New Economics Papers
on Law and Economics
Issue of 2007‒02‒10
twelve papers chosen by
Jeong-Joon Lee, Towson University

  1. A Cartel Analysis of the German Labor Institutions and Its Implications for Labor Market Reforms By Justus Haucap; Uwe Pauly; Christian Wey
  2. Do Employment Protections Reduce Productivity? Evidence from U.S. States By David H. Autor; William R. Kerr; Adriana D. Kugler
  3. Antitrust By Louis Kaplow; Carl Shapiro
  4. Behavioral Law and Economics By Christine Jolls
  5. Political Uncertainty and Crime in Transition Economies By Barbara G. Katz; Joel Owen
  6. A New Law for the Bond Rating Industry-- For Better or For Worse? By Lawrence J. White
  7. Law and State Power: The Institutional Roots of the Strong State in Islamic History By Metin Cosgel; Rasha Ahmed; Thomas Miceli
  8. Products Liability, Signaling and Disclosure By Andrew F. Daughety; Jennifer F. Reinganum
  9. Communicating Quality: A Unified Model of Disclosure and Signaling By Andrew F. Daughety; Jennifer F. Reinganum
  10. Geographic Indications for Javanese Teak: A constitutional change By Dwi R. Muhtaman; Philippe Guizol; Jean-Marc Roda; Herry Purnomo
  11. Crime Distribution and Victim Behavior during a Crime Wave By Rafael Di Tella; Sebastian Galiani; Ernesto Schargrodsky
  12. Price adjustment under the table: Evidence on efficiency-enhancing corruption By Levy, Daniel

  1. By: Justus Haucap; Uwe Pauly; Christian Wey
    Abstract: In this paper we apply standard cartel theory to identify the major institutional stabilizers of Germany's area tariff system of collective bargaining between a single industry union and the industry's employers association. Our cartel analysis allows us to demonstrate that recent labor policy reforms that intend to make labor markets more "flexible" further serve to stabilize the labor cartel while other pro-competitive proposals have failed. We argue that the pro-competitive recommendations failed exactly because of their destabilizing effects on insiders' incentives to stay in the labor cartel. We propose regulatory measures for injecting competition into Germany's labor markets that focus on the creation of new options for firms and workers outside the existing area tariff system; in particular, by liberalizing existing barriers for the establishment of a fully tariff-enabled union. Such an endeavor must go hand in hand with the institutionalization of a competition policy framework for labor market disputes as any destabilizing policy inevitably provokes counter measures of the incumbent labor cartel so as to protect their dominance vis-à-vis outsider competition.
    Keywords: Union, Collective Bargaining, Cartel Stability, Labor Market Reforms
    JEL: J52 K31 L12
    Date: 2006
  2. By: David H. Autor; William R. Kerr; Adriana D. Kugler
    Abstract: Theory predicts that mandated employment protections may reduce productivity by distorting production choices. Firms facing (non-Coasean) worker dismissal costs will curtail hiring below efficient levels and retain unproductive workers, both of which should affect productivity. These theoretical predictions have rarely been tested. We use the adoption of wrongful-discharge protections by U.S. state courts over the last three decades to evaluate the link between dismissal costs and productivity. Drawing on establishment-level data from the Annual Survey of Manufacturers and the Longitudinal Business Database, our estimates suggest that wrongful-discharge protections reduce employment flows and firm entry rates. Moreover, analysis of plant-level data provides evidence of capital deepening and a decline in total factor productivity following the introduction of wrongful-discharge protections. This last result is potentially quite important, suggesting that mandated employment protections reduce productive efficiency as theory would suggest. However, our analysis also presents some puzzles including, most significantly, evidence of strong employment growth following adoption of dismissal protections. In light of these puzzles, we read our findings as suggestive but tentative.
    JEL: J21 J32 J38 J63 J83 J88 K12 K31
    Date: 2007–01
  3. By: Louis Kaplow; Carl Shapiro
    Abstract: This is a survey of the economic principles that underlie antitrust law and how those principles relate to competition policy. We address four core subject areas: market power, collusion, mergers between competitors, and monopolization. In each area, we select the most relevant portions of current economic knowledge and use that knowledge to critically assess central features of antitrust policy. Our objective is to foster the improvement of legal regimes and also to identify topics where further analytical and empirical exploration would be useful.
    JEL: K21 L12 L13 L40 L41 L42
    Date: 2007–01
  4. By: Christine Jolls
    Abstract: Behavioral economics has been a growing force in many fields of applied economics, including public economics, labor economics, health economics, and law and economics. This paper describes and assesses the current state of behavioral law and economics. Law and economics had a critical (though underrecognized) early point of contact with behavioral economics through the foundational debate in both fields over the Coase theorem and the endowment effect. In law and economics today, both the endowment effect and other features of behavioral economics feature prominently and have been applied in many important legal domains. The paper concludes with reference to a new emphasis in behavioral law and economics on "debiasing through law" - using existing or proposed legal structures in an attempt to reduce people's departures from the traditional economic assumption of unbounded rationality.
    JEL: A12 B00 D30 D61 D63 D91 J70 K00 K12 K13 K41
    Date: 2007–01
  5. By: Barbara G. Katz; Joel Owen
    Date: 2007
  6. By: Lawrence J. White
    Date: 2007
  7. By: Metin Cosgel (University of Connecticut); Rasha Ahmed (University of Connecticut); Thomas Miceli (University of Connecticut)
    Abstract: The struggle for power has been a persistent phenomenon throughout history, involving the rulers, general public, and various other interest groups. As one of these groups, the legal community has been in a unique position to regulate the relationship between the ruler and the public because of its dual responsibilities to provide services to the public and to impose constraints on the rulers. Using a political economy model of state power and focusing on the power of the rulers to tax and spend, we study the role of the legal community in regulating the coercive powers of the rulers in Islamic history. We examine the power relationship between the rulers, the legal community, and the general public, explain long term trends in the development of the rulersÇ power, and identify the institutional roots of the strong state in the Ottoman Empire and other Islamic states.
    Keywords: state power, taxation, political economy, Islamic Law, legal community
    Date: 2007–01
  8. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: In this paper we examine the behavior of a firm that produces a product with a privately-observed safety attribute; that is, consumers cannot observe directly the product¹s safety. The firm may, at a cost, disclose its safety prior to sale; alternatively, if a firm does not disclose its safety then consumers can attempt to infer its safety from the price charged. The liability system is important because it is a determinant of the firm¹s full marginal cost, which consists of both manufacturing cost and liability cost. If the firm does not bear substantial liability for a consumer¹s harm, then the firm¹s marginal cost consists mainly of manufacturing cost, which is presumably higher for safer products. On the other hand, if the firm does bear substantial liability for a consumer¹s harm, then the firm¹s marginal cost consists of both manufacturing cost and liability cost. In this case, it is quite possible for a firm producing a safer product to have lower full marginal cost. We characterize the firm¹s equilibrium disclosure and pricing behavior, and compare that behavior and the associated welfare to what would occur under a regime of mandatory disclosure. We derive a range of disclosure costs that would induce a high-safety firm to choose disclosure over signaling. When the firm¹s full marginal cost is increasing (decreasing) in safety, a firm with a high-safety product will sometimes inefficiently choose to signal rather than disclose (disclose rather than to signal). Furthermore, we find that whether ex ante information regulation (in the form of mandatory disclosure) or reliance on ex post liability that induces information revelation is the better policy also depends upon whether the firm faces substantial liability for a consumer¹s harm. Finally, we find that a small fraction of naively optimistic consumers (who always buy as if the product were of high safety) leads to higher profits for both less-safe and safer products, and a reduced incentive for voluntary disclosure.
    Keywords: Products liability, disclosure, signaling, safety, quality
    JEL: K13 L15 D82
    Date: 2006–12
  9. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: Firms communicate product quality attributes to consumers through a variety of channels, such as pricing, advertising, releases of research reports and test results, or warranties and returns policies. The conceptualization of the economics of such communication is that it takes on one of two alternative forms when quality is exogenous: 1) disclosure of quality through a credible direct claim; 2) signaling of quality via producer actions that influence buyers¹ beliefs about quality. In general, these two literatures have ignored one-another. In this paper we argue that disclosure and signaling are two sides of a coin and that firms should be viewed as choosing which means of communication they will employ. Moreover, we show that integration of these two alternatives leads to a number of new implications about disclosure, signaling, firm preferences over type, and the social efficiency of the channel of communication employed.
    Keywords: Disclosure, signaling, quality, efficiency
    JEL: D82 L15 K13
    Date: 2007–01
  10. By: Dwi R. Muhtaman; Philippe Guizol; Jean-Marc Roda; Herry Purnomo
    Abstract: The central issue addressed in this paper is whether geographic indication (GI) can be applied as a tool to encourage some furniture industries and teak producers to take collective action to improve teak product quality and increase global market competitiveness. This paper explores the possibility of implementing GI on teak as a means to improve local community rights to manage teak resources, Perum Perhutani revenues and the perception of teak wood products on national and international markets, as well as employment in the furniture industry. The paper also discusses the institutional arrangement necessary to enable GI implementation on teak. After the 1998 financial crisis, Javanese furniture industries experienced a boom, but illegal logging in state forests surged as well. Unfortunately this development was disconnected from forest resources capacities. Stakeholders made a living from bad practices and misuse of forest resources. Furniture was rejected because of its bad quality, and wood was wasted. Instead of producing high-quality teak products, Java turned to mass production of cheap furniture for national and international markets. As a result wood supply was shrinking, putting many furniture enterprises and their hundreds of thousands of employees in jeopardy. Indonesian furniture is getting a bad reputation on the international market. Indonesians by culture have the perception that teak wood is something special, and on the world market teak is the best-known tropical species. In other good news, local community enthusiasm for planting teak is growing. Building on this we expect that GI to help maintain a common interest among stakeholders. GI designation is a sign that goods have a specific geographic origin and possess qualities or have a reputation because of that place of origin and the knowledge of local communities. Most commonly, a GI consists of the name of the place of origin of the goods. Agricultural products typically have qualities that derive from their place of production and are influenced by specific local factors, such as climate and soil.
    Keywords: Teak; Geographic Indication; Furniture; Community; Collective action
    JEL: K42 L73 O13 Q16 Q17 Q23 Q34 Q56 Q57
    Date: 2006–01
  11. By: Rafael Di Tella (Harvard Business School); Sebastian Galiani (Washington University in St. Louis -- Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) - Universidad Nacional de La Plata); Ernesto Schargrodsky (Universidad Torcuato Di Tella)
    Abstract: The study of how crime affects different income groups faces several difficulties. The first is that crime-avoiding activities vary across income groups. Thus, a lower victimization rate in one group may not reflect a lower burden of crime, but rather a higher investment in avoiding crime. A second difficulty is that, typically, only a small fraction of the population is victimized so that empirical tests often lack the statistical power to detect differences across groups. We take advantage of a dramatic increase in crime rates in Argentina during the late 1990s to document several interesting patterns. First, the increase in victimization experienced by the poor is larger than the increase endured by the rich. The difference appears large: low-income people have experienced increases in victimization rates that are almost 50 percent higher than those suffered by high-income people. Second, for home robberies, where the rich can protect themselves (by hiring private security, for example), we find significantly larger increases in victimization rates amongst the poor. In contrast, for robberies on the street, where the rich can only mimic the poor, we find similar increases in victimization for both income groups. Third, we document direct evidence on pecuniary and non-pecuniary protection activities by both the rich and poor, ranging from the avoidance of dark places to the hiring of private security. Fourth, we show the correlations between changes in protection and mimicking and changes in crime victimization. Fifth, we offer one possible way of using these estimates to explain the incidence of crime across income groups.
    Keywords: Victimization, income distribution, private security, victim adaptation.
    JEL: K42
    Date: 2006–12
  12. By: Levy, Daniel
    Abstract: Based on first-hand account, this paper offers evidence on price setting and price adjustment mechanisms that were illegally employed under the Soviet planning and rationing regime. The evidence is anecdotal, and is based on personal experience during the years 1960–1971 in the Republic of Georgia. The description of the social organization of the black markets and other illegal economic activities that I offer depicts the creative and sophisticated ways that were used to confront the shortages created by the inefficient centrally-planned command economic price system with its distorted relative prices. The evidence offers a glimpse of quite explicit micro-level evidence on various types of behavior and corruption that were common in Georgia. Rent-seeking behavior, however, led to emergence of remarkably well-functioning and efficiency enhancing black markets. The evidence, thus, underscores once again the role of incentives in a rent-seeking society.
    Keywords: Corruption; Black Market; Bribe; Price System; Distorted Relative Prices; USSR; Georgia; Command Economy; Price Setting; Price Adjustment; Cost of Price Adjustment; Menu Cost
    JEL: D73 O17 H26 D30 B14 E64 P20 Z13 K42 P26 H40
    Date: 2007–01–16

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