New Economics Papers
on Law and Economics
Issue of 2005‒07‒03
sixteen papers chosen by
Jeong-Joon Lee, Towson University

  1. The Collective Selling of Broadcasting Rights in Team Sports By Tina Heubeck
  3. Court Delay in Developing Countries with Special References to China By Qing-Yun Jiang
  4. Jurisdiction and Choice of Law in Economic Perspective By Katrin Lantermann; Hans-Bernd Schäfer
  5. Incentive Effects of State Liability for Wrongful Conviction on the Level of Crime By Vincy Fon; Hans-Bernd Schäfer
  6. Der "more economic approach" in der Wettbewerbspolitik By Dieter Schmidtchen
  7. Driving Forces Behind Informal Sanctions By Armin Falk; Ernst Fehr; Urs Fischbacher
  8. U.S. Border Enforcement and the Net Flow of Mexican Illegal Migration By Manuela Angelucci
  9. The Growth of Executive Pay By Lucian Bebchuk; Yaniv Grinstein
  10. Race to the top or bottom? Corporate governance, freedom of reincorporation and competition in law By Zsuzsanna Fluck; Colin Mayer
  11. Law and Behaviours in Social Dilemmas: Testing the Effect of Obligations on Cooperation By Roberto Galbiati; Pietro Vertova
  13. Does Crime Pay? A Classroom Demonstration of Monitoring and Enforcement By Lisa R. Anderson; Sarah L. Stafford
  14. Can Consumers Enforce Environmental Regulations? The Role of the Market in Hazardous Waste Compliance By Sarah L. Stafford
  15. The Economic Effects of Judicial Accountability - Some Preliminary Insights By Stefan Voigt
  16. Membership has its Privileges - On the Effects of Delegating Powers Internationally By Stefan Voigt

  1. By: Tina Heubeck (University of Hamburg, Germany)
    Abstract: This paper introduces the theory of complementarities to the selling of broadcasting rights in team sports in two ways. Firstly, from a legal point of view such rights should not be centrally sold by the league or the association in order to comply with antitrust law because the league as the only seller demands monopoly prices. However, the problem cannot be solved by simply prohibiting collective selling. Using a variation of Cournot's model we show that the price of a single game is higher if sold individually by the participating clubs compared to collective selling by the league. Secondly, as consumers regard games either as complements or as substitutes, demand for simultaneously played games is interdependent. We use the solutions employed in deciding about the pooling of patents to make a general suggestion.
    Keywords: sports, broadcasting rights, complementarities, antitrust law,
    JEL: D23 K21 L43 L13
  2. By: Maurizio Pontani (University of Siena)
    Abstract: The word "bankruptcy" derives from the Italian word bancarotta (= broken bench) that during the Middle Ages was used to indicate the typical sanction applied to bankrupt tradesmen or bankers - the bench breaking, i.e. the breaking of the tradesman/banker's money table. At its origin, thus, the word bankruptcy had a punitive meaning that has been preserved in continental Europe (for instance the words bancarotta, Bankrott and banqueroute still designate the criminal consequences of failure in Italy, Germany and France respectively), but it has been lost in the Anglo-American world, where bankruptcy presently indicates the default as such. This study focuses on criminal liability of directors and entrepreneurs for misconduct committed prior to bankruptcy in the US and Italy and tries to understand how the different regulation is likely to affect the economic agents' behavior. We show that the boundary between a firm's legal and illegal management appears more clear-cut in the US than in Italy, with positive effects on the economic behavior of entrepreneurs and managers.
    Keywords: Bankruptcy law, Criminal liability, Judicial discretion, Optimal risk taking,
  3. By: Qing-Yun Jiang
    Abstract: The judiciary in developing countries is troubled with various problems. Specifically, court delays, backlogs and uncertainty associated with unexpected outcomes have diminished the quality of justice and leads to loss of confidence of the general public in judiciary. Court delay is always coupled with impartiality, corruption and low quality of judgment, etc. The reform program needs to address the major causes of the deterioration in the quality of court services and address the root political, economic causes of an inefficient and inequitable judiciary and not simply deal with its symptoms. Like many other judiciaries in developing countries, court delay is also a problem facing the jurisdiction in Chinese courts, especially in appeal and retrial procedure. Based on empirical study, this paper will also illustrate the major causes of court delay as well as difficulties of law enforcement in Chinese jurisdiction. In particular, some special references are made to the retrial procedure and the roll of the Trial Committee in the course of jurisdiction, as well as accessibility to the courts.
    Keywords: jurisdiction, duration of the court, retrial, the Trial Committee, enforcement of judgments,
  4. By: Katrin Lantermann (Universität Hamburg, Fachbereich Rechtswissenschaften, Institut für Recht und Ökonomik); Hans-Bernd Schäfer (University of Hamburg, Germany)
    Abstract: This article looks at choice of law rules from an economic perspective . The aim is to understand whether particular choice of law norms are wealth creating or wealth destroying and which of different norms should be preferred from this point of view. In this article we do not try to understand the forces that generate and sustain particular choice of law rules. We restrict ourselves to an efficiency analysis of existing or proposed choice of law rules. In the first part of the paper we argue that a free choice of law should be granted, whenever the choice causes no third party effects. We show that this criterion would extend free choice beyond the present scope. Free menu choice of law increases the wealth of the parties and creates institutional competition. It should be extended to fields of the law other than contract and tort law. In the second part we proceed with choice of law rules if the choice leads to positive or negative third party effects. To take care of these effects mandatory choice rules are sometimes but not always necessary. Methodologically choice of law rules should be market-mimicking rules, which reflect the interests of a grand coalition of the parties and all third parties affected by the choice rule. In the third part of the paper we discuss existing rules for the choice of tort law and refer to the discussion on a draft proposal for a European Council regulation of the law applicable to non-contractual obligations . In the fourth part we discuss whether the German or the US approach of international comparative law is preferable from an economic perspective. The US approach gives more judicial discretion for the choice of law than the German approach. We argue that the choice of law rules should lead to precise and clear legal commands with escape clauses for the judiciary only in exceptional and obvious cases. As Guzman pointed out it is striking that choice of law scholars have paid virtually no attention on how choice of law rules affect individual behaviour. But any economic analysis has to focus on this aspect as otherwise the social consequences of legal norms remain unknown and consequently little can be said about whether the consequences of one rule are socially better than those of another rule.
  5. By: Vincy Fon (The George Washington University); Hans-Bernd Schäfer (University of Hamburg, Germany)
    Abstract: The criminal justice system is not infallible. This unfortunate but unavoidable fact has been known for some time. For many reasons, in spite of advocacy raised as early as 1913 by Borchard to offer compensation to those wrongfully convicted and later exonerated, currently in the United States only 15 states, the District of Columbia, and the federal government have laws for such compensation. Further, the compensation is fairly meager, and compensation is usually not granted if the alleged criminal pleaded guilty in cases involving confessions. Outside the United States, a different era seems to be on the horizon. In recent years, the scope of state liability has been expanding through membership in international organizations and through international treaties. In particular, the Council of Europe's Convention for the Protection of Human Rights and Fundamental Freedoms encourages compensation for anyone punished as a result of a wrongful conviction. Article 3 of Protocol 7, Compensation for Wrongful Conviction, states that: When a person has by a final decision been convicted of a criminal offence and when subsequently his conviction has been reversed, or he has been pardoned, on the ground that a new or newly discovered fact shows conclusively that there has been a miscarriage of justice, the person who has suffered punishment as a result of such conviction shall be compensated according to the law or the practice of the State concerned, unless it is proved that the non-disclosure of the unknown fact in time is wholly or partly attributable to him. Although this article lacks specifics, it clearly endorses compensation for the wrongfully convicted. People who are wrongfully convicted and later exonerated should be compensated for many reasons. The wrongfully accused typically incur huge legal expenses for defense. They lose their earning opportunities and their reputations while in prison, and they suffer psychological harm. It is just to compensate these victims -- society is responsible for rectifying its errors by helping these victims regain normal lives when they are released from prison. Following Borchard, scholars also raised the possibility of applying eminent domain principles to compensate those wrongfully convicted, making the case that takings are involved when these victims are incarcerated. Against this backdrop, our paper attempts to study the compensation problem in a different direction. We ask whether expanding the scope of state liability would improve the well-being of citizens after public wrongs occur. In particular, we propose that compensating the wrongfully convicted after exoneration could affect the aggregate level of crime. A model will be developed in which we first point out that the possibility of wrongful conviction, although it cannot be avoided, in fact increases the amount of crime committed as compared to the idealistic case of no erroneous conviction. Then the simple model is extended to show why state liability for wrongful conviction changes criminal behavior. We conclude that the net impact of the expansion of state liability is that the aggregate level of crime decreases.
  6. By: Dieter Schmidtchen (Universität des Saarlandes)
    Abstract: This article argues that it is time for antitrust policy to move beyond structural understandings of competition ("preserving competition") and into the realm of explicit welfare analysis. A "more economic approach" should reflect current economic thinking about competition, incentives and efficiency. Competition is defined in the paper as a process of creating and appropriating value (social surplus). Allocative, technical and innovative inefficiencies are viewed as fundamentally due to failures of capturing value. The paper argues that antitrust laws should recognize a defence for all private acts that restrain "competition" under the traditional antitrust analysis but advance total welfare. The proposed efficiency defense is, however, limited to intra-market second-best tradeoffs, i.e. tradeoffs involving market failures in the relevant market. The antitrust authorities should accept the defense if, first, the conduct will not substantially impair the ability of public or private actors subsequently to ameliorate the effects of the market failure; and if, second, there is no less restrictive alternative consistent with the antitrust laws that could achieve similar welfare gains. The paper also assesses the costs and benefits of implementing an intra-market second-best defense and argues that this approach provides better criteria for a workable antitrust policy than an antitrust standard based on protecting "competition".
    Keywords: more economic approach, second-best tradeoff, Williamson-tradeoff, "Post Chicago", antitrust policy, efficiency defense, property rights, transaction costs, perfect competition as full appropriation,
    JEL: L40
  7. By: Armin Falk (IZA Bonn and University of Bonn); Ernst Fehr (University of Zurich and IZA Bonn); Urs Fischbacher (University of Zurich)
    Abstract: This paper investigates the driving forces behind informal sanctions in cooperation games and the extent to which theories of fairness and reciprocity capture these forces. We find that cooperators’ punishment is almost exclusively targeted towards the defectors but the latter also impose a considerable amount of spiteful punishment on the cooperators. However, spiteful punishment vanishes if the punishers can no longer affect the payoff differences between themselves and the punished individual, whereas the cooperators even increase the resources devoted to punishment in this case. Our data also discriminate between different fairness principles. Fairness theories that are based on the assumption that players compare their own payoff to the group’s average or the group’s total payoff cannot explain the fact that cooperators target their punishment at the defectors. Fairness theories assuming that players aim to minimize payoff inequalities cannot explain the fact that cooperators punish defectors even if payoff inequalities cannot be reduced. Therefore, retaliation, i.e., the desire to harm those who committed unfair acts, seems to be the most important motive behind fairnessdriven informal sanctions.
    Keywords: sanctioning, cooperation, social norm, reciprocity, fairness, spitefulness
    JEL: A13 D63 D23 C92 K42
    Date: 2005–06
  8. By: Manuela Angelucci (University of Arizona and IZA Bonn)
    Abstract: This paper investigates the effect of U.S. border enforcement on the net flow of Mexican undocumented migration. It shows how this effect is theoretically ambiguous, given that increases in border controls deter prospective migrants from crossing the border illegally, but lengthen the duration of current illegal migrations. It then estimates the impact of enforcement on 1972-1993 migration net flows by merging aggregate enforcement data with micro data on potential and current illegal Mexican migrants. The econometric model accounts for the endogeneity of border controls using the Drug Enforcement Administration budget as an instrumental variable. Both the inflow and outflow of illegal Mexican migration are highly sensitive to changes in border enforcement. The estimates of the enforcement overall effect on illegal migration’s net flow range across different specifications, from a decline - about 35% of the size of the effect on the inflow - to an increase. Thus, they suggest that border enforcement may not be an effective means to reduce the level of the illegal alien population in the United States.
    Keywords: illegal migration, border enforcement, Mexico
    JEL: F22 J61 K42 O15
    Date: 2005–06
  9. By: Lucian Bebchuk; Yaniv Grinstein
    Abstract: This paper examines both empirically and theoretically the growth of U.S. executive pay during the period 1993-2003. During this period, pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation. The aggregate compensation paid by public companies to their top-five executives during the considered period added up to about $350 billion, and the ratio of this aggregate top-five compensation to the aggregate earnings of these firms increased from 5% in 1993-1995 to about 10% in 2001-2003. After presenting evidence about the growth of pay, we discuss alternative explanations for it. We examine how this growth could be explained under either the arm's length bargaining model of executive compensation or the managerial power model. Among other things, we discuss the relevance of the parallel rise in market capitalizations and in the use of equity-based compensation.
    JEL: D23 G32 G38 J33 J44 K22 M14
    Date: 2005–06
  10. By: Zsuzsanna Fluck; Colin Mayer
    Abstract: This paper investigates the governance structure choices of firms when there is competition between legal systems. We study the impact of the allocation of control over choice of governance and reincorporation on firms’ technologies and technological specialization of countries in the context of a model of the firm in which there are agency conflicts between shareholders and managers. We show that the allocation of control over firms’ reincorporation decisions determines the corporate governance choice ex ante and the outcome of the competition between legal regimes ex post. When managers have control over reincorporation then competitive deregulation and “runs to the bottom” ensue. When shareholders have partial or full control then there is diversity in governance structures. Runs to the bottom are not necessarily socially undesirable but they have a feedback effect on firms’ choices of technologies that may make the party in control worse off ex ante. We show that it is impossible for any country to achieve social welfare maximization of its existing and new enterprises. With competition between legal regimes, start-up and mature companies incorporate in different jurisdictions even when reincorporation is correctly anticipated.
    Date: 2005
  11. By: Roberto Galbiati; Pietro Vertova
    Abstract: Laws consist of two components: the ‘obligations’ they express and the ‘incentives’ designed to enforce them. In this paper we run a public good experiment to test whether or not obligations have any independent effect on cooperation in social dilemmas. The results show that, for given marginal incentives, different levels of minimum contribution required by obligation determine significantly different levels of average contributions. Moreover, unexpected changes in the minimum contribution set up by obligation have asymmetric dynamic effects on the levels of cooperation: a reduction does not alter the descending trend of cooperation, whereas an increase induces a temporary re-start in the average level of cooperation. Nonetheless, obligations per se cannot sustain cooperation over time.
    Keywords: Obligation, Incentives, Public Good Game, Experiments.
    JEL: K40 H26 C92 C91
    Date: 2005–04
  12. By: Jonathan Yoder (Washington State University)
    Abstract: Prescribed fire is a useful but risky method for reducing general wildfire risk and improving wildlife habitat, biodiversity, timber growth, and agricultural forage. In the past the fifteen years, laws is some states have been adopted to support the use of prescribed fire. This article examines the effect of liability law and common regulations on the incidence and severity of escaped prescribed fires in the United States from 1970 to 2002. Regression results show that stringent statutory liability law and regulation tends to reduce the number and severity of escaped prescribed fires on private land, but not on federal land where state liability law does not directly apply.
    Keywords: endogenous risk, prescribed fire economics, liability law
    JEL: K32 Q2
    Date: 2005–06–28
  13. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Sarah L. Stafford (Department of Economics, College of William and Mary)
    Abstract: This paper presents a classroom game in which students choose whether or not to comply with pollution regulations. By changing the level of monitoring and fines for noncompliance across periods, the game shows students how the probability and severity of enforcement affects incentives for compliance. The game can be adapted for settings other than environmental regulation and can be used in a variety of classes including regulation, law and economics, environmental economics, public economics, or the economics of crime. It can easily be conducted in a fifty-minute class period.
    Keywords: Classroom Experiment, Non-Compliance, Pollution
    JEL: A22 C90 K42
    Date: 2005–05–12
  14. By: Sarah L. Stafford (Department of Economics, College of William and Mary)
    Abstract: To assess the role that consumers can play in encouraging environmental compliance, we examine the U.S. hazardous waste management industry to determine (1) whether environmental performance affects consumer demand and (2) whether markets affect compliance behavior. We find that noncompliance does decrease demand, at least in the short-term. While we do not find any evidence that market size affects compliance, local competition does appear to increase compliance. However, as competition becomes less localized, it has a smaller, if any, effect. Finally, regardless of the pressures exerted by consumers to comply, commercial managers are more likely to violate than on-site managers.
    Keywords: : Commercial Environmentalism, Compliance, Enforcement, Hazardous Waste, Market Size, Competition
    JEL: Q28 K42 D21
    Date: 2005–06–28
  15. By: Stefan Voigt (Department of Economics, University of Kassel)
    Abstract: Judicial independence is not only a necessary condition for the impartiality of judges, it can also endanger it: judges that are independent could have incentives to remain uninformed, become lazy or even corrupt. It is therefore often argued that judicial independence and judicial accountability are competing ends. In this paper, it is, however, hypothesized that they are not necessarily competing ends but can be complementary means towards achieving impartiality and, in turn, the rule of law. It is further argued that judicial accountability can increase per capita income through various channels one of which is the reduction of corruption. First tests concerning the economic effects of JA are carried out drawing on the absence of corruption within the judiciary as well as data gathered by the U.S. State Department as proxies. On the basis of 75 countries, these proxies are highly significant for explaining differences in per capita income.
    Keywords: Judicial Independence, judicial accountability, rule of law, economic growth, corruption, constitutional political economy
    JEL: H11 K40 O40 P51
    Date: 2005–06
  16. By: Stefan Voigt (Department of Economics, University of Kassel)
    Abstract: This paper analyzes whether nation-state governments can increase their credibility by becoming members of international organizations. Credibility is an important asset because it determines the real interest rate and is expected to have an important impact on investment and growth. It is hypothesized that the degree of delegation to international organizations can improve the credibility of nation-state governments. This hypothesis is tested by introducing a new indicator. On the basis of 136 countries, various versions of an indicator of international delegation are highly significant for explaining variation in countries’ credibility. The effect of international delegation on credibility is particularly strong among the group of lower income countries (N=60).
    Keywords: Delegation of Competence, Credibility, Dilemma of the Strong State, International Organizations
    JEL: F02 F21 H11 K33 P26
    Date: 2005–06

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