New Economics Papers
on Law and Economics
Issue of 2006‒02‒19
twelve papers chosen by
Jeong-Joon Lee, Towson University

  1. Market design By David Newbery
  2. The comparative evolution of the employment relationship By Simon Deakin
  3. Diagnosing Discrimination: Stock Returns and CEO Gender By Wolfers, Justin
  4. Sovereignty Reloaded? A Constructivist Perspective on European Research By Tanja E. Aalberts
  5. Beyond Territoriality: The Case of Transnational Human Rights Litigation By Peer Zumbansen
  6. The use of warnings when intended and measured emissions differ By Rousseau Sandra
  7. How to determine fining behaviour in court? Game theoretical and empirical analysis By Rousseau Sandra; Billiet Carole
  8. The enforcement of speeding: should fines be higher for repeated offences? By Delhaye Eef
  9. Determinants and Effects on Property Values of Participation in Voluntary Cleanup Programs: The Case of Colorado By Anna Alberini
  10. Corruption, Exogenous Changes in Incentives and Deterrence By Giuseppe Di Vita
  11. Legal Default Rules: The Case of Wrongful Discharge Laws By W. Bentley MacLeod; Voraprapa Nakavachara
  12. Reputations, Relationships and the Enforcement of Incomplete Contracts By W. Bentley MacLeod

  1. By: David Newbery
    Abstract: Europe is liberalising electricity in accordance with the European Commission’s Electricity Directives. Different countries have responded differently, notably in the extent of restructuring, treatment of mergers, market power, and vertical unbundling. While Britain and Norway have achieved effective competition, others like Germany, Spain and France are still struggling to deal with dominant and sometimes vertically integrated companies. The Netherlands offers an interesting intermediate case, where good economic analysis has sometimes been thwarted by legalistic interpretations. Investment under the new Emissions Trading system could further transform the electricity industry but may be hampered by slow progress in liberalising European gas markets.
    Keywords: Competition, liberalisation, restructuring, electricity, market power
    JEL: G34 K23 L51 L94
    Date: 2006–02
  2. By: Simon Deakin
    Abstract: It is widely believed that the legal institution of the contract of employment is currently undergoing a conceptual crisis as a result of changes in labour markets, the organisation of production, and the form of the enterprise. A historical and comparative perspective, however, indicates that conceptual crises of this kind are nothing new, and have occurred periodically in the systems of western Europe since the industrial revolution. The employment form serves important functions in a market economy even in an era of deregulation and liberalization, and is unlikely to be replaced by a radically new model in the near future.
    Keywords: labour law, contract, employment relationship
    JEL: J28 K31
    Date: 2005–12
  3. By: Wolfers, Justin
    Abstract: A vast labour literature has found evidence of a 'glass ceiling', whereby women are under-represented among senior management. A key question remains the extent to which this reflects unobserved differences in productivity, preferences, prejudice, or systematically biased beliefs about the ability of female managers. Disentangling these theories would require data on productivity, on the preferences of those who interact with managers, and on perceptions of productivity. Financial markets provide continuous measures of the market’s perception of the value of firms, taking account of the beliefs of market participants about the ability of the men and women in senior management. As such, financial data hold the promise of potentially providing insight into the presence of mistake-based discrimination. Specifically if female-headed firms were systematically under-estimated, this would suggest that female-headed firms would outperform expectations, yielding excess returns. Examining data on S&P 1500 firms over the period 1992-2004 I find no systematic differences in returns to holding stock in female-headed firms, although this result reflects the weak statistical power of our test, rather than a strong inference that financial markets either do or do not under-estimate female CEOs.
    Keywords: CEO pay; CEOs; chief executive officer; discrimination; event study; excess returns; female CEOs; statistical discrimination
    JEL: G14 G3 J16 J4 J7 K31 M5
    Date: 2006–02
  4. By: Tanja E. Aalberts
    Abstract: This paper addresses three issues. Beginning with the sovereignty puzzle that emerges from multilevel governance analyses (in terms of the endurance of sovereignty within structures of overlapping authorities), it suggests supplementing the static view of multilevel governance with the dynamic perspective of Europeanization literature as an important step forward for the next generation of EU studies. In addition, it calls for a 'constructivist turn' in order to elaborate the dynamics identified by Europeanization approaches. It is argued that this provides the key to the sovereignty puzzle by analysing the link between interaction and identity. Finally, the constructivist perspective of the mutual constitution of structure and agency is advocated as a fruitful lane for the third wave of EU research as a way to overcome its struggles with unidirectional, causality notions of bottom-up and top-down relationships within multilevel governance structures.
    Keywords: sovereignty; multilevel governance; Europeanization
    Date: 2005–03–01
  5. By: Peer Zumbansen
    Abstract: Cases for civil damages that have been brought before Western courts by victims of torture and persecution against states officials or corporations, challenge the principles of state sovereignty and jurisdictional competence. While national courts can in cases of serious crimes hear cases that grow out of acts committed in another country, the same is not true for cases for civil compensation. A persisting and rising number of private law cases that attempts to empower disenfranchised victims of crime and abuse, points to the necessity of reconsidering the prevailing procedural and substantial obstacles that govern the so-far unsuccessful civil law suits. The law of transnational civil litigation [TCL] emerged with the US American decision in Filartiga in 1980 and perhaps culminated in the US Supreme Court's Decision in Sosa v. Alvarez-Machain in 2004. TCL has become a laboratory for our inquiry into the relationship between laws that were developed within and for the nation-state on the one hand and an increasingly globalized political and legal human rights discourse, on the other. As such, TCL is a case in point for the dramatically changing nature of norm-creation, law, and law enforcement in an era of globalization.
    Keywords: law; sovereignty; globalization
    Date: 2005–08–09
  6. By: Rousseau Sandra (K.U.Leuven-Center for Economic Studies)
    Abstract: This article studies the effects of informal, non-monetary sanctions, such as warnings, which are often used as an enforcement instrument by environmental inspection agencies. In cases of uncertainty with respect to the measured emissions due to measurement errors or accidental violations, some firms are unjustly penalised. As warnings provide a buffer period in which the firm is informed about the violation without any monetary consequences, it will be theoretically shown that warnings can help to reduce the welfare cost of such type II-errors and reduce the overdeterrence of low-cost firms - albeit at the cost of underdeterring medium-cost firms.
    Keywords: Enforcement; non-monetary sanctions; warnings; measurement errors
    JEL: Q38 K42
    Date: 2005–12
  7. By: Rousseau Sandra (K.U.Leuven-Center for Economic Studies); Billiet Carole (Center for environmental law - University of Ghent)
    Abstract: We build a structural model to understand the fine set in court, which is described as the outcome of a two-stage game between defendant, public prosecutor and judge. The equilibrium fine depends on the harm caused, the costs to society and the probalility that the quilty party is punished. This fine influences the severity of prosecution and the defence expenditures. Next we empirically analyse the fines pronounced by the Court of Appeal in Ghent (Belgium) for water related criminal offences. We investigate whether the seriousness of the violation and past convictions, as well as some other characteristics, increase the penalty.
    Date: 2005–12
  8. By: Delhaye Eef (K.U.Leuven-Center for Economic Studies)
    Abstract: Speed limits are a well-known instrument to improve traffic safety. However, speed limits alone are not enough; there is need for enforcement of these limits. When one observes fine structures for speed offences one often finds two characteristics. First, the fine increases with the severity of the violation. Secondly, the fine depends on the speeders' offence history. We focus on this last point and confront two fine structures, both increasing with speed: a uniform fine and a differentiated fine, which depends on the offence history. Drivers differ in their propensity to have an accident and hence in their expected accident costs. Literature then prescribes that the fine for bad drivers should be higher than for good drivers. However, the government does not know the type of the driver. We develop a model where the number of previous convictions gives information on the type of the driver. We find that the optimal fine structure depends on the probability of detection and on the strength of the relationship between the type and having a record. We illustrate this by means of a numerical example.
    Date: 2006–01
  9. By: Anna Alberini (University of Maryland and Fondazione Eni Enrico Mattei)
    Abstract: State Voluntary Cleanup Programs (VCPs) were established starting in the 1990s to encourage the environmental remediation and redevelopment of contaminated properties. These programs typically offer liability relief, subsidies and other regulatory incentives in exchange for site cleanup. This paper asks three questions: First, what type of properties are attracted to voluntary cleanup programs? Second, what is the interaction between these state programs and other incentives for remediation and economic development, such as Enterprise Zone and Brownfield Zone designations? Third, what is the effect of participation in the VCP on property values? We use data from Colorado’s VCP to answer these questions. We find that most of the properties enrolled in this program were not previously listed on EPA’s contaminated site registries, and that most applicants seek to obtain directly a “no further action” determination without undergoing remediation. The main determinants of participation are the size of the parcel and whether the surrounding land use is primarily residential, while other incentives have little effect. Properties with confirmed contamination sell at a 47% discount relative to comparable uncontaminated parcels, and participation tends to raise the property price, but this latter effect is not statistically significant. Taken together, these findings suggest that the participating properties are those with high development potential, and hint at the possibility that owners or developers may be seeking to obtain a clean bill of health from the State with only minimal or no cleanup efforts. Were these findings confirmed with data from other states, they would raise doubts about the effectiveness of voluntary programs in encouraging remediation and their usefulness in reversing some of the undesired effects of the Superfund legislation.
    Keywords: Brownfields, Contaminated sites, Voluntary cleanup programs, Incentives
    JEL: R14 Q58 K32
    Date: 2006–01
  10. By: Giuseppe Di Vita
    Abstract: In this article we apply and extend the model elaborated by Acemoglu and Verdier in their seminal paper (2000), to examine how the economy represented in their theoretical framework responds to an exogenous change in the agent's incentive. In particular, we focus on the consequences of a famous sentence of the Italian Supreme Court in plenary session, no. 500 of 1999, in which a revolutionary interpretation of civil liability rules is introduced, allowing private agents of our economy to appear before the court to demand reimbursement for the damages suffered as a consequence of illicit behavior of the public administration. This is one of the few cases in which the judex substantially makes law in a system of civil law, and the modification in incentive whether or not to be corrupted comes from an authority that is not part of the game (the jurisdictional power). Basing our affirmations on the model, we can say that corruption may have declined in Italy since the year 2000, as a result of a change in the incentives for both private agents and bureaucrats.
    Keywords: Bureaucrats, Government failure, Incentives, Market failure, Public goods
    JEL: K13 D23 H41
    Date: 2006–01
  11. By: W. Bentley MacLeod (Columbia University and IZA Bonn); Voraprapa Nakavachara (University of Southern California)
    Abstract: One of the most vexing public policy issues is the extent to which governments should intervene into private contractual relationships. The purpose of this paper is to explore both theoretically and empirically the extent to which such interventions may enhance efficiency. In the case of employment law, economists have traditionally taken the view that intervention, such as protection against wrongful discharge, simply undoes the original intent of the parties to the agreement. We find that both the good faith and the implied contract exceptions to employment at will may enhance employment in occupations characterized by high levels of investment. These results suggest that under the appropriate conditions courts may enhance the operation of a competitive market by setting appropriate default remedies for breach of contract.
    Keywords: employment law, wrongful discharge, private contracts, default rules
    JEL: J11 J21 J31 J61 K12 K31
    Date: 2006–02
  12. By: W. Bentley MacLeod (Columbia University and IZA Bonn)
    Abstract: This paper discusses the literature on the enforcement of incomplete contracts. It compares legal enforcement to enforcement via relationships and reputations. A number of mechanisms, such as the repeat purchase mechanism (Klein and Leffler (1981)) and efficiency wages (Shapiro and Stiglitz (1984)), have been offered as solutions to the problem of enforcing an incomplete contract. It is shown that the efficiency of these solutions is very sensitive to the characteristics of the good or service exchanged. In general, neither the repeat purchase mechanism nor efficiency wages is the most efficient in the set of possible relational contracts. In many situations, total output may be increased through the use of performance pay and through increasing the quality of law.
    Keywords: contract, law and economics, reputation, repeated games, incomplete contracts, transactions costs, institutional economics, contract enforcement
    JEL: K12 C7 O17
    Date: 2006–02

This issue is ©2006 by Jeong-Joon Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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