New Economics Papers
on Law and Economics
Issue of 2006‒12‒01
five papers chosen by
Jeong-Joon Lee, Towson University

  1. Who writes the rules for hostile takeovers, and why? - The peculiar divergence of US and UK takeover regulations By John Armour; David A. Skeel, Jr.
  2. The costs and benefits of secured creditor control in bankruptcy: Evidence from the UK By John Armour; Audrey Hsu; Adrian Walters
  3. False dawn for CSR? Shifts in regulatory policy and the response of the corporate and financial sectors in Britain By Simon Deakin; Richard Hobbs
  4. Why do budgets received by state prosecutors vary across districts in the United States? By Manu Raghav
  5. Creditor Protection and the Dynamics of the Distribution in Oligarchic Societies By Manuel Oechslin

  1. By: John Armour; David A. Skeel, Jr.
    Abstract: Hostile takeovers are commonly thought to play a key role in rendering managers accountable to dispersed shareholders in the "Anglo-American" system of corporate governance. Yet surprisingly little attention has been paid to the very significant differences in takeover regulation between the two most prominent jurisdictions. In the UK, defensive tactics by target managers are prohibited, whereas Delaware law gives US managers a good deal of room to maneuver. Existing accounts of this difference focus on alleged pathologies in competitive federalism in the US. In contrast, we focus on the "supply-side" of rule production, by examining the evolution of the two regimes from a public choice perspective. We suggest that the content of the rules has been crucially influenced by differences in the mode of regulation. In the UK, self-regulation of takeovers has led to a regime largely driven by the interests of institutional investors, whereas the dynamics of judicial law-making in the US have benefited managers by making it relatively difficult for shareholders to influence the rules. Moreover, it was never possible for Wall Street to "privatize" takeovers in the same way as the City of London, because US federal regulation in the 1930s both pre-empted self-regulation and restricted the ability of institutional investors to coordinate.
    Keywords: Hostile takeovers; History of corporate law; Comparative corporate law; Self-regulation; Institutional investors; Evolution of law; Anglo-American corporate governance
    JEL: G23 G34 G38 K22 N20 N40
    Date: 2006–09
  2. By: John Armour; Audrey Hsu; Adrian Walters
    Abstract: Recent theoretical literature has debated the desirability of permitting debtors to contract with lenders over control rights in bankruptcy. Proponents point to the monitoring benefits brought from concentrating control rights in the hands of a single lender. Detractors point to the costs imposed on other creditors by a senior claimant's inadequate incentives to maximise net recoveries. The UK provides the setting for a natural experiment regarding these theories. Until recently, UK bankruptcy law permitted firms to give complete ex post control to secured creditors, through a procedure known as Receivership. Receivership was replaced in 2003 by a new procedure, Administration, which was intended to introduce greater accountability to unsecured creditors to the governance of bankrupt firms, through a combination of voting rights and fiduciary duties. We present empirical findings from a hand-coded sample of 348 bankruptcies from both before and after the change in the law, supplemented with qualitative interview data. We find robust evidence that whilst gross realisations have increased following the change in the law, these have tended to be eaten up by concomitantly increased bankruptcy costs. The net result has been that creditor recoveries have remained unchanged. This implies that dispersed and concentrated creditor governance in bankruptcy may be functionally equivalent.
    Keywords: Bankruptcy costs; Contract bankruptcy; Secured creditor control, UK, receivership, administration
    JEL: G33 K22 G21
    Date: 2006–09
  3. By: Simon Deakin; Richard Hobbs
    Abstract: We present a model of CSR as a set of mechanisms for aligning corporate behaviour with the interests of society in reducing externalities and promoting a sustainable corporate sector. These mechanisms include voluntary action by companies to go above minimum legal standards, with the aim of enhancing competitiveness ('action beyond compliance'); interventions by regulators designed to promote self-regulation by industry ('reflexive law'); and steps taken by shareholders to put pressure on companies to make effective use of corporate assets (shareholder engagement). We then assess the degree to which the model is realized in current British practice. Focusing on the issue of working conditions, we find managerial resistance to the linking of CSR with internal employee relations, and obstacles to shareholder engagement on this issue.
    Keywords: Corporate social responsibility; Shareholder engagement; Reflexive law; Labour standards
    JEL: K22 M14
    Date: 2006–09
  4. By: Manu Raghav (Indiana University Bloomington)
    Abstract: This paper analyzes how the budget allocated to state prosecutors varies from one district to another and the reasons for such variation by using theoretical and empirical methods. The main results of this paper are as follows: Other factors being equal, more politically conservative prosecutorial districts get less budget, this decrease in budget with political conservatism is steeper in more affluent and also in more populous districts, and that there are fixed costs in operating a prosecutor’s office. Other less surprising results are that other factors remaining same, prosecutorial budget increases with the population, the crime rate, and with the affluence of the district.
    Keywords: Prosecuting Attorneys, District Attorneys, State Courts, Crime, Prosecution, Litigation Process, Budget
    JEL: K40 K41 K42 H72
    Date: 2006–11
  5. By: Manuel Oechslin
    Abstract: This paper introduces credit market imperfections and barriers to entrepreneurship into the neoclassical growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs - when borrowing from workers - may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favor of the oligarchs. The reason is that the workers are forced to charge ”low” borrowing rates in order to decrease the incumbents’ incentives to default. With dynastic preferences, low returns reduce the workers’ propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite’s welfare gains are large - even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development.
    Keywords: Creditor protection, dynamics of the distribution, infinite horizon, oligarchy
    JEL: O11 O16 K42
    Date: 2006–06

This issue is ©2006 by Jeong-Joon Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.