New Economics Papers
on Law and Economics
Issue of 2005‒03‒20
five papers chosen by
Jeong-Joon Lee, Towson University

  1. Special Purpose Vehicles and Securitization By Gary Gorton; Nicholas Souleles
  2. Testing, Crime and Punishment By David N. Figlio
  3. Optimal Auditing Standards By Giovanni Immordino; Marco Pagano

  1. By: Gary Gorton; Nicholas Souleles
    Abstract: Firms can finance themselves on- or off-balance sheet. Off-balance sheet financing involves transferring assets to "special purpose vehicles" (SPVs), following accounting and regulatory rules that circumscribe relations between the sponsoring firm and the SPVs. SPVs are carefully designed to avoid bankruptcy. If the firm's bankruptcy costs are high, off-balance sheet financing can be advantageous, especially for sponsoring firms that are risky. In a repeated SPV game, firms can "commit" to subsidize or "bail out" their SPVs when the SPV would otherwise not honor its debt commitments. Investors in SPVs know that, despite legal and accounting restrictions to the contrary, SPV sponsors can bail out their SPVs if there is the need. We find evidence consistent with these predictions using data on credit card securitizations.
    JEL: G3 G2 E5 K2
    Date: 2005–03
  2. By: David N. Figlio
    Abstract: The recent passage of the No Child Left Behind Act of 2001 solidified a national trend toward increased student testing for the purpose of evaluating public schools. This new environment for schools provides strong incentives for schools to alter the ways in which they deliver educational services. This paper investigates whether schools may employ discipline for misbehavior as a tool to bolster aggregate test performance. To do so, this paper utilizes an extraordinary dataset constructed from the school district administrative records of a subset of the school districts in Florida during the four years surrounding the introduction of a high-stakes testing regime. It compare the suspensions of students involved in each of the 41,803 incidents in which two students were suspended and where prior year test scores for both students are observed. While schools always tend to assign harsher punishments to low-performing students than to high-performing students throughout the year, this gap grows substantially during the testing window. Moreover, this testing window-related gap is only observed for students in testing grades. In summary, schools apparent act on the incentive to re-shape the testing pool through selective discipline in response to accountability pressures.
    JEL: I2
    Date: 2005–03
  3. By: Giovanni Immordino (Università di Salerno and CSEF); Marco Pagano (Università di Napoli "Federico II", CSEF and CEPR)
    Abstract: We study regulation of the auditing profession in a model where audit quality is unobservable and enforcing regulation is costly. The optimal audit standard falls short of the first-best audit quality, and is increasing in the economy’s wealth, in the riskiness of firms and in the amount of funding they seek. The model can encompass collusion between clients and auditors, arising from the joint provision of auditing and consulting services: deflecting collusion requires less ambitious standards. The optimal audit standard depends also on the corporate governance of client firms: audit standards and corporate governance are complements. Finally, banning the provision of consulting services by auditors eliminates collusion but may not be optimal in the presence of economies of scope.
    Keywords: Auditing standards, enforcement, opinion shopping.
    JEL: G28 K22 M42
    Date: 2005–03–01
  4. By: Timothy L. Fort; Cindy A. Schipani
    Abstract: Research reported by Thomas Homer-Dixon characterizes five social effects that can significantly increase the likelihood of violence in the emerging world, effects that are far deeper than can be controlled by security forces: (1) constrained agricultural production, often in ecologically marginal regions; (2) constrained economic productivity, mainly affecting people who are highly dependent on environmental resources and who are ecologically and economically marginal; (3) migration of these affected people in search of better lives; (4) greater segmentation of society, usually along existing ethnic cleavages; and (5) disruption of institutions, especially the state.1 These kinds of social effects create tensions that can erupt in violent expression. It is difficult to envision how additional security forces will solve the embedded social problems that link violence with economic, social, ethnic, and even religious frustrations. This manuscript seeks to address these concerns. Part I elaborates ways in which these issues of violence manifest themselves in a globalized economy. Part II discusses the business implications of these tensions and suggests a way in which business can be a mediating actor to lessen these tensions. Part III concludes with a suggestion for a recharacterization of the corporation in a way to sensitize it to the ecological-mindedness necessary to address the potential issues of violence in societies. We propose sustainable peace as an aim to which businesses should orient their actions both for reasons of the good of avoiding the activities that contribute to the spilling of blood as well as for the good of sustainable economic enterprises, which are fostered by stable, peaceful relationships. Thus, business must do what it does best and address economic development, even in terms of the extraction of natural resources. But it must also be attentive to the rights of others, to the development of community and meaning, and to stop violence when it is likely. Given the dangers ecological stresses pose for the planet, it is hard to think of a more compelling reason to reorient business behavior.
    Keywords: environmental law; peace; social responsibility; corporate governance
    JEL: K22 K23 M14
    Date: 2004–05–01
  5. By: John S. Earle; Klara Sabirianova Peter
    Abstract: We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer’s arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects for employees, employers, and local labor markets. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops – operating through worker quits, effort, strikes, and legal penalties – imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a “punctual payment equilibrium” and a “late payment equilibrium.” The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.
    Keywords: wage arrears, contract violation, neighborhood effect, social interactions, multiple equilibria, network externality, strategic complementarity, transition, Russia.
    JEL: A12 B52 J30 K42 L14 O17 P31 P37
    Date: 2004–07–01

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