New Economics Papers
on Law and Economics
Issue of 2006‒10‒07
six papers chosen by
Jeong-Joon Lee, Towson University

  1. Overoptimism and Lender Liability in the Consumer Credit Market By Elisabetta Iossa; Giuliana Palumbo
  2. The Impact of the Non-distribution Constraint and Its Enforcement on Entrepreneurial Choice, Price, and Quality By Petra Brhlikova; Andeas Ortmann
  3. How Reasonable is the ‘Reasonable’ Royalty Rate? Damage Rules and Probabilistic Intellectual Property Rights By Jay Pil Choi
  4. Dependent Controllers and Regulation Policies: Theory and Evidence By Carmine Guerriero
  5. Paying for Permanence: Public Preferences for Contaminated Site Cleanup By Anna Alberini; Stefania Tonin; Margherita Turvani; Aline Chiabai
  6. Rules of Proof, Courts, and Incentives By Dominique Demougin; Claude Fluet

  1. By: Elisabetta Iossa (Brunel University); Giuliana Palumbo (Bank of Italy)
    Abstract: Credit purchases of consumer goods are commonly made upon terms governed by an agreement between the lender and the seller. This type of purchase is generally subject to a legal principle of joint responsibility under which the lender and the seller are jointly liable to the consumer for breach of the sale contract by the seller. We study the rationale for this principle in situations where market failure arises because consumers under estimate the risk of product failure - for example due to selle rmisrepresentation - and it is difficult to enforce seller responsibility. We show that joint responsibility increases welfare and reduces the incentives of sellers to misrepresent the quality of their products.
    Keywords: consumer credit, lender liability, misrepresentation, overoptimism, product failure
    JEL: D18 G28 K13
    Date: 2006–09
  2. By: Petra Brhlikova; Andeas Ortmann
    Abstract: We study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. Taking as point of departure a model of entrepreneurial choice proposed by Glaeser and Shleifer (2001), we analyze consequences of weak enforcement of the non-distribution constraint on entrepreneurial choice and price and quality of the product. We find that the nonprofit organizational form becomes unequivocally more attractive to entrepreneurs if enforcement of the non-distribution constraint is weak. We also nd that the quality delivered by nonprofit firms is lower under weak enforcement than that of the nonprofit firm under strict enforcement, but higher than the quality delivered by a for-prot rm. We discuss the implications and limitations of our results.
    Keywords: Entrepreneurial choice, Nonprofit, For-profit, Non-distribution constraint, Enforcement
    JEL: D2 L2 L31 K42
    Date: 2006–07
  3. By: Jay Pil Choi
    Abstract: This paper investigates how different damage rules in patent infringement cases shape competition when intellectual property rights are probabilistic. I develop a simple model of oligopolistic competition to compare two main liability doctrines that have been used in the US to assess infringement damages – the unjust enrichment rule and the lost profit rule. It also points out the logical inconsistency in the concept of the “reasonable royalty rates” when intellectual property rights are not ironclad.
    Keywords: probabilistic intellectual property rights, damage rules, reasonable royalty rates
    JEL: D80 K40 L10 L40 O30
    Date: 2006
  4. By: Carmine Guerriero (University of Cambridge)
    Abstract: This paper analyzes the effects of supervisors’ (i.e., regulators and judges) selection rules on regulated prices. A checks and balances’ regulatory review process strengthens the role of the judicial power and election increases the populism of implicitly motivated supervisors. Election arises when the risk related to expropriation of sunk investments and the inter-party distance are lower. Employing U.S. electric power market’s data, the empirical evidence strongly confirms these predictions. Indeed, when treated as endogenous, only the election of administrative law judges and not the one of regulators significantly lowers the level of electricity rates. Moreover a more effective supervision technology shows a marginal negative effect on regulated rates as well.
    Keywords: Election, Agency, Judges, Regulation, Electricity
    JEL: K23 L51 Q43
    Date: 2006–08
  5. By: Anna Alberini (University of Maryland); Stefania Tonin (University of Venice-IUAV); Margherita Turvani (University of Venice-IUAV); Aline Chiabai (Fondazione Eni Enrico Mattei)
    Abstract: We use conjoint choice questions to investigate people’s preferences for income and reductions in mortality risks delivered by contaminated site remediation policies. Our survey is self-administered using the computer by residents of four cities in Italy with severely contaminated sites. We estimate the Value of a Statistical Life to be about €5.6 million for an immediate risk reduction. If the risk reduction takes place 20 years from now, however, the implied VSL is about €1.26 million. The discount rate implicit in the responses to the conjoint choice questions is about 7%. People are willing to pay for permanent risk reductions, but not just any amount. Risk reductions in the nearer future are valued more highly than risk reductions in the more distant future. We also find that the VSL is “individuated,” in the sense that it depends on observable individual characteristics of the respondents, familiarity with contaminated sites, concern about the health effects of exposure to toxicants, having a family member with cancer, perceived usefulness of possible government actions, and the respondent’s beliefs about the goals of government remediation programs. Additional questions suggest that respondents discount lives, and do so at a discount rate in the ballpark of that implicit in their risk v. money tradeoffs.
    Keywords: Value of a Statistical Life, Latent Risk Reductions, Individual Discount Rates, Conjoint Choice Questions, Contaminated Sites, Remediation
    JEL: J17 I18 K32 Q51 Q53
    Date: 2006–09
  6. By: Dominique Demougin; Claude Fluet
    Abstract: We analyze the design of legal principles and procedures for court decision-making in civil litigation. The objective is the provision of appropriate incentives for potential tort-feasors to exert care, when evidence about care is imperfect and may be distorted by the parties. Efficiency is shown to be consistent with courts adjudicating on the basis of the preponderance of evidence standard of proof together with common law exclusionary rules. Inefficient equilibria may nevertheless also arise under these rules. Directing courts as to the assignment of the burden of proof is then useful as a coordination device. Alternatively, burden of proof guidelines are unnecessary if courts are allowed a more active or inquisitorial role, by contrast with that of passive adjudicator.
    Keywords: Evidentiary rules, standard of proof, burden of proof, inquisitorial, adversarial, discovery, deterrence
    JEL: D8 K4
    Date: 2006

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