New Economics Papers
on Law and Economics
Issue of 2006‒11‒04
eight papers chosen by
Jeong-Joon Lee, Towson University

  1. Where Do Firms Incorporate? By Becht, Marco; Mayer, Colin; Wagner, Hannes
  2. The Scope of Punishment: An Economic Theory of Harm-Based vs. Act-Based Sanctions By Garoupa, Nuno; Obidzinski, Marie
  3. Strategic Incompatibility in ATM Markets By Christopher R. Knittel; Victor Stango
  4. Further Tests of Abortion and Crime: A Response to Donohue and Levitt (2001,2004, 2006) By Theodore J. Joyce
  5. Regulation – the Corridor to Liberalization: The Experience of the Israeli Phone Market 1984-2005 By Reuben Gronau
  6. On the Existence and Efficiency of Equilibria Under Liability Rules By Ram Singh
  7. The Impact of Incentives on Human Behavior: Can We Make It Disappear? The Case of the Death Penalty By Naci H. Mocan; R. Kaj Gittings
  8. Crime and Punishment in the "American Dream" By Rafael Di Tella; Juan Dubra

  1. By: Becht, Marco; Mayer, Colin; Wagner, Hannes
    Abstract: Over the last few years, a series of rulings by the European Court of Justice (ECJ) has opened up the European Union to cross-border mobility in incorporation. In this paper we explore how deregulation and the costs of regulation have affected the location decisions of firms. Using a newly constructed dataset of companies from around the world incorporating in the U.K. between 1997 and 2005 we find a large increase in new incorporations of limited liability firms from E.U. Member States following the ECJ rulings. We find that incorporation costs, in particular minimum capital requirements, and delays in incorporation are significant influences on firms’ location decisions. Our results confirm the relevance of price to firms’ choice of legal systems. We also report that cross-border incorporation has prompted regulatory competition between E.U. Member States to provide low-cost corporate law to limited liability companies.
    Keywords: entrepreneurship; financial regulation; incorporation; regulatory competition
    JEL: G38 K22
    Date: 2006–10
  2. By: Garoupa, Nuno; Obidzinski, Marie
    Abstract: The harm caused by many acts is not certain but probabilistic. Current public enforcement of the law combines harm-based sanctions (usually in criminal law) with act-based sanctions (very common in administrative law and regulation). We propose an economic theory of the choice between harm-based and act-based sanctions in public enforcement. The efficiency of act-based versus harm-based sanctions is analyzed and a typology of the determinants is drawn up. In the simple model with risk neutral offenders, both legal policies have the same deterrent level, but act-based sanctions end up punishing more people and the sanctions are lower. However when the assessment of the probability of harm diverges across individuals, the choice between harm-based or act-based sanctions depends on whether it is the enforcer or the average individual who is better informed. Legal policy implications are discussed.
    Keywords: act-based sanction; harm-based sanction; uncertain harm
    JEL: K4
    Date: 2006–10
  3. By: Christopher R. Knittel; Victor Stango
    Abstract: We test whether firms use incompatibility strategically, using data from ATM markets. High ATM fees degrade the value of competitors' deposit accounts, and can in principle serve as a mechanism for siphoning depositors away from competitors or for creating deposit account differentiation. Our empirical framework can empirically distinguish surcharging motivated by this strategic concern from surcharging that simply maximizes ATM profit considered as a stand-alone operation. The results are consistent with such behavior by large banks, but not by small banks. For large banks, the effect of incompatibility seems to operate through higher deposit account fees rather than increased deposit account base.
    JEL: K21 L1 L12 L4 L41 L44 L84
    Date: 2006–10
  4. By: Theodore J. Joyce
    Abstract: The association between legalized abortion and crime remains a contentious finding with major implications for social policy. In this paper, I replicate analyses of Donohue and Levitt (2001, 2004, 2006) in which they regress age-specific arrests and homicides on cohort-specific abortion rates. I find that the coefficient on the abortion rate in a regression of age-specific homicide or arrest rates has either the wrong sign or is small in magnitude and statistically insignificant when adjusted for serial correlation. Efforts to instrument for measurement error are flawed and attempts to identify cohort from selection effects are mis-specified. Nor are their findings robust to alternative identification strategies. A convincing test of abortion and crime should be based on an exogenous change in abortion that had a demonstrable effect on fertility. Thus, I analyze changes in abortion rates before and after Roe to identify changes in unwanted fertility. I use within-state comparison groups to net out hard to measure period effects. I also follow Donohue and Levitt (2004) and average the effects of abortion on crime over 15 to 20 years of the life of a cohort to lessen the impact of the crack epidemic. I find little support for a credible association between legalized abortion and crime.
    JEL: K14 K4
    Date: 2006–10
  5. By: Reuben Gronau
    Abstract: An important part of the literature on regulatory economics is based on the US experience, where a well-established regulator faces a privately owned monopoly. It is sometimes forgotten that this model does not apply in many places where a newly established regulator faces a government owned, or a newly privatized, company. It definitely does not apply to the case of the Israeli communication industry where the government serves as regulator and at the same time is the owner of the wireline monopolist. The paper follows the regulatory experience of the Israeli communication industry over the last 20 years, analyzing its impact on consumers' welfare, the monopoly's profitability and its productivity. Though the Israeli institutions may look to a Western observer today as unique they were quite common in most of the developed economies prior to the wave of privatizations and deregulation in the 90s. The lessons learned from the Israeli experience have, however, more than a historic interest, and may be relevant for the regulatory process in general.
    JEL: K2 L43 L5 L51 L96
    Date: 2006–10
  6. By: Ram Singh
    Abstract: While the focus of mainstream economic analysis of liability rules remains on negligence liability, recently some legal scholars have argued for the sharing of liability. In this paper, our first objective is contribute to the debate regarding the desirability of the sharing of liability for the accident loss. To this end, we study the implications of various approaches toward liability assignment for the existence and efficiency of equilibria. In particular, we analyze the proposal of Calabresi and Cooper (1996). Contrary to what is suggested in the literature, we show that the sharing of liability when parties are either both negligent or both non-negligent does not threaten the existence of equilibria. Moreover, it does not dilute the incentives for the parties to take the due care. Our second objective is to extend the efficiency analysis beyond Shavell (1980, 1987) and Miceli (1997), to search for the second-best liability rules. We show that each of the standard liability rules fails to be efficient even from a second-best perspective. Furthermore, we show that second-best efficiency requires loss sharing between non-negligent parties. As corollaries to our main results, we reexamine some of the existing claims regarding the existence and efficiency of equilibria under liability rules.
    JEL: C62 D62 K13
    Date: 2006–10
  7. By: Naci H. Mocan; R. Kaj Gittings
    Abstract: Although decades of empirical research has demonstrated that criminal behavior responds to incentives, non-economists frequently express the belief that human beings are not rational enough to make calculated decisions about the costs and benefits of engaging in crime and therefore, a priori drawing the conclusion that criminal activity cannot be altered by incentives. However, scientific research should not be driven by personal beliefs. Whether or not economic conditions matter or deterrence measures such police, arrests, prison deaths, executions, and commutations provide signals to people is an empirical question, which should be guided by a solid theoretical framework. In this paper we extend the analysis of Mocan and Gittings (2003). We alter the original model in a number of directions to make the relationship between homicide rates and death penalty related outcomes (executions, commutations and removals) disappear. We deliberately deviate from the theoretically consistent measurement of the risk variables originally employed by Mocan and Gittings (2003) in a variety of ways. We also investigate the sensitivity of the results to changes in the estimation sample (removing high executing states for example) and weighting. The basic results are insensitive to these and a variety of other specification tests performed in the paper. The results are often strong enough to even hold up under theoretically meaningless measurements of the risk variables. In summary, the original findings of Mocan and Gittings (2003) are robust, providing evidence that people indeed react to incentives induced by capital punishment. Research findings about the deterrent effect of the death penalty evoke strong feelings, which could be due to political, ideological, religious, or other personal beliefs. Yet, such findings do not mean that capital punishment is good or bad, nor does it provide any judgment about whether capital punishment should be implemented or abolished. It is simply a scientific finding which demonstrates that people react to incentives. Therefore, there is no need to be afraid of this result.
    JEL: K0 K14 K4 K42
    Date: 2006–10
  8. By: Rafael Di Tella; Juan Dubra
    Abstract: We observe that countries where belief in the "American dream" (i.e., effort pays) prevails also set harsher punishment for criminals. We know from previous work that beliefs are also correlated with several features of the economic system (taxation, social insurance, etc). Our objective is to study the joint determination of these three features (beliefs, punitiveness and economic system) in a way that replicates the observed empirical patterns. We present a model where beliefs determine the types of contracts that firms offer and whether workers exert effort. Some workers become criminals, depending on their luck in the labor market, the expected punishment, and an individual shock that we call "meanness". It is this meanness level that a penal system based on "retribution" tries to detect when deciding the severity of the punishment. We find that when initial beliefs differ, two equilibria can emerge out of identical fundamentals. In the "American" (as opposed to the "French") equilibrium, belief in the "American dream" is commonplace, workers exert effort, there are high powered contracts (and income is unequally distributed) and punishments are harsh. Economists who believe that deterrence (rather than retribution) shapes punishment can interpret the meanness parameter as pessimism about future economic opportunities and verify that two similar equilibria emerge.
    JEL: E62 K14 K42 P16
    Date: 2006–10

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