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

  1. Free to Trust? Economic Freedom and Social Capital By Berggren, Niclas; Jordahl, Henrik
  2. Bank-Tax Conformity for Corporate Income: An Introduction to the Issues By Michelle Hanlon; Terry Shevlin
  3. Private Credit in 129 Countries By Simeon Djankov; Caralee McLiesh; Andrei Shleifer
  4. Using Hit Rates to Test for Racial Bias in Law Enforcement: Vehicle Searches in Wichita By Nicola Persico; Petra Todd
  5. Passenger Profiling, Imperfect Screening, and Airport Security By Nicola Persico; Petra Todd

  1. By: Berggren, Niclas (Ratio Institute); Jordahl, Henrik (Department of Economics)
    Abstract: We present new evidence on how generalized trust is formed. Unlike previous studies, we look at the explanatory power of economic institutions, we use newer data, we incorporate more countries, and we use instrumental variables to handle the causality problem. A central result is that legal structure and security of property rights (area 2 of the Economic Freedom Index) increase trust. The idea is that a market economy, building on voluntary transactions and interactions with both friends and strangers within the predictability provided by the rule of law, entails both incentives and mechanisms for trust to emerge between people.
    Keywords: social capital; trust; economic freedom; rule of law; property rights; legal system
    JEL: K42 O40 Z13
    Date: 2005–01–25
  2. By: Michelle Hanlon; Terry Shevlin
    Abstract: This paper discusses the issues surrounding the proposals to conform financial accounting income and taxable income. The two incomes diverged in the late 1990s with financial accounting income becoming increasingly greater than taxable income through the year 2000. While the cause of this divergence is not known for certain, many suspect that it is the result of earnings management for financial accounting and/or the tax sheltering of corporate income. Our paper outlines the potential costs and benefits of one of the proposed "fixes" to the divergence: the conforming of the two incomes into one measure. We review relevant research that sheds light on the issues surrounding conformity both in the U.S. as well as evidence from other countries that have more closely aligned book and taxable incomes. The extant empirical literature reveals that it is unlikely that conforming the incomes will reduce the amount of tax sheltering by corporations and that having only one measure of income will result in a loss of information to the capital markets.
    JEL: K34 M41 E62 G12
    Date: 2005–01
  3. By: Simeon Djankov; Caralee McLiesh; Andrei Shleifer
    Abstract: We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. We find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of private credit to GDP, but that the former is relatively more important in the richer countries. An analysis of legal reforms also shows that improvements in creditor rights and in information sharing precede faster credit growth. We also find that creditor rights are extremely stable over time, contrary to the convergence hypothesis. Finally, we find that legal origins are an important determinant of both creditor rights and information sharing institutions.
    JEL: G3 G32 K22
    Date: 2005–01
  4. By: Nicola Persico (Department of Economics, University of Pennsylvania); Petra Todd (Department of Economics, University of Pennsylvania)
    Abstract: This paper considers the use of outcomes-based tests for detecting racial bias in the context of police searches of motor vehicles. It shows that the test proposed in Knowles, Persico and Todd (2001) can also be applied in a more general environment where police officers are heterogenous in their tastes for discrimination and in their costs of search and motorists are heterogeneous in their benefits and costs from criminal behavior. We characterize the police and motorist decision problems in a game theoretic framework and establish properties of the equilibrium. We also extend of the model to the case where drivers’ characteristics are mutable in the sense that drivers can adapt some of their characteristics to reduce the probability of being monitored. After developing the theory that justifies the application of outcomes-based tests, we apply the tests to data on police searches of motor vehicles gathered by the Wichita Police department. The empirical findings are consistent with the notion that police in Wichita choose their search strategies to maximize successful searches, and not out of racial bias.
    Keywords: Racial Profiling, Crime, Police, Wichita
    JEL: J70 K42
    Date: 2005–01–12
  5. By: Nicola Persico (Department of Economics, University of Pennsylvania); Petra Todd (Department of Economics, University of Pennsylvania)
    Abstract: We present a theoretical model of airport searches. The model extends previous work in the area in that detection conditional on search is imperfect. The hit rates tests for racial bias developed in Knowles, Persico, and Todd (2001) is shown to apply even in the presence of imperfections in monitoring. We then study two channels for improving airport security: better targeting and better detection. We show that better targeting does not necessarily decrease the overall crime rate, although it will decrease crime in the group that is targeted. Improved detection rates unambiguously decrease crime. Group-specific improvements in detection do not necessarily increase the number of searches for those groups. The analysis is extended to allow for the possibility that criminal passengers disguise themselves as members of low-crime groups.
    Keywords: Racial Profiling, Crime, Police, Airport, Terrorism
    JEL: J70 K42
    Date: 2005–01–12

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