New Economics Papers
on Law and Economics
Issue of 2006‒02‒12
six papers chosen by
Jeong-Joon Lee, Towson University

  1. The Becker Paradox and Type I vs. Type II Errors in the Economics of Crime By Persson, Mats; Siven, Claes-Henric
  2. Dependent Forms of Self-employment in the UK: Identifying Workers on the Border between Employment and Self-employment By René Böheim; Ulrike Muehlberger
  3. Bureaucratic Rents and Life Satisfaction By Simon Luechinger; Stephan Meier; Alois Stutzer
  4. Trust on the Streets: A Natural Field Experiment on Newspaper Purchasing By Gerald Pruckner; Rupert Sausgruber
  5. Bankruptcy Law, Creditors’ Rights and Contractual Exchange in Europe, 1808-1914 By Jérôme Sgard
  6. Myths and Truths: The «Law and Finance Theory» Revisited By Michael Graff

  1. By: Persson, Mats (Institute for International Economic Studies, Stockholm University); Siven, Claes-Henric (Department of Economics)
    Abstract: Two real-world observations are not easily replicated in models of crime. First, although capital punishment is optimal in Becker’s (1968) model, it is rarely observed in the real world. Second, criminal procedure and the evaluation of evidence vary across societies and historical periods, the standard of proof being sometimes very high and sometimes quite low. In this paper, we develop a general equilibrium model of judicial procedure allowing for innocent persons being convicted. We show that the median voter theorem applies to this model, making judicial procedure endogenous. So formulated, the model can replicate both empirical observations.
    Keywords: Criminal law; Judicial error; Burden of proof
    JEL: K40
    Date: 2006–01–01
  2. By: René Böheim (Johannes Kepler University of Linz and IZA Bonn); Ulrike Muehlberger (Vienna University of Economics and B.A.)
    Abstract: We analyse the characteristics of workers who provide work on the basis of a civil or commercial contract, but who are dependent on or integrated into the firm for which they work. We argue that these dependent self-employed lose their rights under labour law, receive less favourable benefits from social security protection and are often beyond trade union representation and collective bargaining. Using data from the British Labour Force Survey we test two hypotheses: (1) Dependent self-employed workers are significantly different from both employees and (independent) self-employed individuals, thus forming a distinct group. (2) Dependent self-employed workers have lower labour market skills, less labour market attachment and, thus, less autonomy than self-employed workers. The data support our hypothesis that dependent self-employed workers are a distinct labour market group which differs from both employees and independent self-employed individuals. Men, older workers, those with low education and a low job tenure have greater odds of working in dependent self-employment than their counterparts. Our results suggest that dependent forms of self-employment are used by firms to increase labour flexibility.
    Keywords: self-employment, dependency, outsourcing
    JEL: K31 J21 L22
    Date: 2006–02
  3. By: Simon Luechinger (University of Zurich); Stephan Meier (Federal Reserve Bank of Boston); Alois Stutzer (University of Zurich and IZA Bonn)
    Abstract: The monopoly position of the public bureaucracy in providing public services allows government employees to acquire rents. Those rents can involve higher wages, monetary and non-monetary fringe benefits (e.g. pensions and staffing), and/or bribes. We propose a direct measure to capture the total of these rents: the difference in reported subjective wellbeing between bureaucrats and people working in the private sector. In a sample of 38 countries, we find large variations in the extent of rents in the public bureaucracy. The extent of rents is determined by differences in institutional constraints and correlates with perceptions of corruption. We find judicial independence to be of major relevance for a tamed bureaucracy.
    Keywords: public sector, rents, life satisfaction, corruption, judicial independence
    JEL: D72 D73 I31 J30 J45 K42 H11 H83
    Date: 2006–02
  4. By: Gerald Pruckner (Department of Economics and Statistics, University of Innsbruck); Rupert Sausgruber (Department of Economics and Statistics, University of Innsbruck)
    Abstract: A publisher uses an honor-system for selling a newspaper in the street. The customers make payments into a cash-box, but can also just take the paper without paying. Payments are not monitored and highly anonymous; hence customers exhibit trustworthiness if they pay for the paper. We run a natural field experiment to identify motives behind payments. The experiment reveals that trustworthiness is based on a social rather than a legal norm. Additional survey questions serve to identify individual-specific components of trustworthiness. We find effects of gender, age, family status, church attendance, measures of reciprocity, social connectedness, and social risk.
    Keywords: trust, trustworthiness; natural field experiment; survey
    JEL: C93 K42
    Date: 2006–02
  5. By: Jérôme Sgard (CEPII and Université de Paris-Dauphine.)
    Abstract: Recent historical research on bankruptcy has been centred almost exclusively on Common law countries, especially the United States. The consequence is that the research agenda includes issues which may, or may not, have broader relevance. This paper is an attempt at including within a larger historical and comparative perspective the evolution observed in continental Europe, during the 19th century. A data set has thus been assembled which includes the main features of a total of 51 codes or statutes, in 15 countries of all legal traditions. An early conclusion is that all these laws defended strongly creditors’ rights during bankruptcy, during the whole period under review. This goes against the thesis defended i.a. by La Porta et alii (1998) which state that “legal origins” have a strong, differentiated effect on property and creditors’ rights, which would be permanent over history. Two dimensions are then analysed. First, the status of the failed debtor, and whether he was subjected to repression; second, the degree to which the law supported or not the attempts of the parties to negotiate a composition, or continuation arrangement. An early period witnessed repressive, highly regulated frameworks: the paradigm is the Napoleonic, 1808 Code de commerce, though its main features were still highly visible half a century latter, in almost all countries. Then emerged a liberal model, between 1865 and 1885 with again a fair degree of convergence: the personal and civic fate of the debtor became much more immune to commercial failure; and the parties get more autonomy to bargain, though a bifurcation emerged between a “menu approach” to re-negotiation in England and in the French law countries, and a “single-option” procedure in German law countries. Beyond, it is proposed that these broad trends reflect the growing capacity of the institutional environment to reduce risks of moral hazards, and more generally transaction costs. By the end of the century, bargaining on bankruptcy had become easier and safer, so that judicial guarantees could be eased.
    Date: 2006–05–01
  6. By: Michael Graff (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The "law and finance theory" predicts that the common law system provides the best basis for financial development and economic growth, followed by Scandinavian and German origin civil law and finally French origin civil law. Referring to a number of sceptical views, this paper argues that the theory faces an identification problem, since the majority of common law countries have a market-based financial system, whereas the majority of civil law countries have a bank-based financial system. Moreover, there are plausible alternative hypotheses to explain the quality of the financial system; but that they cannot rule out that the theory refers to a relevant link between the legal tradition and financial development. Finally it is argued that the corner stone of the law and finance theory is the proposition that different legal traditions imply different degrees of investor protection. It is demonstrated that a few minor, but sensible modifications in aggregating the original indicator set produce results that are different from those reported so far and contradictory to the theory's ranking of the four major legal families in terms of investor protection. Accordingly, the validity of the theory's investor protection measures for international comparisons, the supremacy of the common law legacy in protecting investors and, consequently, the validity of legal origin variables to instrument for financial development, have to be regarded as myths rather than truths.
    Keywords: Financial Development, Legal System, Investor Protection
    JEL: K22 G20 P00
    Date: 2006–01

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