New Economics Papers
on Law and Economics
Issue of 2006‒03‒18
five papers chosen by
Jeong-Joon Lee, Towson University

  1. Youth Unemployment and Crime in France By Denis Fougère; Francis Kramarz; Julien Pouget
  2. Reasons for Wage Rigidity in Germany By Wolfgang Franz; Friedhelm Pfeiffer
  3. The Effect of Divorce Laws on Divorce Rates in Europe By Libertad González; Tarja K. Viitanen
  4. The Persistence of Underdevelopment: Institutions, Human Capital, or Constituencies? By Raghuram G. Rajan; Luigi Zingales
  5. BANKRUPTCY LAW, BONDED LABOR AND INEQUALITY By Ulf von Lilienfeld-Toal; Dilip Mookherjee

  1. By: Denis Fougère (CNRS, CREST-INSEE, CEPR and IZA Bonn); Francis Kramarz (CREST-INSEE, CEPR and IZA Bonn); Julien Pouget (CREST-INSEE and IZA Bonn)
    Abstract: In this paper we examine the influence of unemployment on property crimes and on violent crimes in France for the period 1990 to 2000. This analysis is the first extensive study for this country. We construct a regional-level data set (for the 95 départements of metropolitan France) with measures of crimes as reported to the Ministry of Interior. To assess social conditions prevailing in the département in that year, we construct measures of the unemployment rate as well as other social, economic and demographic variables using multiple waves of the French Labor Survey. We estimate a classic Becker type model in which unemployment is a measure of how potential criminals fare in the legitimate job market. First, our estimates show that in the cross-section dimension, crime and unemployment are positively associated. Second, we find that increases in youth unemployment induce increases in crime. Using the predicted industrial structure to instrument unemployment, we show that this effect is causal for burglaries, thefts, and drug offences. To combat crime, it appears thus that all strategies designed to combat youth unemployment should be examined.
    Keywords: crime, youth unemployment
    JEL: J19 K42 J64 J65
    Date: 2006–03
  2. By: Wolfgang Franz (ZEW and University of Mannheim); Friedhelm Pfeiffer (ZEW, University of Mannheim and IZA Bonn)
    Abstract: This study investigates institutional and economic reasons for downward wage rigidity regarding three occupational skill groups. Based on a survey of 801 firms in Germany and an econometric analysis, we find strong support for explanations based on the effects of labour union contracts and efficiency wages that differ between skill groups. Survey respondents indicate that labour union contracts and implicit contracts are important reasons for wage rigidity for the (less) skilled. Specific human capital and negative signals for new hires are causes of the stickiness of wages for the highly skilled. Compared with US evidence, German firms seem to attach more importance to labour union contracts and specific human capital.
    Keywords: wage rigidity, labour union contracts, efficiency wage theory, implicit contract theory, regulation of labour
    JEL: J41 J51 K31
    Date: 2006–03
  3. By: Libertad González (Universitat Pompeu Fabra and IZA Bonn); Tarja K. Viitanen (University of Sheffield)
    Abstract: This paper analyzes a panel of 18 European countries spanning from 1950 to 2003 to examine the extent to which the legal reforms leading to "easier divorce" that took place during the second half of the 20th century have contributed to the increase in divorce rates across Europe. We use a quasi-experimental set-up and exploit the different timing of the reforms in divorce laws across countries. We account for unobserved country-specific factors by introducing country fixed effects, and we include country-specific trends to control for timevarying factors at the country level that may be correlated with divorce rates and divorce laws, such as changing social norms or slow moving demographic trends. We find that the different reforms that "made divorce easier" were followed by significant increases in divorce rates. The effect of no-fault legislation was strong and permanent, while unilateral reforms only had a temporary effect on divorce rates. Overall, we estimate that the legal reforms account for about 20 percent of the increase in divorce rates in Europe between 1960 and 2002.
    Keywords: divorce rates, legislation
    JEL: J12 J18 K3
    Date: 2006–03
  4. By: Raghuram G. Rajan; Luigi Zingales
    Abstract: Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.
    JEL: O1 O15 P5 I2 K0
    Date: 2006–03
  5. By: Ulf von Lilienfeld-Toal (Department of Economics, University of Frankfurt); Dilip Mookherjee (Department of Economics, Boston University)
    Abstract: Should the law restrict liability of defaulting borrowers? We abstract from possible benefits arising from limited rationality or risk-aversion of borrowers, contractual incompleteness, or lender moral hazard. We focus instead on general equilibrium implications of liability rules with moral hazard among borrowers with varying wealth. If lenders are on the short side of the market, weakening liability rules lower lender profits, may cause additional exclusion among the poor, but generate additional rents for wealthier borrowers. For certain changes in liability rules (such as a ban on bonded labor, or weakening bankruptcy rules below a wealth threshold) they also raise productivity among borrowers of intermediate wealth. Hence they can be interpreted as a form of efficiency-enhancing redistribution from lenders and poor borrowers to middle class borrowers. Our model provides a possible rationale for why weaker liability rules are observed in wealthier countries.
    Date: 2005–09

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