New Economics Papers
on Law and Economics
Issue of 2005‒07‒18
five papers chosen by
Jeong-Joon Lee, Towson University

  1. The Basel II Accord: Internal Ratings and Bank Differentiation By Eberhard Feess; Ulrich Hege
  2. On the Use of Racial Profiling as a Law Enforcement Tool By Bunzel, Helle; Marcoul, Philippe
  3. Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments By Michael Greenstone; Paul Oyer; Annette Vissing-Jorgensen
  4. Crime, Punishment, and Myopia By David S. Lee; Justin McCrary
  5. Execution Moratoriums, Commutations and Deterrence: The Case of Illinois By Dale Cloninger; Roberto Marchesini

  1. By: Eberhard Feess (Aachen University (RWTH), Dept. of Economics, Templergraben 64, D-52056 Aachen); Ulrich Hege (HEC School of Management, Department of Finance and Economics, F-78351 Jouy-en-Josas Cedex, France)
    Abstract: The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks’ inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems.
    Keywords: Basel II Accord, risk-based capital, internal ratings based approach, bank capital, bank competition, risk-taking
    JEL: K13 H41
    Date: 2004–01–25
  2. By: Bunzel, Helle; Marcoul, Philippe
    Abstract: The “End Racial Profiling Act of 2001” (ERPA) states that “no law enforcement agent or law enforcement agency shall engage in racial profiling” and mandates states to “collect detailed data on stops, searches, seizures, and arrests.” We develop a stylized dynamic model of highway policing to study the long-run consequences of ERPA. In the model, color-neutral police officers receive incentives to arrest criminals, but face a per stop cost which increases when the racial mix of the interdicted differs from the racial composition of the population. Incarceration rates are defined to be racially “fair” if the racial composition of the prison and criminal population is identical. The model predicts that the long-term racial composition of the prison population may not be fair and that ERPA may increase fairness. Ceteris paribus, however, ERPA may lower efficiency (the number of criminals in jail). Finally, we characterize and compare the incentive schemes for crime fighting that a government would optimally set with and without ERPA.
    Date: 2005–07–14
  3. By: Michael Greenstone; Paul Oyer; Annette Vissing-Jorgensen
    Abstract: The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that OTC firms most impacted by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement that they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went it went into force, relative to unaffected listed firms and after adjustment for the standard four-factor model. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to more narrowly focus on the maximization of shareholder value.
    JEL: G28 G38 K22 L51 M41 M49 N22
    Date: 2005–07
  4. By: David S. Lee; Justin McCrary
    Abstract: Economic theory predicts that increasing the severity of punishments will deter criminal behavior by raising the expected price of committing crime. This implicit price can be substantially raised by making prison sentences longer, but only if offenders%u2019 discount rates are relatively low. We use a large sample of felony arrests to measure the deterrence effect of criminal sanctions. We exploit the fact that young offenders are legally treated as adults%u2014%u2014and face longer lengths of incarceration%u2014%u2014the day they turn 18. Sufficiently patient individuals should therefore significantly lower their offending rates immediately upon turning 18. The small behavioral responses that we estimate suggest that potential offenders are extremely impatient, myopic, or both.
    JEL: D9 K4
    Date: 2005–07
  5. By: Dale Cloninger (U. Houston-Clear Lake); Roberto Marchesini (U. Houston-Clear Lake)
    Abstract: In an earlier work we examined the impact of an execution moratorium in Texas on the monthly returns (first differences) of homicides. That moratorium was judicially imposed pending the appeal of a death sentence that could have had wide spread consequences. We apply similar methodology to the state of Illinois. In January 2000, the Governor of Illinois declared a moratorium on executions pending a review of the judicial process that condemned certain murderers to the death penalty. In January 2003 just prior to leaving office, the Governor commuted the death sentences of all of those who then occupied death row. We find that these actions are coincident with the increased risk of homicide incurred by the residents of Illinois over the 48 month post event period for which data were available. These findings are consistent with the deterrence hypothesis.
    Keywords: Execution; deterrence; capital punishment; moratorium; death penalty
    JEL: K
    Date: 2005–07–14

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