New Economics Papers
on Law and Economics
Issue of 2006‒10‒28
nineteen papers chosen by
Jeong-Joon Lee, Towson University

  1. Corruption, Extortion, and the Boundaries of the Law By Svetlana Andrianova; Nicolas Melissas
  2. Litigation and Settlement: New Evidence from Labor Courts in Mexico By Davis S. Kaplan; Joyce Sadka; Jorge Luis Silva-Mendez
  3. Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents By Graham, Stuart J.H.; Harhoff, Dietmar
  4. Challenges and Opportunities for Resource Rich Economies By van der Ploeg, Frederick
  5. Sovereign Debt Restructuring: the Judge, the Vultures and Creditor Rights By Miller, Marcus; Thomas, Dania
  6. Firms Merge in Response to Constraints By Boone, Jan
  7. A Theory of Employment Guarantees: Contestability, Credibility and Distributional Concerns By Basu, Arnab K; Chau, Nancy H; Kanbur, Ravi
  8. Leniency and Whistleblowers in Antitrust By Spagnolo, Giancarlo
  9. Crises, What Crises? By Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
  10. CEO Power, Compensation and Governance By Albuquerque, Rui; Miao, Jianjun
  11. Computing Crime: Information Technology, Police Effectiveness and the Organization of Policing By Garicano, Luis; Heaton, Paul
  12. How Corruption Hits People When They Are Down By Hunt, Jennifer
  13. Should Courts Always Enforce What Contracting Parties Write? By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  14. Active Courts and Menu Contracts By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  15. Do Changes in Regulation Affect Employment Duration in Temporary Work Agencies? By Manfred Antoni; Elke J. Jahn
  16. The Rise and Fall of Private Sector Unionism: What Next for the NLRA? By Jeffrey M. Hirsch; Barry T. Hirsch
  17. Regulating Damage Clauses in (Labor) Contracts By Gerd Muehlheusser
  18. La nature juridique de l'impôt dans l'ancienne et la nouvelle économie du droit fiscal. By Kalina Koleva; Jean-Marie Monnier
  19. Doing Business in Indonesia: Legal and Bureaucratic Constraints By Ross H. McLeod

  1. By: Svetlana Andrianova (University of Leiceter); Nicolas Melissas (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: We consider a set-up in which a principal must decide whether or not to legalise a socially undesirable activity. The law is enforced by a monitor who may be bribed to conceal evidence of the offence and who may also engage in extortionary practices. The principal only declares the activity illegal if the activity if "very harmful" and if the private benefit (received by the agent if she breaks the law) is "high". We present comparative static results and highlight policy implications.
    Keywords: Moral Hazard, Collusion, Non-contractive Output, Rewards and Punishments
    JEL: D82 L22 K4
    Date: 2006–09
  2. By: Davis S. Kaplan (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Joyce Sadka (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Jorge Luis Silva-Mendez (Stanford Law School)
    Abstract: Using a newly assembled data set on procedures filed in Mexican labor tribunals, we study the determinants of final awards to workers. On average, workers recover less than 30% of their claim. Our strongest result is that workers receive higher percentages of their claims in settlements than in trial judgments. We also find that cases with multiple claimants against a single firm are less likely to be settled, which partially explains why workers involved in these procedures receive lower percentages of their claims. Finally, we find evidence that a worker who exaggerates her claim is less likely to settle.
    Date: 2006–09
  3. By: Graham, Stuart J.H.; Harhoff, Dietmar
    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: litigation; opposition; patent system; post-grant review
    JEL: K11 K41 L10
    Date: 2006–05
  4. By: van der Ploeg, Frederick
    Abstract: The political economy of resource rich countries is surveyed. The empirical evidence suggests that countries with a large share of primary exports in GNP have bad growth records and high inequality, especially if the quality of institutions and the rule of law are bad. The economic argument that a resource bonanza induces appreciation of the real exchange rate and a decline of non-resource export sectors may have some relevance. More important, a resource boom reinforces rent grabbing, especially if institutions are bad, and keeps in place bad policies. Optimal resource management may make use of the Hotelling rule and the Hartwick rule. However, a recent World Bank study suggests that resource rich economies squander their natural resource wealth and more often have negative genuine saving rates. Still, countries such as Botswana, Canada, Australia and Norway suggest it is possible to escape the resource curse. Some practical suggestions for a better management of natural resources are offered.
    Keywords: corruption; cross-country and panel evidence; debt overhang; dependent economy; Dutch Disease; genuine saving; growth record; Hartwick Rule; Hotelling Rule; institutions; natural resource wealth management; optimal resource depletion; real exchange rate; resource curse; resource dividend; resource fund; rule of law; sustainable development; transparency
    JEL: C12 C13 E1 F43 K42 O41 Q3
    Date: 2006–05
  5. By: Miller, Marcus; Thomas, Dania
    Abstract: What role did the US courts play in the Argentine debt swap of 2005? What are the implications for the future of creditor rights in sovereign bond markets? The judge in the Argentine case has, it appears, deftly exploited creditor heterogeneity – between holdouts seeking capital gains and institutional investors wanting a settlement – to promote a swap with a supermajority of 76% of creditors. Our analysis of Argentine debt litigation reveals a process of 'judge-mediated' sovereign debt restructuring, which resolves the key issues of Transition and Aggregation - two of the roles envisaged for the IMF's still-born Sovereign Debt Restructuring Mechanism (SDRM). For the future we note how the judge-mediated sovereign debt restructuring, together with creditor committees, may complement the market-based alternative promoted by the Treasury, namely collective action clauses (CACs) in sovereign bond contracts.
    Keywords: collective action clauses; holdout creditors; sovereign debt restructuring
    JEL: F34 K41 K49
    Date: 2006–06
  6. By: Boone, Jan
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M\&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: constraints; deregulation; efficiency defence; merger waves; pro/anti-competitive mergers
    JEL: G34 K21 L40
    Date: 2006–07
  7. By: Basu, Arnab K; Chau, Nancy H; Kanbur, Ravi
    Abstract: This paper develops a theory of employment guarantees when labor markets are imperfect and when the credibility of government policy announcements could be in doubt. The basic feature of an EGS is that any individual who satisfies a set of specified criteria is guaranteed public employment at a given wage if they want it. Thus, the two factors that define the guarantee are the wage and the ease of access. The problem for the planner is to choose these to maximize a social welfare function. If the labour market is perfectly competitive, then the introduction of an employment guarantee scheme is bound to have efficiency costs, and can only be justified through its positive distributional consequences – this has been the framework for most of the theoretical and empirical analysis of employment guarantee schemes. If the labor market is imperfect, however, the announcement of a credible employment guarantee scheme can improve efficiency through the introduction of contestability in the private labour market. The paper then considers the issue of credibility and solves for an incentive compatible employment guarantee scheme in a rational expectations equilibrium. It is shown that the outcome with a planner who cares only about efficiency can be less efficient than the outcome with a planner whose social welfare function also gives weight to poverty!
    Keywords: credibility; employment guarantees; employment targeting; poverty aversion
    JEL: I38 J21 K31 O12
    Date: 2006–08
  8. By: Spagnolo, Giancarlo
    Abstract: The paper reviews the recent evolution of leniency programs for cartels in the US and EU, surveys their theoretical economic analyses, and discusses the empirical and experimental evidence available, also looking briefly at related experiences of rewarding whistleblowers in other fields of law enforcement. It concludes with a list of desiderata for leniency and whistleblower reward programs, simple suggestions how to improve current ones, and an agenda for future research. The issues discussed appear relevant to the fight of other forms of multiagent organized crime - like auditor-manager collusion, financial fraud, or corruption - that share with cartels the crucial features that well designed leniency and whistleblower programs exploit.
    Keywords: amnesty; antitrust; cartels; collusion; competition policy; corporate crime; corruption; deterrence; immunity; leniency; organized crime; self-reporting; snitches; whistleblowers
    JEL: K31 K42 L13 L44
    Date: 2006–08
  9. By: Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
    Abstract: Recent research convincingly shows that crises beget reform. Although the consensus is that economic crises foster macroeconomic stabilization, it is silent on which types of crises cause which types of reform. Is it economic or political crises that are the most important drivers of structural reforms? To answer this question we put forward evidence on trade and labour market liberalization from panel data on more than 100 developed and developing countries from 1950 to 2000. We find important differences in the effects of the two types of crises on the two reforms across regions and even from one measure of crisis to another. Yet, in general, we consistently find that political considerations (political crises as well as political institutions) are more important determinants of these reforms than economic crises. This finding is robust to the inclusion of interdependencies between the two types of crises, feedbacks between the two types of reform, the use of alternative measures of political and economic crises and whether or not the data are pooled across all countries or only across regions.
    Keywords: economic crisis; economic reform; labour market reform; political crisis; trade liberalisation
    JEL: E32 H11 K20 O40
    Date: 2006–08
  10. By: Albuquerque, Rui; Miao, Jianjun
    Abstract: This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favour one or the other type of compensation. The model explains why good countrywide investor protection breeds good firm governance and predicts a 'race to the top' in firm-governance quality after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance based on CEO power. Finally, we discuss the optimality of introducing randomness in CEO hiring, for example, by evaluating CEOs based on qualitative characteristics, or soft skills, that are prone to diverse judgements.
    Keywords: CEO compensation; CEO power; investor protection; moral hazard
    JEL: G34 J33 K00
    Date: 2006–09
  11. By: Garicano, Luis; Heaton, Paul
    Abstract: How does information technology (IT) affect the organization of police work? How does it in turn affect police crime-fighting effectiveness? To answer these questions, we construct a new panel data set of police departments covering 1987-2003. We find that while IT adoption had substantial effects on a wide range of police organizational practices, it had, by itself, a negligible impact on crime-fighting effectiveness. These results are robust to various methods for controlling for agency-level characteristics and the endogeneity of IT use. We then suggest and test two explanations for this puzzle. First, we demonstrate that use of a particular technology, computerized record-keeping, increased recorded crime rates. Second, we provide evidence that IT investments only had a substantial impact on crime clearance rates and crime rates when undertaken as part of a broad set of complementary organizational practices such as those in the Compstat program.
    Keywords: hierarchy; information technology; organization; police; skills
    JEL: K42 L23 M5 O33
    Date: 2006–09
  12. By: Hunt, Jennifer
    Abstract: Using cross-country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non-victims to bribe public officials. Misfortune increases victims' demand for public services, raising bribery indirectly, and also increases victims' propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: bribery; corruption; governance
    JEL: H1 K4 O1
    Date: 2006–09
  13. By: Luca Anderlini; Leonardo Felli; Andrew Postlewaite (Department of Economics, Georgetown University)
    Abstract: We find an economic rationale for the common sense answer to the question in our title — courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. We study a buyer-seller multiple-widget model with risk-neutral agents, asymmetric information and ex-ante investments. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. In some cases, an ambiguous court that voids and upholds both with positive probability may be able to increase welfare even further. Classification-JEL Codes: C79, D74, D89, K40, L14.
    Keywords: Optimal Courts, Informational Externalities, Ex-Ante Welfare.
  14. By: Luca Anderlini; Leonardo Felli; Andrew Postlewaite (Department of Economics, Georgetown University)
    Abstract: We describe and analyze a contractual environment that allows a role for an active court. The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. In Anderlini, Felli, and Postlewaite (2006) the possibility of “menu contracts” between the informed buyer and the uninformed seller is described but not analyzed. Here, we fully analyze this case. We find that if we maintain the assumption that one of the potential objects of trade is not contractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact. If however we let all “widgets” be contractible ex-ante, then multiple equilibria obtain. In this case the role for an active court is to ensure the inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs. Classification-JEL Codes: C79, D74, D89, K40, L14.
    Keywords: Optimal Courts, Informational Externalities, Ex-ante Welfare, Informed Principal, Menu Contracts.
  15. By: Manfred Antoni (Institute for Employment Research (IAB), Nuremberg); Elke J. Jahn (Harvard University, IAB Nuremberg and IZA Bonn)
    Abstract: Over the past three decades Germany has repeatedly deregulated the law on temporary agency work by stepwise increasing the maximum period for hiring-out employees and allowing temporary work agencies to conclude fixed-term contracts. These reforms should have had an effect on the employment duration within temporary work agencies. Based on an informative administrative data set we use hazard rate models to examine whether the employment duration has changed in response to these reforms. We find that the repeated prolongation of the maximum period for hiring-out employees significantly increased the average employment duration while the authorization of fixed-term contracts reduced employment tenure.
    Keywords: temporary agency work, regulation, labor law, duration analysis, hazard rate models
    JEL: C41 J23 J40 J48 K31
    Date: 2006–09
  16. By: Jeffrey M. Hirsch (University of Tennessee College of Law); Barry T. Hirsch (Trinity University and IZA Bonn)
    Abstract: In this Article, we ask whether the National Labor Relations Act, enacted over 70 years ago, can remain relevant in a competitive economy where nonunion employer discretion is the dominant form of workplace governance. The best opportunity for the NLRA’s continued relevance is the modification of its language and interpretation to enhance worker voice and participation in the nonunion private sector, without imposing undue costs on employers. Examples of such reforms include narrowing the NLRA’s company union prohibition; implementing a conditional deregulation system that relies on consent by an independent employee association; changing the labor law default to some form of a nonunion work group; expanding state and local authority over labor relations; and encouraging NLRA protection for employee use of employer-owned Internet services. These legal innovations have the potential to be welfare enhancing, as compared to outcomes likely to evolve under the current legal framework. Although the political likelihood of such changes is currently low, steps in this direction could result in an increased relevance for the NLRA in the modern economy.
    Keywords: labor law, employment law, unions, worker voice
    JEL: K31 J5 J88
    Date: 2006–10
  17. By: Gerd Muehlheusser (University of Bern and IZA Bonn)
    Abstract: We analyze the role of damage clauses in labor contracts using a model in which a worker may want to terminate his current employment relationship and work for another firm. We show that the initial parties to a contract have an incentive to stipulate excessive damage clauses, which leads to ex post inefficiencies. This result is due to rent seeking motives a) between the contracting parties vis-à-vis third parties and b) among the contracting parties themselves. We then show that, by imposing an upper bound on the amount of enforceable damages, a regulator can induce a Pareto improvement; in some cases even the first best can be achieved.
    Keywords: damage clauses, penalty doctrine, breach of contract, asymmetric information, labor contracts
    JEL: K12 K31 M12
    Date: 2006–10
  18. By: Kalina Koleva (Panthéon-Sorbonne Economie); Jean-Marie Monnier (Panthéon-Sorbonne Economie)
    Abstract: After specifying the legal nature of tax law as a coercive power application and as a public authority expression, this article examines the way economic tax theories acknowledge these essential fiscal dimensions. Indeed, tax constraint induces a behaviour modification, so that the legal rules produce important economic implications. We first consider the particular position of the old French public financial economics ; then, we underline some public economics' failures, and especially the optimal taxation theory ones. These flaws relate to the economic, fiscal and institutional specifications of the models. We present, then, the new fiscal economics of law framework of analysis. It pretends to take into account tax law and institutions' complexity. Finally, we draw a first critical assessment and propose a future research program, argued in three main directions. In addition to the fact that thenew fiscal economics of law carries out an analysis based primarily on costs, it under estimates the tax evasion results in terms of equity. The suggested framework ignores the way legal conflicts between the taxpayer and the administration are really resolved. This leads us to analyze the institutions'evolution issue. Thus, a true methodological renewal is needed.
    Keywords: Tax law, efficiency costs, economics of law.
    JEL: H20 H21 K0 K34
    Date: 2006–09
  19. By: Ross H. McLeod
    Abstract: The World Bank's new series of Doing Business reports attempt to measure the relative ease of doing business in countries around the world. The output of this research is a set of rankings that enable each country to see how it looks relative to the others from the point of view of private sector businesses. This paper highlights a number of concerns about the Doing Business methodology, and presents a critique of the 'law and finance' view regarding the influence of legal system origins on countries' economic performance, which was highly influential in the first of the Doing Business reports. Selected data from the 2006 report are used to explain why Indonesia is having difficulty getting back to Soeharto-era rates of economic growth. The report's findings in relation to Indonesia are then interpreted within the framework of an analysis of the way the Soeharto 'franchise' operated.
    Keywords: business regulation, contract enforcement, law and finance, legal heritage
    JEL: K2 K4 L51 P14 P52
    Date: 2006

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