New Economics Papers
on Law and Economics
Issue of 2006‒04‒29
six papers chosen by
Jeong-Joon Lee, Towson University

  1. Profitability Measures and Competition Law By Paul A.Grout; Anna Zalewska
  2. A Law and Economics Perspective on Terrorism By Francesco Parisi; Jonathan Klick; Nuno Garoupa
  3. Does Child Abuse Cause Crime? By Janet Currie; Erdal Tekin
  4. Tortious Acts Affecting Markets By Urs Schweizer
  5. Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents By Stuart J.H. Graham; Dietmar Harhoff
  6. How Important is the Credibility Problem in Politics? Evidence from State-Level Abortion Legislation By Francisco Rodríguez

  1. By: Paul A.Grout; Anna Zalewska
    Abstract: The paper outlines various measures of profitability and considers what role they can play in competition law. We argue that profitability measures can provide a good answer to the wrong question and a much less good answer to the question we really want to answer. Using appropriate definitions of asset value it is possible to identify whether a firm earns more than the absolute minimum needed to cover cost and compensate for risk, i.e., whether profitability measures such as the internal rate of return and the accounting rate of return are above the cost of capital. However, both the empirical evidence we present and theory indicates that this does not really help in most cases. Knowing that a firm is earning say, half a percent more than the cost of capital is not really much help in almost all competition law cases. But we show that once the rate of return deviates from the cost of capital it becomes hard to measure. Using simple examples we show that shifts in cash flows that preserve the net present value of a project can have dramatic effects on profitability measures. Hence, it is hard to assess the quantity of the “excessive” return. Furthermore, this problem is likely to be far more prevalent today than in the past given the growth in outsourcing (since outsourcing has exactly this type of effect on cash flows). Despite such problems, we argue that the measurement of profit has a role to play in competition law but that the analysis is far more of an art form and far less of a simple statistical procedure.
    Keywords: profitability measures, excess return, competition
    JEL: K21 L43 G38
    Date: 2006–01
  2. By: Francesco Parisi; Jonathan Klick; Nuno Garoupa
    Abstract: This paper reviews the existing law and economics literature on crime, noting where various models might apply to the terror context. Specifically, it focuses on two strands of the literature, deterrence and incapacitation. Challenging the conventional application of the basic rational agent model of crime in the context of terrorism, it considers anti-terror measures enacted by different countries, highlighting how the details of the laws correspond to the insights from economic models of crime. In conclusion, the paper proposes an efficient sorting mechanism in which individuals will be provided with adequate incentives to reveal their type to law enforcement authorities.
  3. By: Janet Currie; Erdal Tekin
    Abstract: Child maltreatment, which includes both child abuse and child neglect, is a major social problem. This paper focuses on measuring the effects of child maltreatment on crime using data from the National Longitudinal Study of Adolescent Health (Add Health). We focus on crime because it is one of the most socially costly potential outcomes of maltreatment, and because the proposed mechanisms linking maltreatment and crime are relatively well elucidated in the literature. Our work addresses many limitations of the existing literature on child maltreatment. First, we use a large national sample, and investigate different types of abuse in a similar framework. Second, we pay careful attention to identifying the causal impact of abuse, by using a variety of statistical methods that make differing assumptions. These methods include: Ordinary Least Squares (OLS), propensity score matching estimators, and twin fixed effects. Finally, we examine the extent to which the effects of maltreatment vary with socio-economic status (SES), gender, and the severity of the maltreatment. We find that maltreatment approximately doubles the probability of engaging in many types of crime. Low SES children are both more likely to be mistreated and suffer more damaging effects. Boys are at greater risk than girls, at least in terms of increased propensity to commit crime. Sexual abuse appears to have the largest negative effects, perhaps justifying the emphasis on this type of abuse in the literature. Finally, the probability of engaging in crime increases with the experience of multiple forms of maltreatment as well as the experience of Child Protective Services (CPS) investigation.
    JEL: I1 K4
    Date: 2006–04
  4. By: Urs Schweizer (Department of Economics, University of Bonn, Adenauerallee 24, D-53113 Bonn, Germany.
    Abstract: The present paper examines an injurer causing a temporary blackout to a firm as the primary victim but also affecting customers and competitors of the firm. Reflecting existing legal practice, the paper investigates efficiency properties of the negligence rule granting recovery of private losses but to the primary victim only. The regime is shown to provide efficient incentives for precaution provided that the primary loss exceeds the social loss from accidents. The main contribution of the paper consists of an explicit analysis of markets affected by a temporary blackout of one firm. The analysis reveals that the private loss exceeds the social loss indeed if the market is less than fully competitive. Moreover, the net social loss remains positive, no matter which market structure prevails.
    JEL: K13 K12 D62
    Date: 2006–04
  5. By: Stuart J.H. Graham (Georgia Institute of Technology); Dietmar Harhoff (University of Munich, CEPR and ZEW)
    Abstract: This paper assesses the impact of adopting a post-grant review institution in the US patent system by comparing the “opposition careers” of European Patent Office (EPO) equivalents of litigated US patents to those of a control group of EPO patents. We demonstrate several novel methods of "twinning" US and European patents and investigate the implications of employing these different methods in our data analysis. We find that EPO equivalents of US litigated patent applications are more likely to be awarded EPO patent protection than are equivalents of unlitigated patents, and the opposition rate for EPO equivalents of US litigated patents is about three times higher than for equivalents of unlitigated patents. Patents attacked under European opposition are shown to be either revoked completely or narrowed in about 70 percent of all cases. For EPO equivalents of US litigated patents, the appeal rate against opposition outcomes is considerably higher than for control-group patents. Based on our estimates, we calculate a range of net welfare benefits that would accrue from adopting a post-grant review system. Our results provide strong evidence that the United States could benefit substantially from adopting an administrative post-grant patent review, provided that the post-grant mechanism is not too costly.
    Keywords: patent system, post-grant review, opposition, litigation
    JEL: K41 K11 L10
    Date: 2006–04
  6. By: Francisco Rodríguez (Department of Economics, Wesleyan University)
    Abstract: This paper proposes a simple mechanism for evaluating the relevance of credibility problems in politics. If candidates are capable of making credible policy promises, we will not expect them to systematically adopt platforms that entail large probabilities of losing an election. This is because the adoption of very extreme platforms has the effect of shifting expected policies systematically away from their ideal points. For candidates who lack the capacity of making credible commitments, in contrast, policy platforms are simply a reflection of their preferences, which may well be very extreme. I show that this fact implies that when politicians are credible the correlation between candidates preferences and expected policies will always be positive, whereas when they lack credibility the correlation can be negative. Empirical tests on a panel of US abortion preferences and legislation show that the correlation between the preferences of party constituents and enacted policies is consistently negative, a result that strongly suggests the existence of significant credibility problems.
    Date: 2006–04

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