New Economics Papers
on Law and Economics
Issue of 2007‒04‒21
ten papers chosen by
Jeong-Joon Lee, Towson University

  1. Unemployment and Gang Crime: Could Prosperity Backfire? By Panu Poutvaara; Mikael Priks
  2. Bribery in Health Care in Peru and Uganda By Jennifer Hunt
  3. Dividend Decision under Distributed Profit Taxation: Investor’s Perspective By Aaro Hazak
  4. Business Groups in Emerging Markets-Financial Control & Sequential Investment By Christa Hainz
  5. How Corruption Hits People When They Are Down By Jennifer Hunt
  6. Do Investors Value Insider Trading Laws? International Evidence By Laura Beny
  7. Crime Distribution & Victim Behavior During a Crime Wave By Rafael Di Tella; Sebastian Galiani; Ernesto Schargrodsky
  8. Courts Delays and Crime Deterrence (An Application to Crimes Against Property in Italy) By Lucia Dalla Pellegrina
  9. The Changing Nature of the OECD Shadow Economy By Maurizio Bovi; Roberto Dell'Anno
  10. Can minimum prices assure the quality of professional services? By Georg Meran; Reimund Schwarze

  1. By: Panu Poutvaara (University of Helsinki and IZA); Mikael Priks (University of Munich)
    Abstract: Empirical evidence reveals that unemployment tends to increase property crime but that it has no effect on violent crime. To explain these facts, we examine a model of criminal gangs and suggest that there is a substitution effect between property crime and violent crime at work. In the model, non-monetary valuation of gang membership is private knowledge. Thus the leaders face a trade-off between less crime per member in large gangs and more crime per member in small gangs. Unemployment increases the relative attractiveness of large and less violent gangs engaging more in property crime.
    Keywords: violence, crime, gangs, unemployment, identity
    JEL: K42 D71 D74
    Date: 2007–03
  2. By: Jennifer Hunt
    Abstract: In this paper, I examine the role of household income in determining who bribes and how much they bribe in health care in Peru and Uganda. I find that rich patients are more likely than other patients to bribe in public health care: doubling household consumption increases the bribery probability by 0.2-0.4 percentage points in Peru, compared to a bribery rate of 0.8%; doubling household expenditure in Uganda increases the bribery probability by 1.2 percentage points compared to a bribery rate of 17%. The income elasticity of the bribe amount cannot be precisely estimated in Peru, but is about 0.37 in Uganda. Bribes in the Ugandan public sector appear to be fees-for-service extorted from the richer patients amongst those exempted by government policy from paying the official fees. Bribes in the private sector appear to be flat-rate fees paid by patients who do not pay official fees. I do not find evidence that the public health care sector in either Peru or Uganda is able to price-discriminate less effectively than public institutions with less competition from the private sector.
    JEL: H4 K4 O1
    Date: 2007–04
  3. By: Aaro Hazak (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: Distributed profit taxation is the corporate taxation regime of Estonia. A theoretical model on dividend policy under this tax system, compared to traditional gross profit taxation, is presented in this paper. The paper seeks to model a company operating under uncertainty in a binomial framework, including company and investor level taxes and investor’s different consumption levels. Overall, the tax effects on different forms of payout (e.g. dividends or share repurchases) are equal under this tax regime and the main question is deciding upon the timing of dividends. There appear to be different optimums for the timing, depending on the investor’s consumption as well as the probability of losses, tax rates and interest rates. Though one of the aims of the Estonian corporate tax system is to motivate companies to reinvest the profits earned instead of paying them out, the theoretical analysis in this paper shows that from the investor’s perspective retaining of all profits in the company may not be the optimal payout policy in many cases. The study helps to understand the characteristics of this unusual tax regime and may potentially lead to discussions on introducing a similar system in other jurisdictions or on modifying the corporate taxation principles in Estonia
    Keywords: dividend policy, corporate taxation, distributed profit taxation
    JEL: G35 K34
    Date: 2006
  4. By: Christa Hainz
    Abstract: Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.
    Keywords: Business groups, self-enforcing contract, institutions, internal capital market
    JEL: G31 G32 G34 K49 L22
    Date: 2006–06–01
  5. By: Jennifer Hunt
    Abstract: Using cross–country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non–victims to bribe public officials. Misfortune increases victims’ demand for public services, raising bribery indirectly, and also increases victims’ propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: Corruption, bribery, governance
    JEL: H1 K4 O1
    Date: 2006–08–01
  6. By: Laura Beny
    Abstract: The article presents a simple agency model of the relationship between corporate valuation and insider trading laws. The article then investigates the model’s three testable hypotheses using firm-level data from a cross-section of developed countries. I find that more stringent insider trading laws and enforcement are associated with greater corporate valuation among the sample firms in common countries, while they are generally irrelevant to corporate valuation for the sample firms in civil law countries. This puzzling dichotomy is robust to various alternative specifications and to controlling for a wide range of potentially omitted variables. The result for the firms in common law countries is consistent with the claim that insider trading laws can help to reduce corporate agency costs. I also find that insider trading laws and cash flow ownership appear to be complementary means to reduce agency costs, contrary to my hypothesis that they are substitute mechanisms for controlling agency costs; however, this result is generally statistically insignificant. Finally, I confirm prior findings of an “incentive effect” of greater cash flow ownership by controlling shareholders.
    Keywords: Corporate Finance and Law, Governance, Valuation, Capital Budgeting, Investment policy, Comparative Law, International Business
    JEL: G30 G38 K22
    Date: 2006–08–01
  7. By: Rafael Di Tella; Sebastian Galiani; Ernesto Schargrodsky
    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: 2006–11–01
  8. By: Lucia Dalla Pellegrina
    Abstract: Using Italian data in the period 1999-2002, we estimate the impact of trials delay on the willingness to commit crimes against property. However, the endogenous relationship that links the former to the latter could generate serious problems of inconsistency in the estimation procedure. Since geographical distance can be considered an exogenous determinant of the probability of belonging to peripheral courts, which are typically considered less efficient than main ones, it should represent a valid candidate instrument for trials delay. Estimates obtained by means of Two- Stages Least Squares show a significant positive effect of trials duration on crimes, supporting the hypothesis that some criminals are either sensitive to the discounting process of punishment or aware of the probability of prescription, or both. As a side result, we also find a relationship between courts' fragmentation and trials duration. This suggests that an optimal dimension of courts is likely to exist, and that policy makers should take this into consideration in the design of the jurisdictional geography.
    Keywords: Illegal Behavior, enforcement of Law, Criminal Law.
    JEL: K14 K42
    Date: 2007–04
  9. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses); Roberto Dell'Anno (Università di Foggia, DSEMS)
    Abstract: As recently suggested, the shadow economy and its determinants (taxation, regulations, corruption, etc.) are linked such that just two stable equilibria are possible. In the good one there is a small hidden sector, large fiscal revenues and honest/appreciated institutions. The other (bad) equilibrium is quite the opposite. Our paper examines the links between these variables in relatively uncorrupt systems. Unlike the mainstream literature, we suggest that a continuum of SE equilibrium rates can emerge and that taxation and underground activities can be positively correlated. Empirical evidence for OECD countries broadly supports the model.
    Keywords: shadow economy; multiple equilibria; taxation; rule of law.
    JEL: H26 K42 O17
    Date: 2007–04
  10. By: Georg Meran; Reimund Schwarze
    Abstract: This papers studies the effects on service quality and consumer surplus of a minimum price which is fixed by a bureaucratic non-monopolistic professional association. It shows that the price set by a Niskanen-type professional assocation will maximize consumer surplus only if consumers demand the highest possible average quality. If consumers demand services of lesser quality, the association’s price will be too high if measured by consumer surplus. Moreover we show that a de-regulated market will always reproduce the favourable result of a uniformly high price in the case of top quality demand while delivering superior results in the case of a mixed demand for high and low quality services.
    Keywords: Liberal professions, price regulation, quality, professional association, self-regulation, EU competition policy, intrinsic motivation
    JEL: L15 J44 K21
    Date: 2007–01

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