New Economics Papers
on Law and Economics
Issue of 2004‒12‒20
nine papers chosen by
Jeong-Joon Lee, Towson University

  1. Playing It Safe with Low Conditional Fees versus Being Insured by High Contingent Fees By Winand Emons
  2. Punishing the Innocent along with the Guilty: The Economics of Individual versus Group Punishment By Thomas J. Miceli; Kathleen Segerson
  3. Secrecy and Safety By Andrew F. Daughety; Jennifer F. Reinganum
  4. A contest with the taxman - The impact of tax rates on tax evasion and wastefully invested resources By Ralph C Bayer
  5. Markets, Torts and Social Inefficiency By Andrew F. Daughety; Jennifer F. Reinganum
  6. The Holdout Problem and Urban Sprawl By Thomas J. Miceli; C. F. Sirmans
  7. Manufacturer Liability for Harms Caused by Consumers to Others By Bruce Hay; Kathryn E. Spier
  8. The excess burden of tax evasion - An experimental detection- concealment contest By Ralph C Bayer; Matthias Sutter
  9. A Simple Theory of Increasing Penalties for Repeat Offenders By Thomas J. Miceli; Catherine Bucci

  1. By: Winand Emons
    Abstract: Under contingent fees the attorney gets a share of the judgment; under conditional fees he gets an upscale premium if the case is won which is, however, unrelated to the adjudicated amount. We compare conditional and contingent fees in a framework where lawyers choose between a safe and a risky litigation strategy. Under conditional fees lawyers prefer the safe strategy, under contingent fess the risky one. Risk-averse plaintiffs prefer conditional fees over contingent fees when lawyering costs are low and vice versa for high lawyering costs
    Keywords: contingent fees; conditional fees; risk aversion; insurance; incentives
    JEL: D82 K1
    Date: 2004–12
  2. By: Thomas J. Miceli (University of Connecticut); Kathleen Segerson (University of Connecticut)
    Abstract: Standard models of law enforcement involve the apprehension and punishment of a single suspect, but in many contexts, punishment is actually imposed on an entire group known to contain the offender. The advantages of .group punishment. are that the offender is punished with certainty and detection costs are saved. The disadvantage is that innocent individuals are punished. We compare individual and group punishment when social welfare depends on fairness, and when it depends on deterrence. We show that group punishment may dominate in the former case if the detection technology is ineffective but never in the latter case. We discuss our results in the context of several examples.
    Keywords: Group punishment, Law enforcement
    JEL: K14 K42
    Date: 2004–10
  3. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: We employ a simple two-period model to show that the use of confidential settlement as a strategy for a firm facing tort litigation leads to lower average product safety than that which would be produced if a firm were committed to openness. Moreover, confidentiality can even lead to declining average product safety over time. We also show that a rational risk-neutral consumer's response to a market environment, wherein a firm engages in confidential settlement agreements, may be to reduce demand. We discuss how firm profitability is influenced by the decision to have open or confidential settlements; all else equal, a firm following a policy of openness will pay higher equilibrium wages and incur higher training costs, though product demand will not be diminished (as it may be for a firm employing confidentiality). Further, we characterize the choice of regime, providing conditions such that, if the cost of credible auditing (to verify openness) is low enough, a firm will choose to pay for auditing and eschew confidentiality.
    Keywords: confidential settlement, product safety
    JEL: K13 L15
    Date: 2003–08
  4. By: Ralph C Bayer (University of Adelaide)
    Abstract: We develop a moral hazard model with auditing where both the principal and the agent can influence the probability that the true state of nature is verified. This setting is widely applicable for situations where fraudulent reporting with costly state verification takes place. However, we use the framework to investigate tax evasion. We model tax evasion as a concealment-detection contest between the taxpayer and the authority. We show that higher tax rates cause more evasion and increase the resources wasted in the contest. Additionally, we …nd conditions under which a government should enforce incentive compatible auditing in order to reduce wasted resources.
    Keywords: Tax Evasion, Auditing Rules, Contest, Moral Hazard
    JEL: H26 D82 K42
    Date: 2004–12–14
  5. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: In this paper we examine the nexus between product markets and the legal system. We examine a model wherein oligopolists produce differentiated products that also have a safety attribute. Consumption of these products may lead to harm (to consumers and/or third parties), lawsuits, and compensation, either via settlement or trial. Firm-level costs reflect both R&D and production activities, as well as liability-related costs. Compensation is incomplete, both because of inefficiencies in the bargaining process and (possibly) because of statutorily-established limits on awards. We compare the market equilibrium safety effort and output levels to what a planner would choose. We consider two planners, one of whom is able to set safety standards, but takes the market equilibrium output as given, and one of whom can control both safety effort and output. We argue that the former type of planner is the better representative of what the tort system might do if faced with deciding upon a safety effort standard. We examine two measures of competitiveness: the number of firms, and the degree of substitutability of the products. Holding substitutability constant, an increase in the number of firms always reduces equilibrium safety effort. On the other hand, holding the number of firms constant, increasing substitutability first decreases, but ultimately increases, the equilibrium safety effort. Non-cooperative firms under-provide safety effort (relative to the restricted social planner¼s preferred level) when the products are relatively poor substitutes. However, when the products are sufficiently good substitutes, the non-cooperative firms over-provide safety effort. Moreover, the more firms there are in the industry, the less substitutable their products need to be in order for the equilibrium to result in over-provision of safety effort. Under-provision of safety becomes more typical as the rate of third-party exposure increases or as the amount of third-party uncompensated losses increases. Finally, we use the settlement subgame to examine the effects of alternative tort reform policies on the equilibrium provision of safety and welfare. In the presence of third-party victims, welfare can be increased even though changes in such policies may increase expected trial costs.
    Keywords: Liability, oligopoly, safety, social optimality, torts
    JEL: D4 K0 L1
    Date: 2003–04
  6. By: Thomas J. Miceli (University of Connecticut); C. F. Sirmans (University of Connecticut)
    Abstract: Developers attempting land assembly often face a potential holdout problem that raises the cost of development. To minimize this extra cost, developers will prefer land whose ownership is less dispersed. This creates a bias toward development at the urban fringe where average lot sizes are larger, resulting in urban sprawl. This paper examines the link between the holdout problem and urban sprawl and discusses possible remedies.
    Keywords: Urban sprawl, holdout problem, urban renewal, public use
    JEL: K11 R14 R52
    Date: 2004–11
  7. By: Bruce Hay; Kathryn E. Spier
    Abstract: Should the manufacturer of a product be held legally responsible when a consumer, while using the product, harms someone else? We show that if consumers have deep pockets then manufacturer liability is not economically efficient. It is more efficient for the consumers themselves to bear responsibility for the harms that they cause. If homogeneous consumers have limited assets, then the most efficient rule is "residual-manufacturer liability" where the manufacturer pays the shortfall in damages not paid by the consumer. Residual-manufacturer liability distorts the market quantity when consumers' willingness to pay is correlated with their propensity to cause harm. It distorts product safety when consumers differ in their wealth levels. In both cases, consumer-only liability may be more efficient.
    JEL: K13 D62
    Date: 2004–12
  8. By: Ralph C Bayer (University of Adelaide); Matthias Sutter (Max Planck Institute for Research into Economic Systems & University of Innsbruck)
    Abstract: We present an experimental study on the wasted resources associated with tax evasion. This waste arises from taxpayers and tax authorities investing costly effort in the concealment and detection of tax evasion. We show that these socially inefficient efforts - as well as the frequency of tax evasion - depend positively on the prevailing tax rate, but not on the fine which is imposed in the event of detected tax evasion. Tax evasion is less frequent, though, than a model with risk neutral taxpayers predicts. We find evidence that this is due to individual moral constraints rather than to risk aversion.
    Keywords: tax evasion, contest, experiment, tax rates, fines
    JEL: H26 K42 C91
    Date: 2004–12–14
  9. By: Thomas J. Miceli (University of Connecticut); Catherine Bucci
    Abstract: A feature of many penal codes is that punishments are more severe for repeat offenders, yet economic models have had a hard time providing a theoretical justification for this practice. This paper offers an explanation based on the wage penalty suffered by individuals convicted of crime. While this penalty probably deters some first-timers from committing crimes, it actually hampers deterrence of repeat offenders because of their diminished employments opportunities. We show that in this setting, an escalating penalty scheme is optimal and time consistent.
    Keywords: Criminal enforcement, repeat offenders
    JEL: K14 K42
    Date: 2004–11

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