New Economics Papers
on Law and Economics
Issue of 2007‒01‒13
eighteen papers chosen by
Jeong-Joon Lee, Towson University

  1. On Legal Origins and Brankruptcy Laws: the European Experience (1808-1914) By Jerome Sgard
  2. A Survey of the Literature on the WTO Dispute Settlement System By Horn, Henrik; Mavroidis, Petros C.
  3. Trade Agreements as Endogenously Incomplete Contracts By Horn, Henrik; Maggi, Giovanni; Staiger, Rikard W.
  4. Bargaining at divorce: The allocation of custody By Christine Atteneder; Martin Halla
  5. Optimal Executive Compensation vs. Managerial Power: A Review of Lucian Bebchuk and Jesse Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation" By Michael S. Weisbach
  6. Which Countries Become Tax Havens? By Dhammika Dharmapala; James R. Hines Jr.
  7. Black Box Warnings and Drug Safety: Examining the Determinants and Timing of FDA Warning Labels By Allan Begosh; John Goldsmith; Ed Hass; Randall W. Lutter; Clark Nardinelli; John A. Vernon
  8. Debt Enforcement Around the World By Simeon Djankov; Oliver Hart; Caralee McLiesh; Andrei Shleifer
  9. Lucky Directors By Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer
  10. Does the law alone explain the rise in bankruptcies in XIXth century France? By Pierre-Cyrille Hautcoeur; Nadine Levratto
  11. Education and Crime over the Life Cycle By Giulio Fella; Giovanni Gallipoli
  12. Property, liability and market power: The antitrust side of copyright. By Nicita, Antonio; Ramello, Giovanni B.
  13. An Economic Model of Fair Use By Thomas J. Miceli; Richard P. Adelstein
  14. Criminal Solicitation, Entrapment, and the Enforcement of Law By Thomas J. Miceli
  15. An Economic Theory of Mortgage Redemption Laws By Matthew J. Baker; Thomas J. Miceli; C. F. Sirmans
  16. On Negligence Rules and Self-Selection By Thomas J. Miceli
  17. Food Safety and Social Capital: A Double Side Connection By Valeria Sodano
  18. The Value of Certainty in Intellectual Property Rights: Stock Market Reactions to Patent Litigation By Marco, Alan C.

  1. By: Jerome Sgard
    Abstract: We study the impact of FDI on growth performance. We rely on a data set of Chinese cities between 1990 and 2002 to investigate the effects of FDI in the traditional growth regression framework using the GMM estimator for dynamic panels. Our growth model incorporates an explicit consideration of spatial dependence effects in the form of spatially lagged income and FDI. Our results reveal that Chinese cities take advantage not only of FDI flows received locally but also of FDI flows received by their neighbors.
    Keywords: bankruptcy, renegotiation, law history, legal origins
    JEL: G33 K12 N43
    Date: 2006–12
  2. By: Horn, Henrik (Research Institute of Industrial Economics); Mavroidis, Petros C. (Columbia University)
    Abstract: This paper surveys the law and economics literature on WTO dispute settlement. As a background, we first briefly lay out main features of the legal framework, and discuss possible roles of a dispute settlement mechanism. We then discuss the two main themes in the empirical literature on dispute settlement: (i) the determinants of participation by members as complainants, respondents and third parties; and (ii) the role of the DS system for the settling of disputes. The paper finally points to a number of areas that are in need of further research.
    Keywords: WTO; Dispute Settlement; DSU
    JEL: F13 K33
    Date: 2006–12–20
  3. By: Horn, Henrik (Research Institute of Industrial Economics); Maggi, Giovanni (Princeton University); Staiger, Rikard W. (Stanford University)
    Abstract: We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. Inspite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.
    Keywords: Trade Agreement; WTO; GATT; Endogenously Incomplete Contracts
    JEL: D86 F13 K33
    Date: 2007–01–03
  4. By: Christine Atteneder (Department of Economics, Johannes Kepler University Linz, Austria); Martin Halla (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We model the bargaining process of parents over custody at the time of divorce. First we assume an institutional setting where only sole custody is available. In a second step we reform this institutional setting and introduce the possibility of joint custody. We show that some parents, who would not be able to find an agreement in a sole custody regime, can find an agreement after the joint custody reform. Accordingly, our empirical analysis shows that the introduction of joint custody enables more parents to divorce by mutual consent.
    Keywords: (joint) custody; divorce; family law; bargaining
    JEL: J12 J13 K36 D1 C78
    Date: 2006–09
  5. By: Michael S. Weisbach
    Abstract: This essay reviews Bebchuk and Fried's "Pay without Performance: The Unfulfilled Promise of Executive Compensation". Bebchuk and Fried criticize the standard view of executive compensation, in which executives negotiate contracts with shareholders that provide incentives that motivate them to maximize the shareholders' welfare. In contrast, Bebchuk and Fried argue that executive compensation is more consistent with executives who control their own boards, and who maximize their own compensation subject to an "outrage constraint". They provide a host of evidence consistent with this alternative viewpoint. The book can be evaluated from both a positive and a normative perspective. From a positive perspective, much of the evidence they present, especially about the camouflage and risk-taking aspects of executive compensation systems, is fairly persuasive. However, from a normative perspective, the book conveys the idea that policy changes can dramatically improve executive compensation systems and consequently overall corporate performance. It is unclear to me how effective in practice are potential reforms designed to achieve such changes likely to be.
    JEL: G3 J4 K22
    Date: 2006–12
  6. By: Dhammika Dharmapala; James R. Hines Jr.
    Abstract: This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal. The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens -- and suggests that the range of sensible tax policy options is constrained by the quality of governance.
    JEL: H25 H87 K10
    Date: 2006–12
  7. By: Allan Begosh; John Goldsmith; Ed Hass; Randall W. Lutter; Clark Nardinelli; John A. Vernon
    Abstract: Comparing the safety of prescription drugs over time is difficult due to the paucity of reliable quantitative measures of drug safety. Both the academic literature and popular press have focused on drug withdrawals as a proxy for breakdowns in the drug safety system. This metric, however, is problematic because withdrawals are rare events, and they may be influenced by factors beyond a drug's safety profile. In the current paper, we propose a new measure: the incidence and timing of Black Box Warnings (BBWs). BBWs are warnings placed on prescription drug labels when a drug is determined to carry a significant risk of a serious or life-threatening adverse event. Using a unique data set, one that includes all new molecular entities (NMEs) submitted to the FDA between May 1981 and February 2006, and subsequently approved and marketed, we analyze the timing and incidence of BBWs. Our analyses also use data on several drug characteristics likely to affect the probability a new drug will receive a BBW. We draw several conclusions from our analyses. For example, drugs receiving priority FDA review are more likely to have BBWs at the time of approval than NMEs receiving standard review. We also find that early prescription volume and orphan drug status are associated with an increased likelihood of receiving a BBW. We do not, however, find a significant difference in the rate of BBWs across time cohorts. A comparison of NMEs approved before and after the 1992 Prescription Drug User Fee Act (PDUFA), which authorized the payment of user fees from drug manufacturers to the FDA in an effort to expedite new drug application (NDAs) review times, did not reveal a statistically significant difference in the rate of BBWs. Critics of PDUFA maintain that reduced FDA-approval times under PDUFA have compromised drug safety. We do not find empirical support for this contention.
    JEL: I1 I11 I18 I28 K2 K23 K32
    Date: 2006–12
  8. By: Simeon Djankov; Oliver Hart; Caralee McLiesh; Andrei Shleifer
    Abstract: We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. We identify several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. Our measure of efficiency of debt enforcement is strongly correlated with per capita income and legal origin and predicts debt market development across countries. Interestingly, it is also highly correlated with measures of the quality of contract enforcement and public regulation obtained in other studies.
    JEL: G33 K2
    Date: 2006–12
  9. By: Lucian A. Bebchuk; Yaniv Grinstein; Urs Peyer
    Abstract: While prior empirical work and much public attention have focused on the opportunistic timing of executives' grants, we provide in this paper evidence that outside directors' option grants have also been favorably timed to an extent that cannot be fully explained by sheer luck. Examining events in which public firms granted options to outside directors during 1996-2005, we find that 9% were "lucky grant events" falling on days with a stock price equal to a monthly low. We estimate that about 800 lucky grant events owed their status to opportunistic timing, and that about 460 firms and 1400 outside directors were associated with grant events produced by such timing. There is evidence that the opportunistic timing of director grant events has been to a substantial extent the product of backdating and not merely spring-loading based on private information. We find that directors' luck has been correlated with executives' luck. Furthermore, grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal, as well as when the board did not have a majority of independent directors.
    JEL: D23 G32 G38 J33 J44 K22 M14
    Date: 2006–12
  10. By: Pierre-Cyrille Hautcoeur; Nadine Levratto
    Abstract: This paper is the first result of a project aiming at understanding the history of bankruptcy law from an empirical economic perspective. By contrast with some proponents of "law and economics" (e.g.La Porta & alii, 1998), we consider that the impact of bankruptcy law on national economic performance cannot be deducted a priori from a simple description of the law, but can only be measured examining actual court practices and economic agents' behaviour. First of all, we believe that an empirical assessment of bankruptcy must start with a better understanding of what determines the proportions of debtor-creditors relationships which end-up in court (contrasting with those settled outside the courts, see Klapper, 2001). This simple question, which is not usually discussed, is a precondition for any interpretation of aggregate bankruptcy statistics. In this paper, we try to measure the impact of the changes in French bankruptcy law in the XIXth century focusing on the behaviour of economic agents as users of bankruptcy law for the sake of finding the best solution to their economic problems. Debtors used bankruptcy law in order to minimize their debt level when facing difficulties in servicing it, but they had to convince their creditors and/or the courts of their good faith, and faced the adverse effects of bankruptcy on their reputation and on the smooth functioning of their business. Creditors used bankruptcy law in order to force their debtors to pay, if they could. We use a new and still incomplete database constructed using both the yearly official statistics produced by the judicial system from 1830 on, and individual bankruptcy files from the Paris commercial court (Tribunal de commerce) archives in order to measure actual practices. The first part of the paper presents the evolution of French bankruptcy law during the XIXth century in its historical context. The second part briefly describes the theoretical model we use in order to understand the choices facing debtors and creditors in the face of financial distress. The last part proposes some major stylized facts concerning bankruptcies during that period and tries to understand their relationship with the legal evolution described before.
    Date: 2006
  11. By: Giulio Fella (Economics Queen Mary, University of London); Giovanni Gallipoli
    Abstract: This paper provides a framework within which to study the equilibrium impact of alternative policies. We develop an overlapping generation, life-cycle model with endogenous education and crime choices. Education and crime depend on different dimensions of heterogeneity, which takes the form of differences in innate ability and wealth at birth as well as employment shocks. The model is calibrated to match education enrolments, aggregate (property) crime rate and some features of the wealth distribution. In our numerical experiments we find that policies targeting crime reduction through increases in high school graduation rates are more cost-effective than simple incapacitation policies. The cost-effectiveness of high school subsidies increases significantly if they are targeted at the wealth poor. Financial incentives to high school graduation have radically different implications in general and partial equilibrium
    Keywords: Crime, Education, Life Cycle
    JEL: E26 H52 I28 K42
    Date: 2006–12–03
  12. By: Nicita, Antonio; Ramello, Giovanni B.
    Abstract: This paper investigates the interplay between copyright law and antitrust law in two distinct respects. We first argue that the origin of copyright seems to be rooted not only in the need to foster the production and the spread of knowledge but also in the necessity of limiting market power on the side of distributors. We then show the potential impact on market competition of the evolution of copyright as a property rule. While property rules reduce transaction costs in the standard case of bilateral monopoly over the exchange of information goods, they might increase transaction costs. When coupled with market power, a property rule enables the right holder to control uses and prices so as to implement entry deterrence strategies against potential competitors. Conversely, we argue that reversing property rules in favor of competitors or switching to liability rules for copyright may restore competitive outcomes. This conclusion brings new insights on the application of the essential facility doctrine to copyrighted works.
    Date: 2006–12
  13. By: Thomas J. Miceli (University of Connecticut); Richard P. Adelstein (Wesleyan University)
    Abstract: The doctrine of fair use allows limited copying of creative works based on the rationale that copyright holders would consent to such uses if bargaining were possible. This paper develops a formal model of fair use in an effort to derive the efficient legal standard for applying the doctrine. The model interprets copies and originals as differentiated products and defines fair use as a threshold separating permissible copying from infringement. The analysis highlights the role of technology in shaping the efficient standard. Discussion of several key cases illustrates the applicability of the model.
    Keywords: Fair use, copyright law, technological improvement
    JEL: K11 O34
    Date: 2005–11
  14. By: Thomas J. Miceli (University of Connecticut; University of Connecticut)
    Abstract: This paper examines the optimal use of criminal solicitation as a law enforcement strategy. The benefits are greater deterrence of crime (due to the greater likelihood of apprehension), and the savings in social harm as some offenders are diverted away from committing actual crimes through solicitation. The costs are the expense of hiring undercover cops and the greater likelihood of punishment. The optimal use of solicitation balances these factors. The paper also examines the justification for the entrapment defense, which exonerates those caught in a criminal solicitation but who otherwise had no predisposition to commit a crime.
    Keywords: Entrapment, criminal solicitation, law enforcement
    JEL: K14 K42
    Date: 2006–09
  15. By: Matthew J. Baker (City University of New York, Hunter College); Thomas J. Miceli (University of Connecticut); C. F. Sirmans (University of Connecticut)
    Abstract: Redemption laws give mortgagors the right to redeem their property following default for a statutorily set period of time. This paper develops a theory that explains these laws as a means of protecting landowners against the loss of nontransferable values associated with their land. A longer redemption period reduces the risk that this value will be lost but also increases the likelihood of default. The optimal redemption period balances these effects. Empirical analysis of cross-state data from the early twentieth century suggests that these factors, in combination with political considerations, explain the existence and length of redemption laws.
    Keywords: Mortgage redemption, default, subjective value
    JEL: G21 K11
    Date: 2006–09
  16. By: Thomas J. Miceli (University of Connecticut)
    Abstract: Economic models of negligence ordinarily involve a single standard of care that all injurers must meet to avoid liability. When injurers differ in their costs of care, however, this leads to distortions in their care choices. This paper derives the characteristics of a generalized negligence rule that induces injurers to self-select their optimal care levels. The principal features of the rule are (1) the due standard of care is maximal, and (2) liability increases gradually as injurers depart further from this standard. The results are broadly consistent with the gradation in liability under certain causation rules and under comparative negligence.
    Keywords: Liability, negligence rules, self-selection
    JEL: D82 K13
    Date: 2006–04
  17. By: Valeria Sodano
    Abstract: The globalisation of the agri-food system and the growing variety of food products and technologies have made it increasingly difficult for nation-states to regulate food safety and quality practices, giving rise to a shift from public to private governance, essentially in the form of private standards and TPC. The paper suggests that the current shift from public to private intervention calls for a different approach to the analysis of food safety policy, on both descriptive and normative ground. Two different concepts of social capital, one of trust and the other of power, are used in order to assess the welfare effects of the newest trends in food safety policy. Through the lens of social capital it is clear that private standards and TPC are not merely an impartial technical tool able to foster food markets efficiency and safety. Rather they are the means by which powerful actors in the chain discipline people and things in order to accomplish their own objectives
    JEL: L15 L66 K13
    Date: 2006–10
  18. By: Marco, Alan C. (Vassar College Department of Economics)
    Abstract: Using a sample of patents litigated between 1977 and 1997, I estimate stock market reactions to patent litigation decisions and to patent grants. I find that the resolution of uncertainty over validity and infringement is worth as much to the firm as the initial patent right. Each is worth about 1 to 1.5% excess returns. Additionally, I find that there are significant differences pre and post-1982 with the establishment of the Court of Appeals for the Federal Circuit. I also find that there are significant differences in reactions for plaintiff patent-holders and defendant patent-holders. Interestingly, there is no similar effect for appellate court decisions relative to the district court. To my knowledge, this is the first study that measures the stock market reactions to legal outcomes of patent cases.
    Date: 2006–11

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