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on Law and Economics |
| By: | Margarita Sapozhnikov (Boston College) |
| Abstract: | It has long been thought that government antitrust policy has an effect on aggregate merger and acquisition activity, but the empirical support for this hypothesis has been weak and inconsistent. This paper uses a new empirical specification and a new dataset on mergers and acquisitions to provide support for this conjecture. Regression analysis shows that government policy has a significant influence on mergers and that the nature of the effects depends on the type of merger. Fitting the time series into a two-state Markov switching model shows that conglomerate and horizontal time series fol low different dynamics for the last half century, which is most likely caused by the dissimilar treatment of the two types of merger by the government. Only the conglomerate merger and acquisition time series is well described by a two-state Markov switching model. In contrast, the horizontal time series has a break in the early 1980s that may be attributed to the dramatic change in government policy. |
| Keywords: | Antitrust enforcement, mergers and acquisitions, time series models, Markov switching |
| JEL: | L40 K21 C32 C50 |
| Date: | 2006–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:656&r=law |
| By: | Luca Anderlini; Leonardo Felli; Andrew Postlewaite |
| 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. |
| Keywords: | optimal courts, informational externalities, ex-ante welfare |
| JEL: | C79 D74 D89 K40 L14 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1847&r=law |
| By: | Theocharis N. Grigoriadis; Benno Torgler |
| Abstract: | This paper investigates the relative impact of regional energy production on the legislative choices of Russian Duma deputies on energy regulation between 1994 and 2003. We apply Poole’s optimal classification method of roll call votes using an ordered probit model to explain energy law reform in the first decade of Russia’s democratic transition. Our goal is to analyze the relative importance of home energy on deputies’ behavior, controlling for other factors such as party affiliation, electoral mandate, committee membership and socio-demographic parameters. We observe that energy resource factors have a considerable effect on deputies’ voting behavior. On the other hand, we concurrently find that regional economic preferences are constrained by the public policy priorities of the federal center that continue to set the tone in energy law reform in post-Soviet Russia. |
| Keywords: | energy regulation; energy roll law reform; energy resources; roll call votes; legislative politics; State Duma; Russia |
| JEL: | Q40 D72 K23 P27 P37 P31 R11 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:cra:wpaper:2006-25&r=law |
| By: | M. Keith Chen (Yale School of Management, Yale University); Barry J. Nalebuff (Yale School of Management, Yale University) |
| Abstract: | While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good. Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft's joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality. There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B's surplus highlights the challenges facing a firm whose product depends on an essential good. |
| Keywords: | Bundling, Complements, Monopoly leverage, Net neutrality, Price discrimination, Tying, Versioning |
| JEL: | C7 D42 D43 K21 L11 L12 L13 L41 M21 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1588&r=law |
| By: | Randolph Sloof (Universiteit van Amsterdam); Hessel Oosterbeek (Universiteit van Amsterdam); Joep Sonnemans (Universiteit van Amsterdam) |
| Abstract: | Theory predicts that default breach remedies are immaterial whenever contracting costs are negligible. Some experimental studies, however, suggest that in practice default rules do matter, as they may affect parties\' preferences over contract terms. This paper presents results from an experiment designed to address the importance of default breach remedies for actual contract outcomes. We find that default rules do have an impact. The reason for this is not that contract proposals and/or responses are biased towards the default, but rather that parties often disagree over what the best contract is and therefore end up with the default. |
| Keywords: | breach remedies; default remedies; experiments |
| JEL: | K12 C91 |
| Date: | 2006–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060082&r=law |
| By: | Fabrizio Cafaggi |
| Abstract: | The European regulatory space is changing. The role of private regulation is increasing more as a complement of public regulation than as an alternative to it. The emergence of new regulatory models coordinating public and private regulators has characterized the last decade. They reflect the crisis of the regulatory state but at the same time pose serious questions to the legitimacy and accountability of private regulators. The paper distinguishes five different models: public regulation, co-regulation, delegated private regulation, ex post recognized private regulation and private regulation. Within these models it concentrates on the differences between pure private regulation and modes through which public and private actors coordinate to perform regulatory activity. The paper addresses the questions posed by these changes in terms of rule-making and monitoring. It focuses particularly on three dimensions: the alternative between monopolistic private regulators and plurality of regulators, the conflict of interest and the liability regimes. It underlines on the one hand the opportunity for new rules and on the other hand the necessity to distinguish between private regulators operating in coordination with public institutions and those whose regulatory power is embedded in freedom of contract. These two typologies present different issues. Different modes of control should be used to correlate the new powers with new liabilities. The legitimacy of private regulators and their contribution to a democratic regulatory regime will depend on the ability of legislators and private parties to device adequate European and transnational rules and institutions. This is the main challenge ahead. |
| Keywords: | regulation; regulatory competition; judicial review |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:erp:euilaw:p0049&r=law |
| By: | Joseph H. Golec; John A. Vernon |
| Abstract: | EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms. Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D). Some differences have increased over time. In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs. |
| JEL: | I11 I18 K2 O34 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12676&r=law |
| By: | Alberto Abadie; Sofia Dermisi |
| Abstract: | The attacks of September 11, 2001, and more recently the Madrid and London downtown train bombings, have raised concerns over both the safety of downtowns and the continuous efforts by terrorists to attack areas of such high density and significance. This article employs building-level data on vacancy rates to investigate the impact of an increased perception of terrorist risk after 9/11 on the office real estate market in downtown Chicago. Chicago provides the perfect laboratory to investigate the effects of an increase in the perceived level of terrorist risk in a major financial district. Unlike in New York, the 9/11 attacks did not restrict directly the available office space in downtown Chicago. Moreover, the 9/11 attacks induced a large increase in the perception of terrorist risk in the Chicago Central Business District, which includes the tallest building in the U.S. (the Sears Tower) and other landmark buildings which are potential targets of large-scale terrorist attacks. Our results show that, following the 9/11 attacks, vacancy rates experienced a much more pronounced increase in the three most distinctive Chicago landmark buildings (the Sears Tower, the Aon Center and the Hancock Center) and their vicinities than in other areas of the city of Chicago. Our results suggest that economic activity in Central Business Districts can be greatly affected by changes in the perceived level of terrorism. |
| JEL: | H56 K42 R33 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12678&r=law |
| By: | Nicola Gennaioli; Andrei Shleifer |
| Abstract: | Does it matter for the outcome of a trial who the judge is? Legal practitioners typically believe that the answer is yes, yet legal scholarship sees trial judges as predictably enforcing established law. Following Frank (1951), we suggest here that trial judges exercise considerable discretion in finding facts, which explains the practitioners’ perspective and other aspects of trials. We identify two motivations for the exercise of such discretion: judicial policy preferences and judges’ aversion to reversal on appeal when the law is unsettled. In the latter case, judges exercising fact discretion find the facts that fit the settled precedents, even when they have no policy preferences. In a standard model of a tort, judicial fact discretion leads to setting of damages unpredictable from true facts of the case but predictable from knowledge of judicial preferences, it distorts the number and severity of accidents, and generates welfare losses. It also raises the incidence of litigation relative to settlement, and encourages litigants to take extreme positions in court, especially in new and complex disputes where the law is unsettled. |
| JEL: | K13 K4 K41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12679&r=law |
| By: | Ela Glowicka (Wissenschaftszentrum Berlin, Reichpietschufer 50, 10785 Berlin, Germany. glowicka@wz-berlin.de) |
| Abstract: | Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper. |
| Keywords: | State aid, European Union, Discrete-time hazard, Bivariate probit |
| JEL: | K2 G3 L5 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:176&r=law |
| By: | Fali Huang (School of Economics and Social Sciences, Singapore Management University) |
| Abstract: | This paper studies the transition of contract enforcement institutions. The preva- lence of relational contracts, low legal quality, strong cultural preference for personalistic relationships, low social mobility, and highly unequal endowment form a cluster of mutually reinforcing institutions that hinder economic development. The cultural element per se does not necessarily reduce social welfare though it may slow down the legal development, while the real problem lies in endowment inequality and low social mobility. Thus a more equal distribution of resources may be the ultimate key to unravel the above interlocking institutions. These results are generally consistent with the empirical evidence. |
| Keywords: | relational contract, legal contract enforcement, institutions, endowment inequality, economic development |
| JEL: | O1 K49 C72 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:siu:wpaper:23-2006&r=law |
| By: | Daniel Berkowitz; Chris Bonneau; Karen Clay |
| Abstract: | . . . |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:pit:wpaper:286&r=law |
| By: | Hoshino, Taeko |
| Abstract: | The involvement of members of owners' families in the running of large family businesses in Mexico is decreasing. Although family members still hold key posts such as that of CEO, other executive posts tend to be delegated to professional salaried managers. Top managers, including family members, share some common characteristics. They are young compared with managers in other developed countries, their quality as human resources is high, and many of them are graduates of overseas MBA courses. Most of them are sufficiently experienced. Improvement of quality among top managers is a recent phenomenon in Mexico, and has been encouraged mainly by the following two factors. First, globalization of business activities was promoted by intense competition among firms under conditions of market liberalization. In order to equip themselves with the ability to cope with the globalization of their operations, large family businesses tried hard to improve the quality of top management, by training and educating existing managers, and/or by recruiting managers in the outside labor market. Second, developments in the Mexican economy during the 1990s led to a growth in the labor market for top managers Thus, business restructuring caused by bankruptcy, as well as mergers and acquisitions, privatization and so on, led to the dismissal of business managers who then entered the labor market in large numbers. The increasing presence of these managers in the labor market helped family businesses to recruit well-qualified senior executives. |
| Keywords: | Family business, Ownership, Management, Managers, Mexico, Family concern, Large-scale enterprises, Industrial management |
| JEL: | K22 L22 M12 M13 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper40&r=law |
| By: | Yanagawa, Noriyuki; Ito, Seiro; Watanabe, Mariko |
| Abstract: | It is widely recognized that trade credit is an important financial mechanism, particularly in developing economies and transition economies where institutions are weak. This paper documents theoretical analysis and empirical accounts on what facilitates an effective supply of trade credit based on original surveys conducted in P.R. of China. Our theory predicts that trade volume and trade credit are increasing function of cash held by the buyer and enforcement technology of the seller. Furthermore, if the state sector’s enforcement technology is high, it has positive external effect to expand the volumes of trade credit and trades in the whole economy. From the data, we found that government made active commitment in enforcement of trade credit contract and the government owned firms are main supplier and receivers of trade credit, which suggest that enforcement by government and state sector were effective against presumptions in the previous literatures. |
| Keywords: | Law and finance, Economic growth, Incomplete contract, Enforcement, Trade policy, Credit, China |
| JEL: | G2 K0 O5 P31 Q5 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper58&r=law |
| By: | Shimizu, Tatsuya |
| Abstract: | As in many other developing countries, family businesses are major players in the Peruvian economy. Despite their growth into large-scale groups spanning a wide range of businesses, the owner families still have strong control over their ownership and management. However, Peru's liberal economic reforms in the 1990s brought intense competition into the national market. Not only have these family businesses been forced to compete against large-scale foreign capital that entered the national market through the privatization of state enterprises, but also against cheap goods imported from foreign countries. In order to compete, family businesses have had to move beyond the limited human resources available within the family. The advancement within owner families of new generations with better education and training together with the promotion to top managerial positions of professional salaried managers from outside the family are some of the measures owner families are taking to overcome their human resource limitations. |
| Keywords: | Family business, Ownership, Managers, Family concern, Business enterprises, Industrial management, Peru |
| JEL: | K29 M12 O54 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper59&r=law |
| By: | Takeuchi, Takayuki |
| Abstract: | Ever since the handover of the territory in 1997, Hong Kong has had its own unique law and itsown economic system and international legal personality, and has not been integrated withMainland China. The Basic Law guarantees the uniqueness of the Hong Kong SAR until 2047. But close economic ties between Hong Kong and the Mainland will promote closer economic integration. The Basic Law limits only a customs union and the introduction of a single currency, but not the formation of a Free Trade Agreement (hereafter FTA) and monetary union. FTA has already been realized in the form of the Closer Economic Partnership Arrangement (hereafter CEPA). The Hong Kong SAR government, including the bureaucrat as well as the Chief Executive Tung Chee Hwa, was opposed to, and hesitant towards, the formation of a regional trade agreement with the Mainland, but the business community made them to adopt a positive attitude towards the CEPA. It is unclear how much integration can been deepened, but it can be argued that the current policy of the Hong Kong SAR is too supportive of business, and an excessive degree of economic integration may threaten the uniqueness of Hong Kong. But if Hong Kong achieves democracy and enjoys complete autonomy, it will be easy for economic integration to co-exist with the ‘One Country, Two Systems’ approach, in the interests of the business community and of the citizens of the SAR. |
| Keywords: | Hong Kong, China, Integration, Politic, FTA, Economic systems, Economic policy |
| JEL: | F15 H77 K00 N45 P16 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper70&r=law |
| By: | Georgy Egorov (Center for Economic and Financial Research); Konstantin Sonin (New Economic School, Center for Economic and Financial Research) |
| Abstract: | The possibility of treason by a close associate has been a nightmare of most dictators throughout history. Better informed viziers are also better able to discriminate among potential plotters, and this makes them more risky subordinates for the dictator. To avoid this, dictators, especially those which are weak and vulnerable, sacrifice the competence of their agents, hiring mediocre but loyal subordinates. However, any use of incentive schemes by a dictator is limited by the fact that all punishments are conditional on the dictator’s own survival, and a dictator is typically unable to commit to the optimal (i.e., less than capital) punishment for those who unsuccessfully plotted against him. We endogenize loyalty and competence in a principal-agent game between a dictator and his (probably, few) viziers in both static and dynamic settings. The dynamic model allows us to focus on the succession problem that insecure dictators face. |
| Keywords: | Dictatorship, Loyalty and Competence, Positive Political Theory, Principal-Agent, Non-democratic Succession |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ads:wpaper:0053&r=law |