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on Law and Economics |
| By: | Pietro Tommasino (Bank of Italy) |
| Abstract: | Why do some countries suffer from backward financial institutions and weak corporate governance rules? We show that, even if, overall, the economy would benefit corporate governance reforms, not all the agents would stand to gain from the improvement. In particular, entrepreneurs and firms that are already well-established fear better rules, which would allow the financing of new firms and enhance competition. As a consequence, industry incumbents will try to influence the political process to block the reforms. If national political institutions are weak, these efforts are likely be successful. |
| Keywords: | Corporate Governance, Entry, Financial Development, Investor Protection, Politics |
| JEL: | G30 G38 K22 K42 L11 O16 P16 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_604_06&r=law |
| By: | Luca Anderlini; Leonardo Felli; Andrew Postlewaite |
| 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. |
| Keywords: | optimal courts, informational externalities, ex-ante welfare, informed principal, menu contracts |
| JEL: | C79 D74 D89 K40 L14 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1852&r=law |
| By: | Panu Poutvaara; Mikael Priks |
| Abstract: | This paper isolates the causal effect of policing on group violence, using unique panel data on self-reported crime by soccer and ice hockey hooligans. The problem of reverse causality from violence to policing is solved by two drastic reallocations of the Stockholm Supporter Police unit to other activities following the 9/11 terrorist attack in September 2001 and the Tsunami catastrophe in December 2004. Difference-in-difference analysis reveals that Stockholm-related hooligan violence increased dramatically during these periods. |
| Keywords: | police, violence, hooliganism, natural experiments |
| JEL: | K10 K42 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1882&r=law |
| By: | Almeida, Rita; Carneiro, Pedro |
| Abstract: | This paper investigates how enforcement of labour regulation affects the firm's use of informal labour, firm size and firm performance. Using firm level data on employment, capita, and output, census data on informal employment at the city level, and administrative data on enforcement of regulation at the city level, we show that in areas where law enforcement is stricter firms employ a smaller proportion of informal workers. Furthermore, by reducing the firm's access to unregulated labour stricter enforcement is also associated with smaller firms, less fluid labour markets, and (possibly) lower labour productivity. We control for different regional and firm characteristics, and we instrument enforcement with the distance between firm location and the location of an enforcement office, a measure of access of labour inspectors to firms. Taken together, our findings suggest that increased access to labour flexibility frees the firm from growth constraints, and it is likely to contribute to an improvement in productivity. |
| Keywords: | employment; informal sector; labour demand; labour markets; productivity; regulation |
| JEL: | H00 H10 J50 K20 L50 L60 O17 O40 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5976&r=law |
| By: | Fafchamps, Marcel; Minten, Bart |
| Abstract: | Using original survey data, we examine how insecurity affects welfare. Correcting for unobserved heterogeneity and possible endogeneity, we find an effect of insecurity on incomes, school enrolment, health status, and infant mortality. Results are robust to the inclusion of various shocks potentially affecting both welfare and insecurity. But the significance of the insecurity effect varies somewhat with the method used. We further find a significant effect of insecurity on the provision of certain public services, notably schooling and health care, and in the placement of development projects. Taken together, the evidence suggests that insecurity is an important determinant of welfare in the country studied. |
| Keywords: | crime; health; project placement; school enrolment |
| JEL: | I38 K42 O15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5999&r=law |
| By: | Dubois, Pierre; Vukina, Tomislav |
| Abstract: | The objective of this paper is to develop an analytical framework for estimation of the parameters of a structural model of an incentive contract under moral hazard, taking into account agents heterogeneity in preferences. We show that allowing the principal to strategically distribute the production inputs across heterogenous agents as part of the contract design, the principal is able to change what appears to be a uniform contract into individualized contracts tailored to fit agents' preferences or characteristics. Using micro level data on swine production contract settlements, we find that contracting farmers are heterogenous with respect to their risk aversion and that this heterogeneity affects the principal's allocation of production inputs across farmers. Relying on the identifying assumption that contracts are optimal, we obtain the estimates of a lower and an upper bound of agents' reservation utilities. We show that farmers with higher risk aversion have lower outside opportunities because of lower reservation utilities. |
| Keywords: | agency contracts; heterogeneity; moral hazard; optimal incentives; risk aversion |
| JEL: | D82 K32 L24 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6011&r=law |
| By: | Graziella Bertocchi (Università di Modena e Reggio Emilia, CEPR, CHILD and IZA Bonn); Chiara Strozzi (Università di Modena e Reggio Emilia) |
| Abstract: | We study the determinants of 19th century mass migration with special attention to the role of institutional factors beside standard economic fundamentals. We find that economic forces associated with income and demographic differentials had a major role in the determination of this historical event, but that the quality of institutions also mattered. We evaluate separately the impact of political institutions linked to democracy and suffrage and of those institutions more specifically targeted at attracting migrants, i.e., citizenship acquisition, land distribution, and public education policies. We find that both sets of institutions contributed to this event, even after controlling for their potential endogeneity through a set of instruments exploiting colonial history and the quality of institutions inherited from the past. |
| Keywords: | 19th century international migration, institutions, migration policy, democracy, colonial history |
| JEL: | F22 P16 N33 O15 K40 F54 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2499&r=law |
| By: | Graziella Bertocchi (Università di Modena e Reggio Emilia, CEPR, CHILD and IZA Bonn); Chiara Strozzi (Università di Modena e Reggio Emilia) |
| Abstract: | We investigate the origin and evolution of the legal institution of citizenship from a political economy perspective. We compile a new data set on citizenship laws across countries of the world which documents how these institutions have evolved in the postwar period. We show that, despite a persistent impact of the original legislation, they have responded endogenously and systematically to a number of economic determinants, such as migration, the size of government, and the demographic structure of the population. Overall, a large stock of migrants decreases the probability of adoption of a mix of jus soli and jus sanguinis provisions, while it pushes jus sanguinis countries toward the adoption of jus soli elements. The welfare burden proves not to be an obstacle for a jus soli legislation, while demographic stagnation encourages the adoption of mixed and jus soli regimes. We also gauge the potential role of legal, political and cultural determinants, and find that a jus sanguinis origin is a factor of resistance to change, that a high degree of democracy promotes the adoption of jus soli elements while the instability of state borders associated with decolonization impedes it, and that cultural factors have no impact. |
| Keywords: | citizenship laws, international migration, legal origins, democracy, borders |
| JEL: | P16 K40 F22 O15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2510&r=law |
| By: | Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer |
| Abstract: | We study the relation between corporate governance and opportunistic timing of CEO option grants via backdating or otherwise. Our methodology focuses on how grant date prices rank within the price distribution of the grant month. During 1996-2005, about 12% of firms provided one or more lucky grant -- defined as grants given at the lowest price of the month -- due to opportunistic timing. Lucky grants were more likely when the board did not have a majority of independent directors and/or the CEO had longer tenure -- factors associated with increased influence of the CEO on pay-setting. We find no evidence that gains from manipulated grants served as a substitute for compensation paid through other sources; total reported compensation from such sources was higher in firms providing lucky grants. Finally, opportunistic timing has been widespread throughout the economy, with a significant presence in each of the economy's twelve (Fama-French) industries. |
| JEL: | D23 G32 G38 J33 J44 K22 M14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12771&r=law |
| By: | A. Mitchell Polinsky; Steven Shavell |
| Abstract: | We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess -- since such information has value to consumers -- voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure. The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent. |
| JEL: | D18 D62 D82 H23 K13 L15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12776&r=law |
| By: | Douglass C North; John Joseph Wallis; Barry R. Weingast |
| Abstract: | Neither economics nor political science can explain the process of modern social development. The fact that developed societies always have developed economies and developed polities suggests that the connection between economics and politics must be a fundamental part of the development process. This paper develops an integrated theory of economics and politics. We show how, beginning 10,000 years ago, limited access social orders developed that were able to control violence, provide order, and allow greater production through specialization and exchange. Limited access orders provide order by using the political system to limit economic entry to create rents, and then using the rents to stabilize the political system and limit violence. We call this type of political economy arrangement a natural state. It appears to be the natural way that human societies are organized, even in most of the contemporary world. In contrast, a handful of developed societies have developed open access social orders. In these societies, open access and entry into economic and political organizations sustains economic and political competition. Social order is sustained by competition rather than rent-creation. The key to understanding modern social development is understanding the transition from limited to open access social orders, which only a handful of countries have managed since WWII. |
| JEL: | A0 K0 K22 N0 N4 N40 O1 O4 P0 P1 P16 P2 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12795&r=law |
| By: | Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn) |
| Abstract: | Oligopoly has been among the first topics in the experimental economics. Over half a century, some 150 papers have been published. Each individual paper was interested in demonstrating one effect. But in order to do so, experimenters had to specify many more parameters. That way they have generated a huge body of evidence, untapped thus far. This meta-analysis makes this evidence available. More than 100 of the papers lend themselves to calculating an index of collusion. The data bank behind this paper covers some 700 different settings. The experimental results may be normalised as a percentage of the span between the Walrasian and the Pareto outcomes. The same way, results may be expressed as a percentage of the distance between the Nash and the Pareto outcomes. For each and every of the parameters, these two indices make it possible to answer two questions: how far is the market outcome away from the competitive equilibrium? And how good is the Nash prediction? Most importantly, however, the meta-analysis sheds light on how features of the experimental setting interact with each other. Most main effects and many interaction effects are indeed statistically significant. |
| Keywords: | oligopoly, collusion, unilateral effect, experiment |
| JEL: | C91 D21 D43 K21 L13 L41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mpg:wpaper:2006_27&r=law |