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on Law and Economics |
| By: | Dhillon, Amrita; García-Fronti, Javier; Ghosal, Sayantan; Miller, Marcus |
| Abstract: | When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a supermajority of creditors accepted a swap implying a recovery rate of around 37 cents in the dollar. In this paper a bargaining approach is used to explain both the settlement and the delay. We conclude that the agreed swap broadly corresponds to a bargaining outcome where the Argentine government had 'first mover' advantage, and that a substantial delay occurred as negotiators seeking a sustainable settlement waited for economic recovery. Factors not explicit in the formal framework are also considered - heterogeneity of creditors, for example, and the role of third parties in promoting 'good faith' bargaining. |
| Keywords: | bargaining; debt restructuring; efficiency delay; sustainability |
| JEL: | C7 F3 F33 F34 K4 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5236&r=law |
| By: | Simon Loertscher; Gerd Muehlheusser |
| Abstract: | We consider Hotelling location games with global and local players. Global players are active in several markets, while local players act in a single market only. The decisive feature is that global players cannot tailor their product to each market but have to choose a location on the Hotelling line that is valid for all markets in which they are active. Obvious examples include the media industry and politics, where competitors typically compete in several markets with basically the same product. We determine equilibrium configurations for simple specifications of such games. We then show that the presence of \gp s\ tends to induce lower product diversity across markets. Finally, when the number of firms is endogenous, we show how \gp s\ may use their location choice as a preemptive device |
| Keywords: | Hotelling location games; spatial competition; multiple markets; product differentiation; diversity; preemption |
| JEL: | D45 K21 K23 L11 L51 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp0511&r=law |
| By: | Kugler, Maurice; Verdier, Thierry; Zenou, Yves |
| Abstract: | We analyse an oligopoly model in which differentiated criminal organisations globally compete on criminal activities and engage in local corruption to avoid punishment. When law enforcers are sufficiently well-paid, difficult to bribe and corruption detection highly probable, we show that increasing policing, or sanctions, effectively deters crime. However, when bribing costs are low, that is badly-paid and dishonest law enforcers work in a weak governance environment, and the rents from criminal activity relative to legal activity are sufficiently high, we find that increasing policing and sanctions can generate higher crime rates. In particular, the relationship between the traditional instruments of deterrence, namely intensification of policing and sanctions, and the crime rate is nonmonotonic. Beyond a threshold, further increases in intended expected punishment create incentives for organised crime extending corruption rings, and ensuing impunity results in a fall of actual expected punishment that yields more rather than less crime. JEL Classification: K42, L13, O17. |
| Keywords: | Intended deterrence, organised crime, weak governance, corruption. |
| Date: | 2004–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:stn:sotoec:0407&r=law |
| By: | Urs Schweizer (Department of Economics, University of Bonn, Adenauerallee 24, D-53113 Bonn, Germany) |
| Abstract: | This paper revisits the economic analysis of contract law for a setting of cooperative investments. While Che and Chung (1999) have shown that expectation damages perform rather poorly, the present paper argues that this negative result follows from their impicit assumption of unilateral expectation damages. Yet, the very nature of cooperative investments gives rise to the possibility that both parties may claim expectation damages. It is shown that such a regime of bilateral expectation damages provides the incentives for the first best solution even in a framework of binary choice where, for selfish investments, the traditional overreliance result would hold. |
| JEL: | K12 D62 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:10&r=law |
| By: | Jianpei Li (Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin, Spandauer Str. 1, 10099 Berlin, Germany); Elmar Wolfstetter (Institut für Wirtschaftstheorie I, Humboldt Universität zu Berlin, Spandauer Str. 1, 10099 Berlin, Germany) |
| Abstract: | We study a partnership that anticipates its possible dissolution. In our model, partnerships form in order to take advantage of complementary skills; although, new opportunities may arise that make partners' skills useless. We characterize the optimal, incentive compatible partnership contract that can be implemented by a simple call option, and then analyze the commonly used buy--sell provision. We show that this dissolution rule gives rise to inefficiency, either in the form of excessive dissolutions combined with underinvestment or efficient dissolutions combined with overinvestment. However, supplementing the buy--sell provision with the right to veto may restore efficiency. |
| JEL: | D82 C78 J12 K12 L24 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:12&r=law |
| By: | Matthias Kräkel (Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany) |
| Abstract: | Individuals who compete in a contest-like situation (for example, in sports, in promotion tournaments, or in an appointment contest) may have an incentive to illegally utilize resources in order to improve their relative positions. We analyze such doping within a tournament game between two heterogeneous players. Three major effects are identified which determine a player's doping decision — a cost effect, a likelihood effect and a windfall-profit effect. Moreover, we discuss whether the favorite or the underdog is more likely to be doped, the impact of doping on overall performance, the influence of increased heterogeneity on doping, the welfare implications of doping, and possible prevention of doping. |
| Keywords: | contest, doping, drugs, fraud in research, tournament. |
| JEL: | J3 K42 M5 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:46&r=law |
| By: | Ferdinand von Siemens (University of Munich, ferdinand.vonsiemens@lrz.uni-muenchen.de) |
| Abstract: | In the hold-up problem incomplete contracts cause the proceeds of relation-specific investments to be allocated by ex-post bargaining. The present paper investigates the efficiency of incomplete contracts if individuals have heterogeneous preferences implying heterogeneous bargaining behavior and - equally important - preferences are private information. As the sunk investment costs can thus potentially signal preferences, they can influence beliefs and consequently bargaining outcomes. The necessities of signalling are shown to generate very strong investment incentives. These incentives are based on the desire not to reveal information that is unfavorable in the ensuing bargaining. After finding all perfect Bayesian equilibria in pure strategies, the paper derives the necessary and sufficient conditions under which it is optimal to invest and trade efficiently. |
| Keywords: | Incomplete Contracts, Hold-Up, Fairness, Bargaining under Incomplete Information, Signalling |
| JEL: | C70 D23 D63 D82 J33 K12 L22 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:57&r=law |
| By: | Giuseppe Dari-Mattiacci; Gerrit de Geest |
| Abstract: | This study shows that the effects of judgment proofness on precaution depend on whether the injurer can reduce the probability of the accident, the magnitude of the harm, or both. Different legal solutions to the problem are examined: punitive damages, average compensation, undercompensation, accurate compensation and negligence. We find that when the injurer can only reduce the probability of the accident, negligence with average compensation is the best solution, but negligence with perfectly compensatory damages is the desirable solution if the injurer can only or also affect the magnitude of the harm. |
| Keywords: | insolvency, judgment proof, liability, bankruptcy |
| JEL: | K13 K32 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0316&r=law |
| By: | Giuseppe Dari-Mattiacci; Gerrit de Geest; Jacques Siegers |
| Abstract: | In this paper, we argue that, as an enforcement mechanism, efficiency wages are intrinsically inferior to damages and to conditional bonuses an alternative positive sanction system overlooked in the labor economics literature, under which rents are only paid if monitoring has effectively taken place (and the employee is not found shirking). While all three alternatives succeed in incentivizing agents and satisfy the participation constraint of non-shirking employees, damages (and negative sanctions in general) do so at lower costs because they do not require the payment of any rents. Of the two positive sanction systems, conditional bonuses are less expensive than efficiency wages because the latter also pay rents when no monitoring has taken place and may allow employees who are found shirking to keep some rents. Moreover, we find that monitoring levels are inefficiently low under efficiency wages. While efficiency wages (if they are completely non-retroactive) remove the employer's incentive to falsely sanction the employee, they solve this appropriation problem in a less rational way than some decoupling mechanisms that can be used under damages and conditional bonus regimes. Therefore, it seems extremely unlikely that employers would ever opt for efficiency wages on such a massive scale that structural unemployment would result, as Shapiro and Stiglitz (1984) suggested. |
| Keywords: | contract remedies, carrots, corruption, structural unemployment, decoupling. |
| JEL: | J41 K12 K14 K31 |
| Date: | 2004–04 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0415&r=law |
| By: | Giuseppe Dari-Mattiacci; Gerrit de Geest |
| Abstract: | Sharing rules have a filtering effect on violations: they prevent the most harmful violations and let the least harmful ones occur. We show under what conditions the filtering effect improves social welfare and argue that this may explain why, in most areas of the law, sharing rules are, in general, preferred to rules that entirely burden one party. Our analysis applies to comparative negligence, communal liability, the allocation of police investigation efforts, contract remedies for non-verifiable breaches such as those that may occur in marriage and employment contracts, and to the distribution of shares in partnerships. |
| Keywords: | comparative negligence, law enforcement, divorce, employment contracts, theory of the firm. |
| JEL: | K13 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0417&r=law |
| By: | Giuseppe Dari-Mattiacci; Gerrit de Geest |
| Abstract: | This article identifies the conditions under which potentially insolvent injurers overinvest in precaution. We show that this may happen only with respect to precautionary measures that reduce the probability of the accident. No such result occurs if precaution only reduces the magnitude of the harm. Contrary to the literature, we find that over-precaution may also occur when precaution is nonmonetary. The reason being is that over-precaution can not only be due to the implicit precaution-subsidy effect (the fact that care-taking reduces the injurer's exposure to liability when precaution is monetary) but also to a substitution effect between precaution that reduces the probability of accidents and precaution that reduces the magnitude of the harm. Finally, we find that when the injurer's wealth is sufficiently low, precautions may actually be lower when they are monetary than when they are non-monetary, despite the implicit precaution subsidy in the former case. |
| Keywords: | insolvency, judgement, liability, bankruptcy, over precaution |
| JEL: | K13 K32 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0427&r=law |
| By: | Gerrit de Geest; Giuseppe Dari-Mattiacci |
| Abstract: | Judges have a tendency to be more demanding than regulators. In the United States, a majority of the courts has adopted the rule that the unexcused violation of a statutory standard is negligence per se. However, the converse does not hold: compliance with regulation does not relieve the injurer of tort liability. In most European legal systems, the outcome is similar. We use a framework in which, on the one hand, the effects of tort law are undermined by insolvency and evidence problems and, on the other hand, regulation is expensive in terms of monitoring and information gathering. We show that a regulatory standard set below the socially optimal level of care can be sufficient to remove the shortcomings of tort law. In essence, this is because the injurer's cost function may have two local minima that make only major deviations from the socially desirable level of precaution advantageous for the injurer, but not minor violations. This may occur when precaution also or only reduces the magnitude of the harm and under liability for negligence. Thus, minimum regulation can completely restore optimal liability incentives. Conversely, liability reduces the cost of enforcing regulation in two ways: first, enforcing minimum regulation rather than a standard set at the socially optimal level is cheaper because it requires lower monitoring levels; second, tort liability already provides a part of the sanction for sub-optimal behavior, thus allowing for a further reduction in monitoring. Moreover, we show that minimum regulation does not need to be set at a very precise level. On the contrary, any level within a certain range is socially optimal. This allows regulators to further curb their cost by saving on information gathering. We show that an imperfectly working tort system can be fully corrected by minimum regulation in a variety of circumstances (for instance, even if the injurer is unable to compensate for the harm at the optimal level of precaution, and even if the rule in force is strict liability or a cause-in-fact variant of negligence). |
| Keywords: | insolvency, judgment proof problem, disappearing defendant, bankruptcy, regulation |
| JEL: | K13 K32 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0506&r=law |
| By: | Marc Goergen; Marina Martynova; Luc Renneboog |
| Abstract: | This paper contributes to the research on corporate governance by predicting the effects of European takeover regulation. In particular, we investigate whether the recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations. With the help of 150 corporate governance lawyers from 30 European countries, we collected the main changes in takeover regulation. We assess whether a process of convergence towards the Anglo-(American) corporate governance system has been started and we find that this is the case. We make predictions as to the consequences of the reforms for the ownership and control. However, we find that, while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the blockholder-based system. |
| Keywords: | takeover regulation, mergers and acquisitions, corporate governance, ownership and control, governance regulation, convergence. |
| JEL: | G3 G34 G38 K2 K22 K40 G32 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0519&r=law |