New Economics Papers
on Law and Economics
Issue of 2007‒05‒19
sixteen papers chosen by
Jeong-Joon Lee, Towson University

  1. Assessing Economic Damages in Personal Injury and Wrongful Death Litigation: The State of North Carolina By George A. Schieren; Gary R. Albrecht
  2. Economic Efficiency and Damage Awards in Personal Injury Torts By George A. Schieren
  3. Securities Fraud Class Actions and Corporate Governance: New Evidence on the Role of Merit By Christopher F. Baum; James G. Bohn; Atreya Chakraborty
  4. Towards Reform of Land Acquisition Framework in India By Morris Sebastian; Pandey Ajay
  5. Party Autonomy in International Commercial Arbitration By Agarwal Anurag K.
  6. When did Ownership Separate from Control? Corporate Governance in the Early Nineteenth Century By Eric Hilt
  7. Environmental Policy as Social Policy? The Impact of Childhood Lead Exposure on Crime By Jessica Wolpaw Reyes
  8. Private Property, Public Use, and Just Compensation: The Economics of Eminent Domain By Thomas Miceli; Kathleen Segerson
  9. Bargaining in Mergers and Termination Fees By Utz Weitzel; Stephanie Rosenkranz
  10. Expert Incentives: Cure versus Prevention By Kris de Jaegher
  11. How Much Do Perceptions of Corruption Really Tell Us? By Weber Abramo, Claudio
  12. Financial Aspects of Transactions with FDI: Trade Credit Provision by SMEs in China By Ito, Seiro; Watanabe, Mariko; Yanagawa, Noriyuki
  13. Competition in Law Enforcement and Capital Allocation By Nicolas Marceau; Steeve Mongrain
  14. Deterrence in Rank-Order Tournaments By Philip A. Curry; Steeve Mongrain
  15. What You Don't See Can't Hurt You: An Economic Analysis of Morality Laws By Philip A. Curry; Steeve Mongrain
  16. Plea Bargaining with Budgetary Constraints By Steeve Mongrain; Joanne Roberts

  1. By: George A. Schieren; Gary R. Albrecht
    Abstract: This article is one in a series of articles in the Journal of Forensic Economics detailing the different and the common methods for assessing economic damages in the various states. In this article we discuss the legal framework by which economic damages are computed in personal injury and wrongful death cases in the state courts of North Carolina. The relevant state statutes, case precedents, and North Carolina Pattern Instructions (jury) are presented for the various aspects of a forensic economist’s work in estimating economic damages.
    Date: 2007
  2. By: George A. Schieren
    Abstract: Past discussions about economic efficiency and personal injury torts have focused on the relationship between the optimal amount of care a potential injurer should take for economic efficiency. Typically this discussion has assumed that the economic damages are strictly monetary without any full consideration of how these damages should be measured. This paper constructs a general model which incorporates as an unknown the amount of monetary damages that an injurer should pay in the interest of economic efficiency. The optimal amount of damages need to be known to serve as signal for the amount of care a potential injurer should take. The model shows that the optimal damage award should be at that point where that marginal utility of money paid out by the injurer equals the marginal utility of the money received by the victim under his utility function after the accident and not considering any non-monetary damages.
    Date: 2007
  3. By: Christopher F. Baum (Boston College; DIW Berlin); James G. Bohn (UHY Advisors); Atreya Chakraborty (University of Massachusetts-Boston)
    Abstract: We examine the relationship between outcomes of securities fraud class action lawsuits and board turnover rates. Our results indicate that the outcome of a class action is a good indicator of the underlying, unobservable merit of the action. Consistent with the merit hypothesis, board turnover rates are higher in the period following the filing of a lawsuit that is ultimately settled than one that is dismissed. Turnover propensities are more sensitive to outcome for CEOs and for individuals named as defendants in the lawsuits. Turnover rates of both inside and outside directors are higher when external equity ownership is more concentrated.
    Keywords: Securities fraud class actions, board turnover, corporate governance
    JEL: G32 K22
    Date: 2007–04–28
  4. By: Morris Sebastian; Pandey Ajay
    Abstract: We bring out the fundamental and more important problems with the current framework of land acquisition in India, regulations on land and the functioning of land markets. We argue that reform is overdue and the current framework would be unsustainable in a democracy that is India. Current land prices are highly distorted owing largely to regulatory constraints and the process of takings. Land acquisition more than any other factor is the most important constraint on development and especially in infrastructure development. We bring out the core elements of the reform – the need to define “public purpose” ex-ante for compulsory acquisition of land, the measures that would allow the market price of land to play its correct role, and the approach to valuation. We also argue for an independent valuer when compulsory taking is involved and methods of valuation to ensure that the land owner including the farmer gets the correct value for this land in both compulsory acquisition and in voluntary sale. We also argue the need for a parallel non-compulsory framework for acquisition and develop the key elements of the same. We also bring out alternatives to physical acquisition of land especially in the context of infrastructure development in central places.
    Keywords: Land-Acquisition, Eminent-Domain, Public Purpose, Takings, Rehabilitation, Law, Valuation, Central Places, Land-Use, Regulation, India
    JEL: K2
    Date: 2007–05–08
  5. By: Agarwal Anurag K.
    Abstract: As global business expands, the number of business disputes is also on the rise. It is extremely difficult or rather impossible to get all these disputes resolved through the conventional method of courts. Moreover, for international business disputes issues of jurisdiction, law, language, culture, etc. pose additional problems. As the courts all over the world are loaded with unresolved cases, delay in getting justice is inevitable. In such a scenario, businesses have to search new methods of resolution of business disputes and arbitration is one of them. Arbitration is a private court by a private judge. The decision of the arbitrator is called an award, which is binding on the parties. When the business dispute is international in character and is to be resolved with the help of arbitration, it is known as ‘international commercial arbitration.’ The arbitration is a creation of contract between the parties. Hence, party autonomy is the heart and soul of each and every arbitration contract. However, this autonomy is not unbridled. The applicable law and public policy provide the boundaries to this autonomy. Rules of arbitral institutions also curtail the autonomy of parties. This research focuses on a catena of judgments of various courts, primarily the U.S. Supreme Court, the House of Lords and the Supreme Court of India in determining the trend towards acknowledging party autonomy as one of the most important aspects of international commercial arbitration. It shall also look into related issues dealt by the New York Convention and the UNCITRAL (United Nations Commission on International Trade Law) Model Law.
    Keywords: International commercial arbitration, Party Autonomy, UNCITRAL Model Law
    Date: 2007–05–10
  6. By: Eric Hilt
    Abstract: This paper analyzes the ownership and governance of the business corporations of New York State in the 1820s. Using a new dataset collected from the manuscript records of New York's 1823 capital tax, and from the charters of the corporations, I analyze the ownership structures of the firms, and investigate the degree to which ownership was separated from control at the time. In contrast to Berle and Means's account of the development of the corporation, the results indicate that many of the firms were dominated by large shareholders, who were represented on the firms' boards, and held sweeping power to utilize the firms' resources for their own benefit. The oppression of minority shareholders was a significant problem in early corporate governance, and many of the firms configured their voting rights in a way that curtailed the power of large investors. A positive relationship between firm value and these voting rights configurations is found among the publicly-traded firms in the sample.
    JEL: G3 K22 M2 N21 N81
    Date: 2007–05
  7. By: Jessica Wolpaw Reyes
    Abstract: Childhood lead exposure can lead to psychological deficits that are strongly associated with aggressive and criminal behavior. In the late 1970s in the United States, lead was removed from gasoline under the Clean Air Act. Using the sharp state-specific reductions in lead exposure resulting from this removal, this article finds that the reduction in childhood lead exposure in the late 1970s and early 1980s is responsible for significant declines in violent crime in the 1990s, and may cause further declines into the future. The elasticity of violent crime with respect to lead is estimated to be approximately 0.8.
    JEL: I18 K49 Q53 Q58
    Date: 2007–05
  8. By: Thomas Miceli (University of Connecticut); Kathleen Segerson (University of Connecticut)
    Abstract: The eminent domain clause of the U.S. Constitution concerns the limits of the governmentÇs right to take private property for public use. The economic literature on this issue has examined (1) the proper scope of this power as embodied by the 'public use' requirement, (2) the appropriate definition, and implications, of 'just compensation,' and (3) the impact of eminent domain on land use incentives of owners whose land is subject to a taking risk. This essay reviews this literature and draws implications for our understanding of eminent domain law.
    Keywords: Eminent domain, just compensation, land use incentives, public use
    JEL: K11 R52
    Date: 2007–05
  9. By: Utz Weitzel; Stephanie Rosenkranz
    Abstract: We model takeovers as a bargaining process and explain termination fees for, both, the target and the acquirer, subject to parties’ bargaining power and outside options. In equilibrium, termination fees are offered by firms with outside options in exchange for a greater share of merger synergies. Termination fees decrease in firms’ bargaining power, and increase in firms’ outside options. We find that a merger with the second highest bidder, including a termination fee, can lead to equally high premiums as a merger with the highest bidder, without a termination fee. This novel result directly contrasts the agency cost perspective, which argues that termination provisions may be used by managers to lock into acquirers that do not generate the highest shareholder value. Further, even in a merger with the highest bidder and in the absence of bidding related costs, a termination fee is not necessarily a deal protection device, but can be used to improve shareholder value. Our bargaining model offers an alternative to auction related explanations of termination fees, like cost compensation or seller commitment.
    Keywords: Mergers and Acquisitions, Bargaining, Outside Option, Termination Fees, Break-Up Fees, Lockups
    JEL: G34 C71 C78 D44 K22
    Date: 2007–03
  10. By: Kris de Jaegher
    Abstract: This paper distinguishes between two scenarios for the expert-client encounter. In the cure scenario, the client does not know whether a loss can be recovered. In the prevention scenario, the client faces a threat but does not know whether this threat is real enough to justify preventive action. The client wants to induce the expert both to give an accurate diagnosis and to put appropriate effort into cure or prevention. It is shown that in the cure scenario, a contingent fee solves both these incentive problems. In the prevention scenario, however, putting up with low effort makes it easier to get an accurate diagnosis, and the use of contingent fees should be limited. These results are interpreted as providing a rationale for observed exceptions to legal and ethical restrictions on the use of contingent fees. Indeed, such exceptions are often granted for cases that fit the cure scenario.
    Keywords: Prevention, Cure, Expert Incentives, Principal-Agent Models
    JEL: D82 K1
    Date: 2007–01
  11. By: Weber Abramo, Claudio
    Abstract: Regressions and tests performed on data from Transparency International Global Corruption Barometer 2004 survey show that personal or household experience of bribery is not a good predictor of perceptions held about corruption among the general population. In contrast, perceptions about the effects of corruption correlate consistently among themselves. However, no consistent relationship between opinions about general effects and the assessments of the extent with which corruption affects the institutions where presumably corruption is materialized is found. Countries are sharply divided between those above and below the US$ 10,000 GDP per capita line in the relationships between variables concerning corruption. Among richer countries, opinions about institutions explain very well opinions concerning certain effects of corruption, while among poorer countries the explanatory power of institutions for the effects of corruption falls. Furthermore, tests for dependence applied between the variables in the sets of respondents for each of 60 countries also show that, for most of them, it is likely that experience does not explain perceptions. On the other hand, opinions tend to closely follow the trend of other opinions. Additionally, it is found that in the GCB opinions about general effects of corruption are strongly correlated with opinions about other issues, as much as to justify the hypothesis that it would suffice to measure the average opinion of the general public about human rights, violence etc. to accurately infer what would be the average opinion about least petty and grand corruption. The findings reported here challenge the value of perceptions of corruption as indications of the actual incidence of the phenomenon.
    Keywords: corruption, perceptions, corruption indicators
    JEL: D73 H11 K42
    Date: 2007
  12. By: Ito, Seiro; Watanabe, Mariko; Yanagawa, Noriyuki
    Keywords: Incomplete contract, Trade credit, Spillover of technology, FDI, Government-owned firms, China, Foreign investments, Credit, Small and medium-scale enterprises
    JEL: G2 K0 O5 P31
    Date: 2007–04
  13. By: Nicolas Marceau (Université du Québec à Montréal); Steeve Mongrain (Simon Fraser University)
    Abstract: This paper studies interjurisdictional competition in the fight against crime and its impact on occupational choice and the allocation of capital. In a world where capital is mobile, jurisdictions are inhabited by individuals who choose to become workers or criminals. Because the return of the two occupations depends on capital, and because investment in capital in a jurisdiction depends on its crime rate, there is a bi-directional relationship between capital investment and crime which may lead to capital concentration. By investing in costly law enforcement, a jurisdiction makes the choice to become criminal less attractive, which reduces the number of criminals and makes its territory more secure. This increased security increases the attractiveness of the jurisdiction for investors and this can eventually translate into more capital being invested. We characterize the Nash equilibria — some entailing a symmetric outcome, others an asymmetric one — and study their efficiency.
    Keywords: Crime; Occupational Choice; Capital Location; Law Enforcement
    JEL: K42
    Date: 2007–05
  14. By: Philip A. Curry (Simon Fraser University); Steeve Mongrain (Simon Fraser University)
    Abstract: In a tournament, competitors may engage in undesirable activities, or ``cheating'', in order to gain an advantage. Examples of such activities include the taking of steroids, plagiarism, and ``creative accounting''. This paper considers the problem of deterrence of these activities and finds that there exist special considerations that are not present in a traditional model of law enforcement. For example, an agent's returns to cheating depend on the cheating decisions of others, and so there may exist multiple equilibria. The problem of multiple equilibria can be reduced when the first-place prize is awarded to the person that performed best without cheating. Moreover, we show that re-awarding prizes reduces the amount of monitoring required to ensure compliance. We also demonstrate that monitoring costs can be further reduced by monitoring the winner of the tournament more than the loser, and by manipulating prizes, including through the introduction of prizes for non-winners.
    Keywords: Enforcement; Cheating; Tournament
    JEL: K42 J41
    Date: 2007–05
  15. By: Philip A. Curry (Simon Fraser University); Steeve Mongrain (Simon Fraser University)
    Abstract: This paper provides an efficiency explanation for regulation of sex, drugs and gambling (the so-called ``morality laws''). The argument is motivated by the observation that the design an enforcement of these laws often promotes discretion by the people engaging in such activities. We propose that morality laws can be best explained by considering the proscribed activities to impose a negative externality on others when the activity is observed. In such a case, efficiency requires discretion by the individual who engages in such activities. When discretion is difficult to regulate directly, the activities can instead be proscribed thereby giving individuals incentive to hide their actions from others. We find conditions for the first-best levels of consumption and hiding to be implementable. In addition, since some level of activity is efficient, this paper provides another environment in which the optimal sanctions are not maximal.
    Keywords: Crime; Externality; Laws; Morality; Enforcement
    JEL: K42 K32 H32
    Date: 2007–05
  16. By: Steeve Mongrain (Simon Fraser University); Joanne Roberts (University of Toronto)
    Abstract: In this paper, we construct a simple model that illustrates a perverse effect associated with plea bargaining in which an increase in sanctions can lead to reduced deterrence. This finding is derived from the interaction of binding budgetary constraints and plea bargaining. In an environment with these institutional features, higher sanctions are not always optimal when resources are limited, even if such sanctions are costless. Such potential phenomena may be useful in explaining the fact that many states have introduced limitations on plea bargaining. Career-concerned prosecutors are necessary for such a result to be present.
    Keywords: Plea Bargaining; Budget Constraint; Crime; Prosecutor
    JEL: K42 K14
    Date: 2007–05

This issue is ©2007 by Jeong-Joon Lee. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.