New Economics Papers
on Law and Economics
Issue of 2005‒06‒14
eleven papers chosen by
Jeong-Joon Lee, Towson University

  1. Playing it Safe with Low Conditional Fees versus Being Insured by High Contingent Fees By Emons, Winand
  2. Exclusive Dealing, Entry and Mergers By Fumagalli, Chiara; Motta, Massimo; Persson, Lars
  3. Legal, Actual and Desirable Independence: A Case Study of the Bank of Israel By Cukierman, Alex
  4. The Need for Institutional Changes in the Global Financial System: An Analytical Framework By Claessens, Stijn; Underhill, Geoffrey R D
  5. Firm Size and the Quality of Entreprenuers By Hvide, Hans K
  6. The 'Tampa' Effect. Australian Asylum Policy in International Perspective By Hatton, Timothy J.; Lim, Audrey
  7. The Role of Beliefs for the Sustainability of the Fiscal Constitution By Gerald Pech; Bernhard Neumaerker
  8. Consequences of the IPPC-directive’s BAT requirements for abatement costs and emissions By Jan Larsson and Kjetil Telle
  9. Reform of Building Regulation By Productivity Commission
  10. The Economic Costs of Corruption: A Survey and New Evidence By Axel Dreher; Thomas Herzfeld
  11. Rationality, Tort Reform and Contingent Valuation: A Classroom Experiment in Starting Point Bias By Victor Matheson

  1. By: Emons, Winand
    Abstract: Under contingent fees the attorney gets a share of the judgement; under conditional fees they get 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: conditional fees; contingent fees; incentives; insurance; risk aversion
    JEL: D82 K10
    Date: 2005–01
  2. By: Fumagalli, Chiara; Motta, Massimo; Persson, Lars
    Abstract: We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent’s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer’s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de novo entry would be socially optimal, and (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment on future prices they will increase welfare.
    Keywords: antitrust; entry deterrence; exclusive dealing; mergers
    JEL: K21 L10 L40
    Date: 2005–02
  3. By: Cukierman, Alex
    Abstract: This paper documents the evolution of the legal independence of the Bank of Israel since its creation in 1954 to present times, provides an international comparison, and assesses the changes in the actual independence of the Bank on a yearly basis following the 1985 stabilization of inflation. The data developed in the paper makes it possible to compare the evolution of actual and of legal independence after the 1985 stabilization and to compare the legal independence of the bank with that of other countries at different points in time. The paper also evaluates the level of legal independence embedded in the Levin’s committee recommendations for reform of the Bank of Israel law. The paper shows that various institutional changes have induced, since 1985, substantial changes in the actual independence of the bank without any legislative change. The paper also identifies domestic and international factors that stimulated those changes and evaluates the desirable level of independence for the future. In particular the paper evaluates the pros and the cons of assigning to the bank growth targets, in addition to inflation targets.
    Keywords: central banks; independence - legal and actual; Israel; monetary institutions and policy
    JEL: E40 E50 K40 P50
    Date: 2005–02
  4. By: Claessens, Stijn; Underhill, Geoffrey R D
    Abstract: The international financial system has been the subject of much debate following the financial crises of the 1990s. While many reforms have been proposed for and implemented by mostly developing countries, few changes have been made to the international financial system itself. Fundamentally, the design, institutions, and governance of the international system remain very similar to those of two decades ago. The major changes in global financial markets, financial services industries and economies during this period, however, have rendered the international financial system and its governance of out date. In this paper, we analyse the causes and consequences of the failure to reform. We highlight the forces driving the need for changes in the governance of the international financial system, in particular the combination of the global integration processes and the increased role of the private sector. We then provide insights into the desirable institutional structure for international financial decision-making, also as it relates to the legitimacy of the international system in the eyes of the public worldwide. We also discuss the (political economy) factors inhibiting reform. We conclude with suggestions for future research.
    Keywords: international financial arrangements; international financial institutions; international governance; legitimacy; political economy
    JEL: F33 F34 K33 N20 O19 P50
    Date: 2005–03
  5. By: Hvide, Hans K
    Abstract: Founders of new firms tend to be experienced workers pursuing opportunities related to their previous employment. The paper proposes a simple framework to study the interaction between individual workers’ entrepreneurship decision and established firms’ effort to keep their best workers and ideas. The main insights are twofold. First, taking the firm size as given, larger firms tend to have less fine-tuned wage setting and produce entrepreneurs of higher quality than smaller firms. Second, making firm size endogenous, stronger property rights protection makes the optimal firm size larger (and the average quality of entrepreneurs higher). I apply these ideas to entrepreneurs’ data from a Stanford MBA alumni survey and firm size data from the US software industry.
    Keywords: entrepreneurship; IPP; patents; private benefits; property rights; software; spin off; start up
    JEL: G39 J33 J41 J62 K00 L24 L25 M52 M54
    Date: 2005–03
  6. By: Hatton, Timothy J.; Lim, Audrey
    Abstract: Australia’s policies towards asylum seekers hit the headlines when it refused to admit those aboard the Tampa in September 2001. This tough stance and the raft of legislation that followed became known as Australia’s ‘Pacific Solution’. It was clearly intended to deter those who might otherwise arrive by sea or by air to claim asylum in Australia. Several other countries toughened their policies after September the 11th 2001. This paper examines the effects of those policies on the subsequent streams of asylum applications by estimating the effects from panel data using a differences-in-differences approach. We find that the post-Tampa effect for Australia was to cut asylum applications by more than half. In other countries such as New Zealand and the UK, negative policy effects are also found but they are somewhat weaker. We conclude that the deterrent effects of policy are greatest not only when tough policies are enforced but when they are also widely publicised.
    Keywords: asylum applications; asylum policy; migration
    JEL: F22 J61 K42
    Date: 2005–05
  7. By: Gerald Pech; Bernhard Neumaerker
    Abstract: Why does the government not defect from the constitution? This article focuses on the dynamic restraints the government faces under the rule of law: violations against unconstitutional laws are not punished under the constitution. If a violating government cannot commit itself never to reinstall the constitution enforcing an unconstitutional law becomes difficult. Citizens' expectations to go unpunished when not complying may be self-fulfilling. Deriving the equilibrium of a global game we show that this mechanism is effectively deterring a government from defecting from a constitutionally permissible tax rate.
    Keywords: tax evasion, global games, self-fulfilling expectations, dynamic policy restraints
    JEL: K42 H26 E61 D7
  8. By: Jan Larsson and Kjetil Telle (Statistics Norway)
    Abstract: The Integration Pollution and Prevention Control (IPPC) directive from the European Union implies that the regulatory emission caps should be set in accordance with each industry’s Best Available Techniques (BAT). The directive is under implementation in Norway, and it represents a refocus of the Norwegian environmental regulations away from economic efficiency towards a BAT principle. We examine the effect of this implementation with respect to expected emission reductions and increases in costs. Data Envelopment Analyses (DEA) is used to construct a frontier of all efficient plants. This provides us with two alternative interpretations of BAT. First, we assume that all the plants emit in accordance with the best practice technology, represented by the frontier, by reducing all inputs proportionally. Second, we assume that all plants emit in accordance with the best practice technology by reducing emissions only. Both interpretations reveal substantial potential for emission reductions. Further, abatement cost estimates indicate that considerable emission reductions can be achieved with low or no social costs, but that the implementation of BAT for all plants involves substantial costs.
    Keywords: IPPC; BAT; Emissions; Energy intensive industries; DEA; Technical efficiency; Frontier technology.
    JEL: D21 K23 K32 L61 L65 L73 Q48 R38
    Date: 2005–03
  9. By: Productivity Commission
    Abstract: The Productivity Commission's final research report, released December 2004, responds to a request by the Australian Government to examine the contribution that national reform of building regulation has made and further reform could make to the performance of the building and construction industry. The Commission found that the Australian Building Codes Board has made progress in reducing regulatory differences across jurisdictions and in basing the Building Code of Australia to performance-based requirements. However, there is scope for further reforms to enhance productivity and to benefit the broader community. The Commission recommends the Australian Government, as well as the State and Territory Governments, continue to be actively involved in reform of building regulation and to negotiate a new Intergovernmental Agreement. The agreement would clarify the objectives of building regulation reform; strengthen the commitment to national consistency; and also affirm the importance of a whole-of-government approach to building regulation.
    Keywords: Australia; Commissioned study; Australian Building Codes Board (ABCB); Building; Construction; Economics; Inter-Government Agreement; Policy; Reform; Regulation;
    JEL: A D K
    Date: 2005–06–06
  10. By: Axel Dreher (Thurgau Institute of Economics & University of Konstanz); Thomas Herzfeld (Department of Agricultural Economics, University of Kiel)
    Abstract: This paper reviews the empirical literature on the economic costs of corruption. Corruption affects economic growth, the level of GDP per capita, investment activity, international trade and price stability negatively. Additionally, it biases the composition of government expenditures. The second part of the paper estimates the effect of corruption on economic growth and GDP per capita as well as on six possible transmission channels. The results of this analysis allows to calculate the total effect of corruption: An increase of corruption by about one index point reduces GDP growth by 0.13 percentage points and GDP per capita by 425 US$.
    Keywords: Costs of Corruption, Survey, Empirical Evidence
    JEL: O1 K49 C39
    Date: 2005–06–02
  11. By: Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: This simple classroom experiment demonstrates the existence of starting point bias. Asked to place a dollar value on a non-market good such as the loss of a limb or the destruction of a wetland, students place a much smaller value on the loss if a small value is first suggested by the questioner while placing a significantly higher value on the loss when a large value is originally suggested. This experiment can be used in theory classes to demonstrate the limits of individual rationality or in applied classes in law or environmental economics in relation to tort reform or contingent valuation.
    Keywords: starting point bias, contingent valuation, tort reform, classroom experiment, experimental economics
    JEL: A2 C42 C91 K41 Q51
    Date: 2005–06

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