Jaké reformy a proč (202) Wawrosz: Transf. Price

26. srpen 2014 | 08.00 |

Následující příspěvk byl připraven na mezinárodní konferenci v Turíně a byl zde též přednesen. Obsahuje několik nových prvků oproti materiálům, které byly doposud v rámci diskuse zaměřené na přípravu pracovní části 17. ročníku konference Lidský capital a investice do vzdělání předneseny. Uveřejňuji jej na několik pokračování. Toto je třetí z nich:

Transferred price and the sector of productive services as the key preconditions to smart, sustainable, and inclusive growth III.

Petr Wawrosz, Radim Valenčík

5. The essence of transferred price

In case it is possible to attain sustainable, inclusive, and smart growth through the sector of productive services, it is worth asking why such growth is not taking place. To answer this question, we will formulate a thesis that the transition to the economy of productive services requires the involvement of entities operating within the sector of productive services to ensure that their clients truly acquire, develop, preserve, and apply their human capital and that other clients have sufficient income and utility from such capital. In case an entity operating within the sector of productive services is motivated to develop its clients' capabilities to ensure that they maximize their income or utility, this sector will develop and may actually become the dominant economic sector. Therefore, we call for the creation of feedback between the effects of productive services and the financing of entities that provide the productive services.

Investments aimed at acquiring, developing, or preserving human capital meet the general characteristics of investments in many parameters. The given entity invests in the capital, because it assumes the given investment will generate returns. Some entities may have budget constraints – i.e. they may not have sufficient funds for the given investment. In such case, they may look for someone willing to lend funds to them to cover the investment. As already noted by Friedman (1955 and 1962), a lender that provides funds to a borrower for investments in human capital is disadvantaged compared to a lender that provides funds to a borrower for investments in physical capital. Physical capital may be pledged in favor of the lender – i.e. in case an investment in such capital fails, the lender may recover at least some of the loan by selling or using the physical capital. Human capital cannot be pledged. From this perspective, investments in human capital are riskier than investments in physical capital; the guarantee of recovering an investment is lower. It may easily happen that a person with low budget constraints is unable to convince any lender about the profitability of his investment and will fail to acquire a loan. If his investment could have been successful, then not only the given person incurs a loss, losses are also incurred by the lenders, he could not convince, as well as by the entire society, because he cannot contribute with activities he would have been able to perform as a result of acquiring, developing, or preserving human capital.

Economic theory (e.g. Friedman 1962; Palacios Lleras 2004) proposed a solution to the given problem in the form of human capital contracts that mainly relate to investments in education. A Human Capital Contract (HCC) is a voluntary private contract between a student and an investor in which the student commits part of his future earnings to an investor for a fixed period of time in exchange for capital to finance his education. The main parameters for producing an HCC are the percentage of income and the repayment period. Because of its voluntary nature it works best when market forces determine the contract parameters. The advantages of an HCC are that it decreases the risk of the investment for students by adjusting the payments they will have to make according to the amount they earn after completing their education. If a student's investment in education does not result in higher earnings afterwards, the payments required for financing the education are small. Conversely, if a student can earn a higher income after his education, the payments are much higher. On average, those students who can pay, because of the higher earnings they obtain as a result of their education, cover the costs of those who do not obtain higher earnings.

The significant characteristic of HCC is the fact that the contract uses the transferred price principle. The principle[5] means that:

1. A lender provides funds to a borrower today as an investment in acquiring, developing, applying, and preserving the borrower's human and social capital.

2. The borrower only makes payments from the earnings generated from the funds provided by the lender and invested in a defined manner.

3. The borrower makes payments based on the amount generated from the funds provided by the lender.

4. The borrower makes payments directly to the person that provided the given funds (i.e. to the lender).

Briefly speaking, the borrower pays to the lender using his future earnings. It is a type of contract, which transfers the future earnings into the present – hence the name "transferred price”. The basic contract parameters are set down today; the given amount to be paid is transferred from the future. The borrower's payments to the lender take place in the future - provided the contract terms are met, i.e. the funds invested by the borrower in human and social capital actually start to generate such earnings for the borrower that he is able to repay his liabilities. Therefore, the borrower's payment to the lender depends on the borrower's future earnings. In case the borrower's earnings are too low, no payments are made. The amount of the earnings then determines the success of the borrower's investments in his human and social capital. The transferred price eliminates the borrower's budget constraints, making investments in human and social capital possible even for those entities that currently do not have sufficient funds. Moreover, the transferred price increases the number of entities that are involved in the borrower's success. It is no longer only the investor – currently acting as the borrower – but also his creditor. The creditor (lender) provided funds to the borrower and in case the borrower fails to repay such funds, the lender incurs a loss. In case an investor might, for various reasons (e.g. lack of information, his personal qualities, etc.), prefer investments in such structure of human and social capital that does not lead to successful investments, the lender shall also act as the borrower's corrector. Obviously, even the lender may be wrong. However, if there are several lenders or in case one lender has several borrowers, the pressure on the elimination of error further increases.

We must underline that the transferred price does not have to work solely in the area of investments in education, but in other areas as well – investments in health (e.g. with regard to medical, spa, and sports services), old-age security, etc. Therefore, we believe the transferred price principle is applicable in all situations where one person provides some goods and services (most frequently services) to another person, whereas the other person's earnings are, at least partially, determined by the quality of such services[6]. This is why we use the term "transferred price” and not "Human Capital Contract” throughout our paper. We believe that an HCC, i.e. contract relating to investments in human capital, is only one of the contracts where the transferred price principle may be applied. In other words, we believe the transferred price principle is a universal principal, whereas an HCC is a specific contract that utilizes such principle. The transferred price differs from a "regular” price to some extent, specifically:

-                      Transferred price has more parameters: amount of earnings, from which payments start – payment amount set as a percentage, repayment period;

-                      Transferred price does not have a primary nominal value – its nominal valuation may only be determined on capital markets, on a secondary basis;

-                      Transferred price amount is derived from the valuation of the effect of services associated with the acquisition of human capital on professional markets.

[5] We believe the transferred price principle is the most important part of the Human Capital Contract. This is why we given this principle such significant attention.

[6] The transferred price principle may be applied in purely commercial areas. For example, Valenčík (2014) mentions the compensation of tennis coaches from professional players, where the coaches' remuneration may be determined as a specific share from the players' earnings.

(Pokračování příspěvku zítra)

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