New Economics Papers
on Law and Economics
Issue of 2005‒01‒02
four papers chosen by
Jeong-Joon Lee, Towson University

  1. Quality of Institutions, Credit Markets and Bankruptcy By Christa Hainz
  2. Capital structure and managerial compensation : the effects of remuneration seniority By Calcagno,R.; Renneboog,L.D.R.
  3. Murky Waters: The Law and Economics of Salvaging Historic Shipwrecks By Paul Hallwood; Thomas J. Miceli
  4. The Network Economy and Models of the Employment Contract: Psychological, Economic and Legal By David Marsden

  1. By: Christa Hainz
    Abstract: The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.
    Keywords: credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking
    JEL: D82 G21 G33 K10
    Date: 2004
  2. By: Calcagno,R.; Renneboog,L.D.R. (Tilburg University, Center for Economic Research)
    Abstract: We show that the relative seniority of debt and managerial compensation has important implications on the design of remuneration contracts. Whereas the traditional literature assumes that debt is senior to remuneration, we show that this is frequently not the case according to bankruptcy regulation and as observed in practice. We theoretically show that including risky debt changes the incentive to provide the manager with stronger performance-related incentives ("contract substitution" effect). If managerial compensation has priority over the debt claims, higher leverage produces lower powerincentive schemes (lower bonuses) and a higher base salary. With junior compensation, we expect more emphasis on pay-for-performance incentives. The empirical findings are in line with the regime of remuneration seniority as the base salary is significantly higher and the performance bonus is lower in financially distressed firms.
    JEL: G32 G33 G34 K12
    Date: 2004
  3. By: Paul Hallwood (University of Connecticut); Thomas J. Miceli (University of Connecticut)
    Abstract: The salvage of historic shipwrecks involves a debate between salvors, who wish to maximize profit, and archeologists, who wish to preserve historical value. Traditionally, salvage of shipwrecks has been governed by admiralty law, but the Abandoned Shipwreck Act of 1987 transferred title of historically important wrecks in U.S. waters to the state in whose waters the wreck is found, thereby abrogating admiralty law. This paper examines incentives to locate and salvage historic wrecks under traditional admiralty law and proposes an efficient reward scheme. It then re-considers current U.S. and international law in light of the results.
    Keywords: Historic shipwrecks, Law of salvage, Admiralty law, Archeological value.
    JEL: K1 K33
    Date: 2004–12
  4. By: David Marsden
    Abstract: The emergence of the so-called ¿network economy¿ and the development of project-basedwork pose a fundamental challenge to established methods of regulating the employmentrelationship. There appears to be an unsatisfied demand for its greater use, especially amongemployers, and it is argued that this may be blocked by the lack of suitable contractual forms,such as those that have underpinned the established open-ended employment relationship.Project-based work seeks to retain some of the open-ended flexibility of the standardemployment relationship in relation to its task content but not its duration. The paper arguesthe success of the standard employment relationship owes much to the articulation of itspsychological, economic/incentive, and legal aspects. As yet, this appears to be lacking formore transient forms of relationship.
    Keywords: Network economy, Labor Contracting, Labor Law, Labor-Management Relations
    JEL: M55 K31 J44 J53
    Date: 2004–02

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