, which is high by international standards, and by its “worldwide” tax base. This paper explains why this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.’s former vice-chairman) as a case study.

The recent surge in interest in inversion transactions is explained primarily by U.S. based multinational firms’ increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to “strip” income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction. These motives play out against a backdrop of corporate existential despair over the political prospects for tax reform, or for a second “repatriation tax holiday” of the sort offered by Congress in 2004.

The Impact of Right to Carry Laws and the NRC Report: The Latest Lessons for the Empirical Evaluation of Law and Policy

January 6, 2015 Comments off

The Impact of Right to Carry Laws and the NRC Report: The Latest Lessons for the Empirical Evaluation of Law and Policy
Source: Social Science Research Network

For over a decade, there has been a spirited academic debate over the impact on crime of laws that grant citizens the presumptive right to carry concealed handguns in public – so-called right-to-carry (RTC) laws. In 2004, the National Research Council (NRC) offered a critical evaluation of the “More Guns, Less Crime” hypothesis using county-level crime data for the period 1977-2000. 15 of the 16 academic members of the NRC panel essentially concluded that the existing research was inadequate to conclude that RTC laws increased or decreased crime. One member of the panel thought the NRC’s panel data regressions showed that RTC laws decreased murder, but the other 15 responded by saying that “the scientific evidence does not support” that position.

We evaluate the NRC evidence, and improve and expand on the report’s county data analysis by analyzing an additional six years of county data as well as state panel data for the period 1979-2010. We also present evidence using both a more plausible version of the Lott and Mustard specification, as well as our own preferred specification (which, unlike the Lott and Mustard model presented in the NRC report, does control for rates of incarceration and police). While we have considerable sympathy with the NRC’s majority view about the difficulty of drawing conclusions from simple panel data models and re-affirm its finding that the conclusion of the dissenting panel member that RTC laws reduce murder has no statistical support, we disagree with the NRC report’s judgment on one methodological point: the NRC report states that cluster adjustments to correct for serial correlation are not needed in these panel data regressions, but our randomization tests show that without such adjustments the Type 1 error soars to 22-73 percent.

Our paper highlights some important questions to consider when using panel data methods to resolve questions of law and policy effectiveness. We buttress the NRC’s cautious conclusion regarding the effects of RTC laws by showing how sensitive the estimated impact of RTC laws is to different data periods, the use of state versus county data, particular specifications (especially the Lott-Mustard inclusion of 36 highly collinear demographic variables), and the decision to control for state trends.

Across the basic seven Index I crime categories, the strongest evidence of a statistically significant effect would be for aggravated assault, with 11 of 28 estimates suggesting that RTC laws increase this crime at the .10 confidence level. An omitted variable bias test on our preferred Table 8a results suggests that our estimated 8 percent increase in aggravated assaults from RTC laws may understate the true harmful impact of RTC laws on aggravated assault, which may explain why this finding is only significant at the .10 level in many of our models. Our analysis of the year-by-year impact of RTC laws also suggests that RTC laws increase aggravated assaults. Our analysis of admittedly imperfect gun aggravated assaults provides suggestive evidence that RTC laws may be associated with large increases in this crime, perhaps increasing such gun assaults by almost 33 percent.

In addition to aggravated assault, the most plausible state models conducted over the entire 1979-2010 period provide evidence that RTC laws increase rape and robbery (but usually only at the .10 level). In contrast, for the period from 1999-2010 (which seeks to remove the confounding influence of the crack cocaine epidemic), the preferred state model (for those who accept the Wolfers proposition that one should not control for state trends) yields statistically significant evidence for only one crime – suggesting that RTC laws increase the rate of murder at the .05 significance level. It will be worth exploring whether other methodological approaches and/or additional years of data will confirm the results of this panel-data analysis and clarify some of the highly sensitive results and anomalies (such as the occasional estimates that RTC laws lead to higher rates of property crime) that have plagued this inquiry for over a decade.

You Call it ‘Self-Exuberance,’ I Call it ‘Bragging.’ Miscalibration in Predicted Emotional Responses to Self-Promotion

December 21, 2014 Comments off

You Call it ‘Self-Exuberance,’ I Call it ‘Bragging.’ Miscalibration in Predicted Emotional Responses to Self-Promotion
Source: Social Science Research Network

People engage in self-promotional behavior because they want others to hold favorable images of them. Self-promotion, however, entails a tradeoff between conveying one’s positive attributes and being seen as arrogant and bragging. We propose that people get this tradeoff wrong because they erroneously project their own feelings onto their interaction partners. As a consequence, people overestimate the extent to which recipients of their self-promotion will feel proud of and happy for them, and underestimate the extent to which recipients will feel annoyed (Experiment 1 and 2). Because people tend to self-promote excessively when trying to make a favorable impression on others, such efforts often backfire, causing targets of the self-promotion to view the self-promoter as less likeable and as a braggart (Experiment 3).

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions

December 12, 2014 Comments off

Finance and Social Responsibility in the Informal Economy: Institutional Voids, Globalization and Microfinance Institutions
Source: Social Science Research Network

We examine the heterogeneous effects of globalization on the interest rate setting by microfinance institutions (MFIs) around the world. We consider MFIs as a mechanism to overcome the institutional void of credit for small entrepreneurs in developing and emerging economies. Using a large global panel of MFIs from 119 countries, we find that social globalization that embraces egalitarian institutions on average reduces MFIs’ interest rates. In contrast, economic globalization that embraces neoliberal institutions on average increases MFIs’ interest rates. Moreover, the proportions of female borrowers and of poorer borrowers negatively moderate the relationship between social globalization and MFI interest rate, and positively moderate the relationship between economic globalization and MFI interest rate. This paper contributes to understanding how globalization processes can both ameliorate and exacerbate challenges of institutional voids in emerging and developing economies.

UK — Financial Literacy and Over-Indebtedness in Low-Income Households

December 5, 2014 Comments off

Financial Literacy and Over-Indebtedness in Low-Income Households
Source: Social Science Research Network

Households in Northern Ireland have an increased risk of financial vulnerability compared to the UK as a whole. Financial literacy can explain a significant proportion of wealth inequality. Among the key components of financial literacy are financial numeracy and money management skills. Our study examines the relative importance of these components in the determination of consumer debt and household net worth among credit union members in socially disadvantaged areas. The main finding from our analysis is that money management skills are important determinants of consumer debt behaviour and household net worth but that financial numeracy has almost no role to play. These findings are found to be robust when the sample is reduced to only those who have a clear role in household financial decision-making and also when controlling for potential endogeneity. These results indicate that credit unions could structure an effective programme targeted at those in financial difficulties by promoting awareness of their financial situation, by encouraging them to manage bills more effectively and by improving budgeting skills. Our findings have policy implications throughout the UK where the role of credit unions in providing financial services to the socially disadvantaged is being strongly promoted by the government and the Church of England.

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