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on Law and Economics |
| By: | Moshe Pinto |
| Abstract: | Corporate governance has recently received much attention due to Adelphia, Enron, WorldCom, and other high profile scandals, serving as the impetus to such recent U.S. regulations as the Sarbanes-Oxley Act of 2002, considered to be the most sweeping corporate governance regulation in the past 70 years, and enhancing the long standing bandwagon for increasing shareholder power. More broadly, the Berle and Means model, in which professional managers control large public companies, is being questioned. The separation of ownership and control creates an agency problem, that managers may run the firm in their own, rather than the shareholders' interest, choosing the maximization of their own utility over the maximization of shareholder value. Commentators with a Law and Economics bent have long claimed that shareholder passivity is inevitable. Modern companies have grown so large that they must rely on many shareholders to raise capital. The shareholders then face severe collective action problems in monitoring corporate managers. Each shareholder owns a small fraction of a company's stock, and thus receives only a fraction of the benefits of playing an active role, while bearing most of the costs. Passivity serves each shareholder's self-interest, even if monitoring promises collective gains. Thus, commentators have entrusted the hostile takeover mechanism to discipline the managers by threatening to oust poor performers by bidders who would consolidate ownership and control. Anti takeover legislation and the spread of intra-corporate mechanisms such as poison pills have, in effect, sterilized the hostile takeover mechanism of its disciplining effect, and have turned commentators' attention to Institutional investors as potential monitors of management. Institutional Investors, such as pension funds and mutual funds, which control over half of publicly traded equities in the United States, by virtue of their size are an exception to the small, rationally apathetic shareholder envisioned by Berle and Means, and thus become the natural candidates to watch the watchers. Bernard S. Black has eloquently stated the case for institutional over sight noting that: "The case for institutional oversight, broadly speaking, is that product, capital, labor, and corporate control market constraints on managerial discretion are imperfect, corporate managers need to be watched by someone, and the institutions are the only watchers available." And indeed, Institutional investors have, in the past decade, increasingly engaged in corporate governance activities, introducing proposals under rule 14a-8, the Securities and Exchange Commission's (SEC) proxy proposal rule, and privately negotiating with management of targeted firms with the stated goal of improving corporate performance (jawboning). Shareholder activism, championed by institutional investors and embraced by individuals, has revolutionized U.S. corporate governance. Investors have assumed a looming presence in corporate boardrooms, and the stories of ousted CEOs, emboldened outside directors, shareholder "target" lists, and corporate capitulations fill the financial headlines. The evident Increase in Institutional Investor's activity, stemmed, inter alia, from the change of position of U.S. government agencies regarding institutional involvement in corporate ownership, control, and monitoring. For instance, the Labor Department now encourages pension funds to be active in monitoring and communicating with corporate management if such activities are likely to increase the value of the funds' holdings11. In 1992 and 1997 decisions by the SEC allowed shareholders more flexibility in communicating with each other and submitting shareholder proposals. And, in 1999, the U.S. Congress repealed the Glass-Stega Act, ending restrictions on direct ownership of U.S. equity by banks. More recently, in July 2003, the Securities and Exchange Commission proposed opening up the director nominations process to shareholders ("SEC Roundtable"). The General feature of the above regulatory milieu change is enabling Institutional Investors to take action not aimed at control and enable Institutional Voice. To be sure institutional activism hasn't been monolithic and different institutions vary in their craving for the task and there are reasons to suspect that even further reducing legal encumbrances won't stir the more lethargic institutions of their somnolence. Taking them as a whole, I conclude that there is a strong case for enhanced legal measures that will further facilitate joint shareholder action not directed at control, and further reduce obstacles to particular institutions owning stakes not large enough to confer working control. Narrowly speaking, I purport that the core of legislative action should be on requiring companies, under certain circumstances, to include in their proxy materials shareholder-nominated candidates for the board. The concerns about institutional oversight arise for two main reasons. First, controlling shareholders may divert funds to themselves at the expense of noncontrolling shareholders or may pursue interests of special interest groups that will use their power as lever vis-à-vis corporate management. Second, the institutions are themselves managed by money managers who need (and often don't get) watching and appropriate incentives. Several factors limit the downside risk from increasing institutional power: First, the accumulated evidence concerning the consequences of the increased institutional investors activism proves that much of the alleged adverse effects of institutional voice did not materialize. On the contrary, with a few exceptions the institutions are mainly passive. Second, institutional voice means asking one set of agents (money managers) to watch another set of agents (corporate managers). Money managers have limited incentives to monitor because they keep only a fraction of the portfolio gains. But, money managers also won't take the legal chances that an individual shareholder might, because they face personal risk if they breach their fiduciary duty or break other legal rules. The institution, however, realizes most of the gains from such misdeeds. That limits the downside risk from institutional voice. Third, institutional voice requires a number of institutions, including different types of institutions, to join forces to exercise influence. That further limits the downside risk from institutional power, because money managers can monitor each others' actions to some extent, and won't cooperate unless a proposed initiative benefits all the shareholders; Reputation is a central element in this second form of watching. Diversified institutions are repeat players that interact over and over, at many different companies, over a span of years. Game theory teaches us that a repeat game of this sort induces the actors to cooperate earn good reputation and elicit cooperation from other institutions; realizing that cheating will invite retaliation ("tit for tat" strategy). Fourth, corporate managers can watch their watchers, and if the institutions abuse their power, corporate managers can complain -- loudly and often -- to lawmakers. If the costs to other shareholders, including smaller institutions, of abuse of power by the largest institutions exceed the other shareholders' gains from better monitoring, those shareholders will support corporate managers' efforts to clip the large institutions' wings. Money managers know that, which limits their incentive to misbehave in the first place. Much of the promise of shareholder monitoring lies in informal shareholder efforts to monitor corporate managers or to express a desire for change in a company's management or policies. But, in order to induce managers to cooperate with the active shareholders in the pursuit of improved corporate performance, shareholders must have a "big stick" in the form of a viable option to remove the board of directors and subsequently the underperforming management. Moreover, because institutional incentives push against direct, company-specific monitoring, facilitating indirect monitoring through the board of directors would enhance the chance of awakening private institutional investors from their alleged somnolence. If the institutions can more easily select directors, at least for a minority of board seats, they can hire directors to watch companies on their behalf and be accountable to them. Currently, directors are often more loyal to corporate officers than to the shareholders whom the directors nominally serve. Reform should focus on the process of voting, rather than on substantive governance rules. To be sure, lawmakers should not mandate activism or impose large regulatory costs on companies or shareholders; rather they should empower the institutions to make their own decisions about optimal governance structures. They have incentives to make good choices -- or at least better choices than lawmakers would. Oversight will take place only where the institutions conclude that the benefits of monitoring outweigh the costs. The desired policy goal will let six or ten institutions collectively have a significant say in corporate affairs, while limiting the power of any one institution to act on its own. The focal point of lawmakers' efforts should be on measures that would sway the incentives of shareholders towards more active monitoring of corporate management; the final decision should be left to the shareholders. This paper proceeds as follows. Part 2 develops the qualitative case for believing that institutional voice can improve corporate performance in general and specifically through evaluating the issue of CEOs succession. I evaluate the potential benefits of greater oversight examining the domains in which institutional oversight is more likely to be value enhancing. Moreover, I explore the SEC's proposal to enable shareholder access to the ballot and stress the importance of indirect monitoring through trade groups and through the board of directors. Finally, I explore the role of indirect monitoring through trade groups and the role of the Institutional Investor Service ("ISS"). Part 3 contends that the downside risk from institutional voice is negligible. It responds to the predominant concerns with institutional power, including the risks inherent in asking one set of agents to monitor another set of agents; whether money managers will use their power to obtain private benefits or promote special interest; and concerns about institutional or managerial focus on the short term. Part 4 deals with the evidenced disparity in scope and focus of institutional oversight between different types of institutional investors, and examines the incentive structure of different institutional investors. In addition, since monitoring has to be done by money managers within the institutions, I investigate the incentives of money managers and the impact of promanager conflicts of interests. Furthermore, I asses the regulatory milieu in which various institutional investors operate in order to determine whether legal barriers the cause of relative somnolence of certain types of institutional investors. And finally, I consider the policy questions raised by increased shareholder activism and try to determine the optimal format policy-makers should pursue regarding shareholder activism. Part 5 concludes this paper. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1134&r=law |
| By: | ALEXANDER MESCHKOWSKI |
| Abstract: | In recent years, the German capital market was shaken by scandals caused by the insiders of public corporations like Comroad, Metabox, Infomatec, EM.TV et al. The overall damages of the scandals generated in the Frankfurt Stock Exchange's Neuer Markt are approximated to be close to 200 billion until the market segment was finally closed down. The consequence of the financial scandals is, besides the causation of the tremendous damages to private investors, a substantially spoiled reputation of the capital market itself, whereas the latter adversities seem not yet to be absorbed completely. Even though the criminal procedures in the mentioned cases leaded to the conviction of the responsible insiders, the refurbishment of the scandals in German courtrooms frequently left damaged investors without a remedy for their losses, thereby revealing the jurisdiction's de lege lata limits. As far as noticed actually none of the damaged investors' civil claims did yet succeed. A first reaction to the corporate scandals by the German regulator in the fourth capital market advancement act is widely assessed to be insufficient to amend investors' legal status effectively. The aim of this analysis is to approach the first best solution to minimize the total social costs of false capital market information. It furthermore contributes to the continuing discussion in Germany about the reasons for the financial scandals. Moreover, it makes a contribution to the debate on the issue, whether the damaging events indicate an advanced intervention of the government, and - if so - in which fashion the legal rule should be developed to be an optimal remedy. The capital market scandals are set off by false capital market information that was intentionally or frivolously disseminated by Directors and Officers (D&O) of public corporations, which are in the German two-tier system Vorstand and Aufsichtsrat. Hence, the impact that false material data have on the efficiency of capital markets will be addressed in detail. Its specific effect on the share price is scrutinized by reviewing practical cases that occurred recently in Germany. This might allow a deeper understanding of the different kinds of damages that result from the approval of a frivolous disclosure policy by Board members. By changing the perspectives the hypothesis that Board members have clear incentives to provide capital markets with false information will be verified. The analysis will apply especially insights of Law & Economics - as well as from the developing branch of Law and Behavioral Science - to emphasize the issue's discussion in traditional legal scholarship. Moreover, as economic theory indicates, a reason for a government intervention is only given in cases of market failures. Thus, the analysis will determine if the inefficient allocation of investors' funds and the related Pareto suboptimality is grounded on market failures. Especially presumable obstacles with asymmetric information, negative externalities and potential free riding-behavior by competitors appear worthwhile to focus on. From an economic perspective it is to discuss whether the damages of shareholders that - due to false capital market information - purchased stocks above their actual value, should be recoupable in general. The crucial aspect about influencing the process of disclosure with an effective liability rule is that it could also hinder necessary and valuable truthful information to be available for the market participants. As the economic approach to the law discerns it as a tool to maximize social welfare, the analysis will check whether the drafted German Kapitalmarktinformationshaftungsgesetz (KapInHag) is complying with this prerequisite. It will focus on two aspects that appear crucial for the efficiency of the legal rule. First, the target of the drafted liability rule, i.e. who should be held liable for the dissemination of false information will be focused on. The traditional German liability regime that favors the primary responsibility of the corporation will be depicted and compared with the divergent proposal of the KapInHaG. The main question will be, which liability system provides the optimal setting of incentives for Board members. Second, as the central aspect of a liability rule is the standard of fault that it comprises, it will be analyzed in detail. The German lawmaker suggests in the drafted KapInHag a standard of "gross negligence". Thus, Board members will compensate damaged investors in every case the court in its ex post evaluation will conclude that the disclosure of false information was grossly negligent. The analysis will examine in detail whether the proposal of the KapInHaG is pinpointing the accurate level of deterrence, while assuring that the necessary information will be disseminated courageously and at the perfect time. Therefore it will specially utilize the Business Judgment Rule, an instrument of US corporate law that might be worthwhile to implement also in German capital market law. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1135&r=law |
| By: | Tim Friehe (Johannes-Gutenberg University, Mainz) |
| Abstract: | We show that imperfect information of potential oenders concerning the magnitude of enforcement variables can reason escalating penalties welfare maximizing in two dfferent variants of the optimal-deterrence model. Imperfect information causes distortions in indi- viduals' perception of the enforcement variables that apply to the expected sanction of the first offense. Once detected, individuals learn about enforcement variables which makes this argument less relevant for the expected sanction for consecutive offenses. |
| Keywords: | optimal law enforcement, escalating sanctions, repeat oender, imperfect information, |
| JEL: | K |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1136&r=law |
| By: | Peter Cserne (University of Hamburg) |
| Abstract: | This paper is a preliminary discussion of some theoretical and methodological issues related to my PhD thesis. The topic of the dissertation can be succinctly formulated as the legal and economic analysis of paternalism in contract law. The thesis starts with some discussion of conceptual and normative issues of paternalism in political and legal philosophy, and then focuses on legal policy questions in contract law. Methodologically, my purpose is to analyse whether and how the traditional economic arguments against paternalism and for freedom of contract should be reassessed in light of recent empirical and theoretical studies. More specifically, the question is whether the anti-paternalist view based on consumer sovereignty remains valid if, following behavioural decision theory we assume that not only (at least one of)the contracting individuals but also the legislator/regulator is imperfectly rational or not fully informed. That is, whether we have to modify the traditional anti-paternalism of law and economics for anti-anti-paternalism: a limited and critical version of paternalism. In this paper I discuss the conceptual and methodological background of an economic approach to paternalism in contract law. |
| Keywords: | paternalism, contract regulation, |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1139&r=law |
| By: | Tim Friehe (Johannes-Gutenberg University, Mainz) |
| Abstract: | This paper considers victim heterogeneity in harm levels in a bilateral-care model. In practice, resources are expended on the verification of the accurate magnitude of damages suffered. We show a suficient condition for the possibility to accurately deduce the harm level from the observable care choice without spending on verification or other facilitating means. For cases in which this condition does not hold, this paper sets out a simple screening mechanism that induces victims to reveal their type truthfully and induces optimal care in equilibrium without verication costs. |
| Keywords: | incentives, heterogeneous victims, information asymmetry, |
| JEL: | K K D |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1140&r=law |
| By: | Roger Van den Bergh (Erasmus University Rotterdam); Louis Visscher (Erasmus University Rotterdam) |
| Abstract: | The goal of the Principles of European Tort Law is to serve as a basis for the enhancement and harmonisation of tort law in Europe. This paper takes a critical look at these Principles from a Law and Economics perspective. The first part of the paper questions the traditional arguments in favour of harmonisation, such as the need to achieve a 'level playing field' for industry and the reduction of legal uncertainty which may hinder cross-border trade. There are several economic arguments in favour of diverging tort laws: the possibility to satisfy heterogeneous preferences and the learning processes generated by competition between legal orders. Economic arguments in favour of harmonisation are weak. There is no need for central rules to internalise externalities; a race to the bottom is unlikely and the amount of transaction cost savings may be low. The second part of the paper examines whether the Principles may contribute to 'better' tort law. Large parts of the Principles, such as the fault standard and some of the rules on causation, are in conformity with economic insights. According to Article 10:101, damages serve the goal of compensation but also the aim of preventing harm. However, it is shown that several provisions of the Principles are not in conformity with the goal of prevention. The analysis focuses on the limitation of damages to normal losses, the different levels of protection in function of the nature of the safeguarded interests, the narrow strict liability rule for harm caused by abnormally dangerous activities and rules for assessing damages. The concluding remarks provide an overall assessment of the Principles for the future development of tort law in Europe. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1141&r=law |
| By: | Rimawan Pradiptyo (University of York, UK) |
| Abstract: | We attempt to revise the inspection game used by Tsebelis (1989, 1990, 1993 and Tsebelis in Bianco et al, 1990) to model phenomena in criminal justice. Recent findings from various studies, primarily conducted in the UK, are used to re-construct the game. In contrast to Tsebelis' (1989) propositions, we found that the severity of punishment may affect individuals' offending behaviour. Similar results can be found for the case in which the authority initiates crime prevention initiatives by providing incentives to law abiding individuals. Any attempts to increase the severity of punishment are less certain in reducing individuals' offending behaviour than crime prevention initiatives. This result holds so long as the authority does not alter the levels of enforcement and the severity of punishment. |
| Keywords: | Punishment; Deterrence effect; Crime prevention; Game theory, |
| JEL: | K42 C70 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1142&r=law |
| By: | roberto galbiati |
| Abstract: | Despite strict penalties may be available in order to prosecute violators, regulators frequently just issue a warning of some kind, and if violators move into compliance they do net release any penalty. Example of this practice may be found in several countries and for several different situations, the most common regard traffic law, environmental regulation and financial crimes. This paper defines the optimal sanctioning strategy for an enforcer that minimizes the social cost of violations and can determine the auditing probability and whether to sanction violators immediately or issue a warning and sanctioning only repeat offenders. We show that it may be desirable to procrastinate the sanctions by issuing a warning to the violators and sanction only those who result to be guilty at a second audit. Furthermore, we show that when the potential wrongdoers are uncertain about the auditing parameters the optimal probability of auditing is higher than in the case there is not such an uncertainty. The optimality of issuing a warning is related to the optimal monitoring probability. |
| Keywords: | law enforcement, monitoring probability, regulation, warnings, |
| JEL: | K4 D6 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1143&r=law |
| By: | Stefan Voigt (University of Kassel); Lorenz Blume (Economics Department, University of Kassel, Germany) |
| Abstract: | This is the first study that assesses the economic effects of direct democratic institutions on a cross country basis. Most of the results of the former intra-country studies could be confirmed. On the basis of some 30 countries, a higher degree of direct democracy leads to lower total government expenditure (albeit insignificantly) but also to higher central government revenue. Central government budget deficits are lower in countries using direct democratic institutions. As former intra-country studies, we also find that government effectiveness is higher under strong direct-democratic institutions and corruption lower. Both labor and total factor productivity are significantly higher in countries with direct democratic institutions. The low number of observations as well as the very general nature of the variable used to proxy for direct democracy clearly call for a more fine-grained analysis of the issues. |
| JEL: | H1 H3 H5 H8 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1144&r=law |
| By: | Eef Delhaye (K.U.Leuven) |
| Abstract: | Speed limits are a well-known instrument to improve traffic safety. However, speed limits alone are not enough; there is need for enforcement of these limits. When one observes fine structures for speed offences one often finds two characteristics. First, the fine increases with the severity of the violation. Secondly, the fine depends on the speeders' offence history. We focus on this last point and confront two fine structures, both increasing with speed: a uniform fine and a differentiated fine, which depends on the offence history. Drivers differ in their propensity to have an accident and hence in their expected accident costs. Literature then prescribes that the fine for bad drivers should be higher than for good drivers. However, the government does not know the type of the driver. We develop a model where the number of previous convictions gives information on the type of the driver. We find that the optimal fine structure depends on the probability of detection and on the strength of the relationship between the type and having a record. We illustrate this by means of a numerical example. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1145&r=law |
| By: | Ido Baum (Graduate College of Law and Economics, Hamburg University) |
| Abstract: | Professionals often claim confidential communications with their clients are the cornerstone of the profession's social function. Lawyers claim confidentiality increases clients' consultation with lawyers and promotes candour. A more recent claim is that confidentiality promotes client compliance with the law. Jurisdictions have recognized the importance of confidentiality by granting lawyers with a testimonial privilege. What lies beyond the rhetoric? Law and Economics scholars challenged the social desirability of the lawyer-client privilege. However, most of them have done so in the individual setting. This paper extends the existing analysis to corporations. It offers an explanation for the differences in the application of the corporate privilege in common law (focusing on United States) and in civil jurisdictions (focusing on German law and EU Law). The attempts to restrict the corporate privilege by the SEC and the objections of civil jurisdictions should be attributed to different problems of ownership and control rather than different civil procedures. The absence of a privilege for in-house counsel in EU competition law setting is currently under review by the European Court. We propose that the attempts to extend the privilege be rejected. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1146&r=law |
| By: | Andrew Griffiths (School of Law, University of Manchester, UK) |
| Abstract: | This paper will build upon a paper delivered at the 2005 Workshop in Ghent, "An Economic Perspective on the Concept of Origin in Trade Mark Law", and a subsequent paper on the economic rationale of trade mark law. The Ghent paper considered the "essential function" that trade marks are supposed to perform according to trade mark law, namely indicating the "origin" of products, and showed how this term has a special meaning. Thus, a trade mark indicates that the products with which it is used have a particular economic parentage or trade (or commercial) and does not, for example, indicate their physical source or identify their manufacturer (or provider, in the case of services). Moreover, a trade mark does not have to reveal any details about the origin of the products with which it is used, but merely signifies that a firm (or other undertaking) is responsible for the presence of the goods or services on the market bearing (or sold under) the trade mark and has thus accepted commercial responsibility for them. In effect, a trade mark provides a commercial identity for products that can be used as a means of defining them in a market transaction and as a reference point for conveying information about them and (in the case of goods) in subsequent transactions. Trade marks can therefore be anonymous and do not have to be tied to any particular set of production arrangements. They can be transferred from one firm to another. They provide a focus for acquiring a reputation or "goodwill" that can then be used to generate the economic benefits associated with this factor in terms of providing information and combating opportunism. Moreover, they provide a focus that has great flexibility and versatility as a component of an economic organisation because it can be kept separate from any one undertaking or from any particular set of production arrangements. This flexibility underlies the crucial role of trade mark in the evolution of such business structures as franchising and sub-contracting. The second of the previous papers considered the economic rationale of trade mark law, the guidance this may provide in analysing the development of the law governing the protection of trade marks and the economic case for expanding this protection in the case of familiar (or "strong") trade marks. It noted how trade marks contribute to productive efficiency through their role in providing a focus for goodwill. It also noted their contribution to allocative and dynamic efficiency, although the full nature and extent of this contribution is debatable and provides the context for the present paper. The present paper will examine the economic benefits that trade marks generate, starting with the model, developed by Landes and Posner, that these take the form of a reduction in "search costs" and that this (rather than monopolistic power based on artificial product differentiation) explains why products sold under a trade mark can command premium prices in the market place. It will explore the meaning and range of "search costs" and note how they increase in scale if competing products on a market are assumed to differ significantly in terms of quality and other characteristics where consumers have no ready means of ascertaining these differences prior to purchase. In such a scenario, the concept of "search costs" encompasses the risk of purchasing an inferior product. This paper will then consider the view that certain trade marks can become something more than an efficient reference point that enables a firms to achieve a competitive advantage through reducing consumers' search costs and constitute a source of utility or benefit in their own right. It will examine two reasons for this view. First, there is the idea that a capacity for reducing the risk of purchasing an inferior product can be qualitatively different from a reduction in transaction costs if a consumer is assumed to be risk-averse. Thus, consumers may attach great importance to the safety, reliability and durability of products such as cars and be willing to pay a substantial premium, but have to rely on trust or reassurance as to whether a particular item offered to them has the qualities that they are seeking. It is arguable that the risk of disappointment represents a significant psychological cost for such consumers and that a trade mark that they can trust and that reassures them in fact confers a significant psychological benefit that adds value to the actual functional value of their purchase. The second reason for viewing a trade mark as a distinct source of benefit to consumers is based on the idea that, as a familiar reference point, a strong trade mark can do more than provide a channel for passing information to consumers about the quality and other characteristics of products that they may buy. A trade mark can link products with themes and imagery used in advertising and promotion that establish a "brand image" or set of "brand values". The trade mark then provides a means of gaining access to the image or values. This linkage may come to be as much an object of consumer desire as the product bearing the trade mark and consumers may perceive the trade mark as a source of benefit, this also being mental or psychological in nature. In this context, this paper will examine the ideas of marketing theorists, such as Jerre B. Swann, who have suggested that products deliver a hierarchy of benefits to consumers: the "functional" benefits of the product itself; additional "emotional" benefits of reassurance, satisfaction and security; and further "self-expressive" benefits of linking consumers with an image or set of values with which they wish to identify themselves or which they believe are likely to be shared by the kind of people with whom they would like to be associated. Such selfexpressive benefits can be linked with the trend whereby trade marks are displayed on a product: in effect, consumers can use a product displaying a trade mark as a means of conferring an identity or image upon themselves or to convey information about themselves to others and derive utility from being able to do so. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1147&r=law |
| By: | Paolo Santella (European Commission); Giulia Paone (Dartmouth College, NH, USA); Carlo Drago (University of Naples "Federico II") |
| Abstract: | In this article, we provide an interpretation for the voluntary independence requirements contained in the Italian Corporate Governance Code (Preda Code) checking them against a proxy for international best practice, the independence criteria provided in the EC Recommendation on non-executive and supervisory directors of 2005. We then check to what extent company disclosure for 2003 allows the verification of the independence of directors qualified as independent by the Italian 40 blue chips. We find that the Preda Code (currently under revision) should be updated in several respects in order to make it abreast with best practice in the European Union. We also find that for two key independence requirements (not to have business relationships with the company and not to have too many concurrent commitments outside of the company) the level of compliance is dramatically low (4% and 16% respectively). Overall, for only 5 out of the 284 directors declared as independent by the Italian blue chips is it possible to verify the respect of all the Italian independence standards (and for only 4 directors with respect to the EC standards). This raises the problem of who should monitor what listed companies declare. |
| Keywords: | Independent directors, Corporate governance, |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1148&r=law |
| By: | Emanuela Carbonara (University of Bologna); Francesco Parisi (George Mason University School of Law) |
| Abstract: | The global legal landscape is undergoing substantial transformations, adapting to an increasingly global market economy. Differences between legal systems create obstacles to transnational commerce. Countries can reduce these legal differences through non-cooperative and cooperative adaptation processes, fostering networks of trade that link diverse legal traditions. In this article, we study the process of legal adaptation, looking at non-cooperative and cooperative solutions that can alternatively lead to legal transplantation, harmonization and unification. The presence of adaptation and switching costs renders unification extremely difficult. In the general case, cooperative solutions reduce differences to a greater extent than non-cooperative solutions, but rarely lead to complete legal unification. We consider the case of endogenous switching costs and show that when countries have the possibility to reduce their own switching costs to facilitate harmonization, they may actually choose to raise them. This may lead to the paradox that countries engaging in cooperative harmonization end up with less harmonization than those that pursued non-cooperative strategies. This explains why differences are often bridged by private codifications and by the evolving norms of the lex mercatoria. |
| Keywords: | Legal Harmonization, Legal Transplantation, Transnational Contracts, Legal Change, |
| JEL: | K10 K33 D70 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1149&r=law |
| By: | Guiseppe Di Vita (University of Catania) |
| Abstract: | In this article we apply and extend the model elaborated by Acemoglu and Verdier in their seminal paper (2000), to examine how the economy represented in their theoretical framework responds to an exogenous change in the agent's incentive. In particular, we focus on the consequences of a famous sentence of the Italian Supreme Court in plenary session, no. 500 of 1999, in which a revolutionary interpretation of civil liability rules is introduced, allowing private agents of our economy to appear before the court to demand reimbursement for the damages suffered as a consequence of illicit behavior of the public administration. This is one of the few cases in which the judex substantially makes law in a system of civil law, and the modi modification in incentive whether or not to be corrupted comes from an authority that is not part of the game (the jurisdictional power). Basing our affirmations on the model, we can say that corruption may have declined in Italy since the year 2000, as a result of a change in the incentives for both private agents and bureaucrats. |
| Keywords: | Bureaucrats, Corruption, Government failure, Incentives, Market failure, Public goods, |
| JEL: | K13 D23 H41 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1150&r=law |
| By: | Udo C. Braendle (School of Law, University of Manchester, UK) |
| Abstract: | "Law matters" is the message in several articles of LaPorta et al., which influence economic as well as legal literature. The results of their heavily cited Law and Finance article highlight the much better shareholder protection of Common Law compared to Civil Law countries. In this contribution I reconsider their "ntidirector rights index" for Germany and the United States, two typical representatives of their respective legal tradition. By having a close look at the legal provisions of the two countries I illustrate the weaknesses and pitfalls of the index. Bothering German Company Law, I find that Germany would score much better in this index. Moreover, I point out inconsistencies in the judgment of the USA. In conclusio the differences between Common and Civil Law in terms of shareholder protection are far less significant than LaPorta et al. propose, if at all. The blindfold citation of this article can (and does) implicate wrong politicaleconomic measures and should therefore be avoided. |
| Keywords: | Common Law, Civil Law, Shareholder Protection, Germany, USA, LLSV, Law and Finance, Corporate Governance, |
| JEL: | K22 G34 K40 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1151&r=law |
| By: | Janina Satzer (University of Kassel, Germany) |
| Abstract: | The popularity of the International Court of Justice (ICJ) is discussed controversially. This paper examines the usage of the ICJ by both all UN member states and the top-ten economies of the world. In addition, five hypotheses explaining the decrease in the ICJ's usage by the major powers of the world are presented as follows: (I) the home-bias of judges, (II) the diversification of international tribunals, (III) changes in the composition of the cases filed, (IV) the (re-) allocation of power, and (V) an increased heterogeneity of external institutions among UN member states. We find empirical evidence that the increase in UN membership has led to increased heterogeneity, which again has led to a decline in usage of the ICJ by the top-ten economies. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1152&r=law |
| By: | Roland Kirstein (University of Saarland) |
| Abstract: | The Condorcet jury-theorem is derived from the implicit assumption that jury members may only commit one type of error. In binary decision situations however, two error types may occur, the probability of which is independent of each other. Taking this into account leads to a generalization of the theorem. |
| Keywords: | Group decisions, judicial, imperfect decision-making, |
| JEL: | D71 K40 L22 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1154&r=law |
| By: | Tim Friehe (Johannes-Gutenberg University, Mainz) |
| Abstract: | Standard liability rules do not lead to efficient care choices by injurer and victim if precaution costs are interdependent. This result of Dharmapala and Hoffmann (2005) is shown to depend on role-type certainty. We allow for role-type uncertainty and demonstrate that standard liability rules can handle the complication of interdependent costs of care. Thereby, a context is identified in which uncertainty can further efficiency. |
| Keywords: | interdependent costs of care, role-type uncertainty, liability rules, |
| JEL: | K D |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1155&r=law |
| By: | Oren Gazal-Ayal (University of Haifa, Faculty of Law) |
| Abstract: | The academic world is wonderful. Like few other professionals, we can choose what we want to do and what questions we think are important, which in our line of work means choosing what topics we want to research. But what influences our choices? This paper examines what drives scholars to select Law and Economics (L&E) as a topic for research. It does so by implementing the methodology of many L&E papers - by assuming that regulation and incentives matter. Legal scholars face very different academic incentives in different parts of the world. In some countries, the academic standards for appointment, promotion and tenure encourage legal scholars to concentrate on L&E. In others, they strongly discourage such research. Thus, we should expect wide variation in the rate of participation of legal scholars in the L&E discourse across countries. On the other hand, economists are evaluated with similar yardsticks everywhere. Thus, participation of economists in the L&E discourse is likely to vary much less from one place to another. The hypothesis of this paper is that the academic incentives are a major factor in the level of participation in the L&E scholarship. This "incentives hypothesis" is presented and then examined empirically on data gathered from the list of authors in L&E journals and the list of participants in L&E conferences. The data generally supports the hypothesis. In the legal academia, the incentives to focus research on L&E topics are the strongest in Israel, they are weaker in North America and weakest in Europe. In fact, the data reveal that lawyers' authorship of L&E papers weighted by population is almost ten times higher in Israel than in North America; while in Europe it is almost ten times lower than in North America. By comparison, the weighted participation level of economists - who face relatively similar academic environments across countries - in L&E research is not significantly different across countries. |
| Keywords: | Law and Economics, Legal Education, Comparative Law, |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1156&r=law |
| By: | Dieter Schmidtchen (Universität des Saarlandes); Hans-Jörg Schmidt-Trenz |
| Abstract: | The conventional theory of international trade is dominated by a model presupposing a legal order that is perfect in its specifications and controllability, binding for all economic agents, no matter their nationality. World order appears to be cosmopolitan in the sense of Kant. An international private law community such as this, however, does not exist. In fact, there is a multitude of legal orders and a territoriality of law, leading to problems largely neglected in the traditional theory of international trade. They are at the heart of what we would like to call the New Institutional Economics of International Transactions (NIEIT) - a research program which started from a monograph published in 1990 (see Schmidt-Trenz 1990). This paper addresses two questions: (1) Which specific problems emerge in contracts and the contracting process because of factors such as the multitude of legal orders and the territoriality of law? (2) What solutions are there to these problems a) on the level of the law, and b) in the shadow of the law or completely independent of it ("private ordering")? How do they work from an efficiency point of view? We restrict attention to the international exchange of goods. However, the insights gained can be transferred to other types of transactions, such as international finance transactions, direct investment, and investment agreements. |
| Keywords: | conflict of law, international private law, transaction costs, enforcement of, |
| JEL: | F02 F15 K33 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1157&r=law |
| By: | Thomas Döring (University of Kassel); Stefan Voigt (University of Kassel) |
| Abstract: | The German version of federalism, often called cooperative federalism", has been identified by many as one of the root causes for Germany becoming Europe's new sick man. Now, a number of changes in the institutions defining the relationship between the federal, the state and the local level have been passed. This contribution describes the most important changes and evaluates them from the point of view of fiscal federalism. It concludes that the changes are only a first step in the right direction, but a number of important steps have yet to follow. |
| Keywords: | German Federalism Reform, Fiscal Federalism, |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1161&r=law |
| By: | Marc Rapp (Leipzig Graduate School of Management (HHL)) |
| Abstract: | This paper analyzes security income taxes in a dynamic two-period model of an economy that is part of a cluster of economies with perfectly integrated bond markets but locally segmented equity markets. For an economic income tax, it is shown that if tax proceeds are immediately redistributed within the cohort of market participants, taxation is non-distortionary in the sense that neither optimal production decisions of firms, nor the optimal aggregate consumption path or security prices are affected by taxation. If, however, tax proceeds are transferred to 'outsiders', i.e. non-market-participants, a shift in the tax rate in general affects the optimal aggregate consumption path and equilibrium security prices reflect the prevailing tax rate. While the equilibrium analysis is concerned with a rather stylized tax code, it is argued that the analysis may be interpreted as a partial equilibrium analysis of capital gains taxes within more general tax systems. |
| Keywords: | capital income tax, asset prices, home-bias, |
| JEL: | G12 G18 H24 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1162&r=law |
| By: | Michael Kaeding (Leiden University) |
| Abstract: | Using methods for assessing both correlational causation and necessary/sufficient causation, this article addresses a fundamental puzzle confronting those who seek to understand one important part of the EU policy cycle, namely to explain why member states of the EU differ in their transposition records of EU legislation. Exploring a rationalist framework to assess the transposition problematic in the EU the article treats theoretically and empirically determinants of transposition termination and duration. Using a comprehensive data set on large-scale transposition records in 9 member states (Germany, the UK, France, Italy, Spain, Greece, Ireland, the Netherlands and Sweden) covering the 1995-2004 period, they are tested by means of ordered multinomial logistic and hazard function regressions. Drawing on existing research and knowledge, calibrated measures further improve our understanding of widely acknowledged notions of necessary and sufficient conditions. |
| Keywords: | European Union, transposition, directives, fuzzy set, mixed methods, |
| JEL: | O19 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1163&r=law |
| By: | Marc Rapp (Leipzig Graduate School of Management (HHL)); Bernhard Schwetzler (Leipzig Graduate School of Management (HHL)) |
| Abstract: | This paper examines the equilibrium effect of a shift in the capital income tax rate upon state prices, risk-neutral probabilities, and corresponding security prices in a single-period binomial model economy with an exogenous risk-free rate. The policy design under consideration consists of a simple linear tax code that applies the economic rent as a tax base. It is shown that if tax proceeds are transferred to outsiders, a shift in the tax rate affects state prices, risk-neutral probabilities as well as equilibrium security prices. Thereby, the effect for the equilibrium price of a security is sensitive with respect to the correlation between its own payoff and the payoff of the market portfolio. If in contrast tax proceeds are redistributed within the cohort of market participants, risk-neutral probabilities, and security prices are unaffected by a change in the tax rate, although state prices are sensitive with respect to the tax rate. |
| Keywords: | Equilibrium security prices, capital income tax, risk-neutral probability measure, |
| JEL: | D50 G12 G31 |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1167&r=law |
| By: | Martin Schöpflin (Niedersächsische Fachhochschule für Verwaltung und Rechtspflege) |
| Abstract: | This paper shows that the German legislator thought of the economic effects of sussession law in the year 1879. Equally, the French legislator and the French discussion considered some aspects that are econmomically relevant. The economic considerations concerned the right to a compulsory portion (German: Pflichtteilsrecht; French: la réserve). The legislator's objective was to distribute wealth. The current criticism of this objective in Germany is not justified. The right to a compulsory portion implies several further economic aspects. It generates incentives for economic cooperation between family members and prevents them from externalizing costs (onto the social system). It reduces transaction costs and implifies the legal relationships between the members of the family. The fact that the right to a compulsory portion constitutes binding law does not necessarily decrease efficiency. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2006-1-1169&r=law |
| By: | Bruno Deffains (Université de Nancy 2); Dominique Demougin (Humboldt-Universität zu Berlin) |
| Abstract: | Many have undertaken to show the potential negative impact of legal and institutional competition. We show a similar problem in one of the central institutional design problem in an economy,namely the allocation of bargaining power between labor and capital. We construct a simple model where the firm/worker relationship is characterized by a double hold up problem. The legal and institutional framework has an important role to play by determining the bargaining strength of the party. We derive the optimal bargaining power in autarky. Embedding the framework in a two country model where capital is perfectly mobile whereas workers are not, we find that in a noncooperative equilibrium a benevolent regulator will not implement the optimal solution. |
| URL: | http://d.repec.org/n?u=RePEc:bep:dewple:2007-1-1189&r=law |
| By: | Langus, Gregor; Motta, Massimo |
| Abstract: | We estimate, using event study techniques, the impact of the main events in an antitrust investigation on a firm’s stock market value. A surprise inspection at the firm’s premises has a strong and statistically significant effect on the firm’s share price, with its cumulative average abnormal return being approximately -2%. Further, we find that a negative Decision by the European Commission results in a cumulative average abnormal return of about -3.3%. Overall, the fine accounts for a relatively small fraction of this loss in value. Finally, if the Court annuls or reduces the fine, this has a positive (+2%) effect on the firm’s valuation. |
| Keywords: | antitrust; deterrence; event studies; fines |
| JEL: | K21 K42 L4 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6176&r=law |
| By: | Pierre-André Chiappori (Columbia University); Murat Iyigun (University of Colorado and IZA); Yoram Weiss (Tel Aviv University and IZA) |
| Abstract: | We reconsider the well known Becker-Coase (BC) argument, according to which changes in divorce laws should not affect divorce rates, in the context of households which consume public goods in addition to private goods. For this result to hold, utility must be transferable both within marriage and upon divorce, and the marginal rate of substitution between public and private consumption needs to be invariant in marital status. We develop a model in which couples consume public goods and show that if divorce alters the way some goods are consumed (either because some goods that are public in marriage become private in divorce or because divorce affects the marginal rate of substitution between public and private goods), then the Becker-Coase theorem holds only under strict quasi-linearity. We conclude that, in general, divorce laws will influence the divorce rate, although the impact of a change in divorce laws can go in either direction. |
| Keywords: | Becker-Coase theorem, collective model, divorce rates |
| JEL: | C78 D61 D70 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2646&r=law |
| By: | Brigitte Humer (Upper Austria University of Applied Sciences); Jean-Philippe Wuellrich (University of Zurich); Josef Zweimüller (University of Zurich, CEPR, CESifo and IZA) |
| Abstract: | We study the impact of the Austrian Employment Act for the Disabled which grants extended employment protection, requires a hiring quota for firms, and subsidizes the employment of severely disabled (SD) workers. Using a large sample of eligible individuals we compare workers before and after acquiring legal SD-status. Unsurprisingly, we find that holding SDstatus is associated with lower employment and earnings. However, workers holding a job when acquiring legal SD-status have substantially better subsequent employment prospects after SD-award than before. In contrast, workers who do not hold a job at the date of SDentry do dramatically worse after SD-award than before. This suggests that employment protection legislation places substantial firing costs on firms and has a major impact on the decisions of firms to hire disabled workers. |
| Keywords: | disability, employment protection |
| JEL: | J14 J71 K31 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2649&r=law |
| By: | Paolo, Santella; Carlo, Drago; Giulia, Paone |
| Abstract: | In this article we have expanded the analysis of the new dataset we created in Santella, Paone, Drago (2005) which analysed and quantified corporate disclosure on directors formally identified as independent by the forty Italian Blue Chips. We find here a general low level of compliance with independence requirements for both financial and non-financial companies, particularly with regard to the two key independence criteria of not having too many concurring commitments and not having business relationships with the company or an associated company. We also find that financial companies show a lower level of compliance than non-financial ones and are connected with each other and with a few non-financial companies through networks of cross-directorships: two directors (one independent and one executive) who also sit at the same time on another company board. Finally, those non-financial companies that have a relatively fragmented shareholder structure tend to be characterised by higher levels of compliance and disclosure (but not always by lower levels of not compliance) than tightly-controlled non-financial companies, presumably because of sensitivity to a larger pool of small shareholders. Peculiarly, financial companies with fragmented shareholder structure tend to be characterised by low disclosure levels, although such companies are also subject to strong financial supervision. |
| Keywords: | corporate governance; independent directors; interlocking directorships; empirical legal studies |
| JEL: | K22 K2 K0 G3 |
| Date: | 2007–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2288&r=law |
| By: | Polo, Andrea |
| Abstract: | Since banks are among the most important sources not only of finance but also of external governance for firms, the corporate governance of banks is a crucial factor for growth and development. Despite its importance, this topic has been explored only by a few studies. While some authors support, with different arguments in the course of time, the specificity of banks, other authors, among whom Ross Levine and his co-authors from the World Bank, question heavily the present banking regulatory framework. The debate on the corporate governance of banks has a direct bearing on the current discussions on the future of banking regulatory design: should the regulatory intervention be the most important corporate control mechanism in banking or should regulators focus on introducing incentives for appropriate market behaviour? |
| Keywords: | Financial economics; Corporate Governance; Banking; Regulation and Supervision; Market Discipline; Securities Law |
| JEL: | K22 G28 G21 G34 G18 |
| Date: | 2007–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:2325&r=law |