New Economics Papers
on Law and Economics
Issue of 2007‒06‒11
twelve papers chosen by
Jeong-Joon Lee, Towson University

  1. Opportunistic Termination By Alexander Stremitzer
  2. A Brief History of Space and Time: the Scope-Year Index as a Patent Value Indicator Based on Families and Renewals By van Pottelsberghe, Bruno; van Zeebroeck, Nicolas
  3. Why Kill Politicians? A Rational Choice Analysis of Political Assassinations By Bruno S. Frey
  4. Intellectual Property Rights, Parallel Imports and Strategic Behavior By Maskus, Keith E.; Ganslandt, Mattias
  5. Bargaining Around the Hearth By Robert A. Pollak
  6. No Derivative Shareholder Suits in Europe - A Model of Percentage Limits, Collusion and Residual Owners By Kristoffel Grechenig; Michael Sekyra
  7. Intellectual Property as a Carrot for Innovators Using Game Theory to Show the Limits of the Argument By Dorothee Schmidt
  8. Incentives for Process Innovation in a Collusive Duopoly By Christoph Engel
  9. Weak Tests and Strong Conclusions: A Re-Analysis of Gun Deaths and the Australian Firearms Buyback By Christine Neill; Andrew Leigh
  11. A Multi-Factorial Risk Prioritization Framework for Food-Borne Pathogens By Spencer J. Henson; Julie Caswell; John A. L. Cranfield; Aamir Frazil; Valerie J. Davidson; Sven M. Anders; Claudia Schmidt
  12. Control of Global Business – Legal Questions and Tendencies By Deša Mlikotin Tomić; Marta Božina

  1. By: Alexander Stremitzer
    Abstract: If a seller delivers a good non-conforming to the contract, Article 2 of the UCC as well as European warranty law allows consumers to choose between some money transfer and termination. Termination rights are, however, widely criticized, mainly for fear that the buyer resorts to "opportunistic termination", i.e. takes non- conformity as a pretext to get rid of a contract he no longer wants. We show that the possibility of opportunistic termination might actually have positive ef- fects. Under some circumstances, it will lead to redistribution in favour of the buyer without any loss of efficiency. Moreover, by curbing the monopoly power of the seller, a regime involving termination increases welfare by enabling a more efficient output level in a setting with multiple buyers.
    Keywords: contract law, warranties, breach remedies, termination, harmonization
    JEL: K12 C7 L40 D30
  2. By: van Pottelsberghe, Bruno; van Zeebroeck, Nicolas
    Abstract: The renewal of patents and their geographical scope for protection constitute two essential dimensions in a patent’s life, and probably the most frequently used patent value indicators. The intertwining of these dimensions (the geographical scope of protection may vary over time) makes their analysis complex, as any measure along one dimension requires an arbitrary choice on the second. This paper proposes a new indicator of patent value, the Scope-Year index, combining the two dimensions. The index is computed for patents filed at the EPO from 1980 to 1996 and validated in its member states. It shows that the average value of patent filings has increased in the early eighties but has constantly decreased from the mid-eighties until the mid nineties, despite the institutional expansion of the EPO. This result sheds a new and worrying light on the worldwide boom in patent filings.
    Keywords: geographical scope; patent families; patent statistics; Patent value; renewals
    JEL: K1 L1 O34 O38
    Date: 2007–06
  3. By: Bruno S. Frey
    Abstract: In the course of history a large number of politicians has been assassinated. A rational choice analysis is used to distinguish the expected marginal benefits of killing, and the marginal cost of attacking a politician. The comparative analysis of various equilibria helps us to gain insights into specific historical events. The analysis suggests that – in addition to well-known security measures – an extension of democracy, a rule by a committee of several politicians, more decentralization via the division of power and federalism, and a strengthening of civil society significantly reduce politicians’ probability of being attacked and killed.
    Keywords: Rational choice; democracy; dictatorship; assassination; deterrence
    JEL: D01 D70 K14 K42 Z10
    Date: 2007–05
  4. By: Maskus, Keith E. (Department of Economics); Ganslandt, Mattias (Research Institute of Industrial Economics (IFN))
    Abstract: The existence of parallel imports (PI) raises a number of interesting policy and strategic questions, which are the subject of this survey article. For example, parallel trade is essentially arbitrage within policy-integrated markets of IPR-protected goods, which may have different prices across countries. Thus, we analyze fully two types of price differences that give rise to such arbitrage. First is simple retail-level trade in horizontal markets because consumer prices may differ. Second is the deeper, and more strategic, issue of vertical pricing within the common distribution organization of an original manufacturer selling its goods through wholesale distributors in different markets. This vertical price control problem presents the IPR-holding firm a menu of strategic choices regarding how to compete with PI. Another strategic question is how the existence of PI might affect incentives of IPR holders to invest in research and development (R&D). The global research-based pharmaceutical firms, for example, strongly oppose any relaxation of restrictions against PI of drugs into the United States, arguing that the potential reduction in profits would diminish their ability to innovate. There is a close linkage here with price controls for medicines, which are a key component of national health policies but can give rise to arbitrage through PI. We also discuss the complex economic relationships between PI and other forms of competition policy, or attempts to limit the abuse of market power offered by patents and copyrights. Finally, we review the emerging literature on how policies governing PI may affect international trade agreements.
    Keywords: IPR; Parallel Imports; International Arbitrage; Research and Development
    JEL: F15 K21 L14
    Date: 2007–03–12
  5. By: Robert A. Pollak
    Abstract: In "Unpacking the Household: Informal Property Rights Around the Hearth" (Yale Law Journal, 2006) Robert Ellickson argues that as long as members of a household expect their relationship to continue, norms, rather than law, will determine allocations among them. More specifically, Ellickson argues that in "midgame" household members either ignore the "endgame" completely or, if they do take endgame considerations into account, the relevant endgame considerations are determined by norms rather than by law. This paper examines the fit between Ellickson's claims and four bargaining models that economists have used to understand interactions within household and families.
    JEL: D1 J12 K36
    Date: 2007–05
  6. By: Kristoffel Grechenig; Michael Sekyra
    Abstract: We address one of the cardinal puzzles of European corporate law: the lack of derivate shareholder suits. In the vast majority of European jurisdictions, shareholders can bring a derivative action (for damages) against the management for breach of fiduciary duty. In all of these countries, a derivative lawsuit is the only remedy against managerial misconduct. In spite of corporate fraud by managers there are no such lawsuits. We explain this apparent paradox on the basis of percentage limits. The laws of percentage limits require shareholders to hold a minimum amount of typically 5% to 10% in order to bring an action against the management and they are extremely wide-spread in Europe. Since small shareholders are not entitled to sue, there is an incentive for managers to collude with large shareholders. In a four-stage-model, we show that, given the current percentage limits, managers will misappropriate corporate assets and split the proceeds with large shareholders. Contrary to current and past approaches to agency theory, we find that, in this equilibrium, (1) large shareholders do not monitor the management, (2) small shareholders do not free ride and (3) the residual ownership is not held by the shareholders on the whole but by the managers and the large shareholders. This interpretation of the current situation is consistent with empirical studies that find a more concentrated shareholder structure in Europe than in the United States. Also published as: Columbia Law and Economics Working Paper No. 312 ( German Working Papers in Law and Economics: Vol. 2007: Article 2. ( SSRN (
    Keywords: Agency Theorey, Derivative Suits, Shareholder Suits, Percentage Limits, Collusion, Residual Owners, Corporate Fraud, Managerial Misconduct, European Law, European Corporations, Europe, Large Shareholders, Free Rider, Collective Action, Settlements, Monitoring, Rent-Seeking
    JEL: K22 K42 G30
    Date: 2007–06
  7. By: Dorothee Schmidt (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: One possible solution to mitigate the negative influences of conflict which has been proposed in the literature is to subject the relevant parties to education. Education can take two forms: increasing an individual's human capital on the one hand, increasing her social capital on the other hand. Using a stylized model of a two-individual economy, we derive that increasing an individual's social capital will lead her to reduce her conflict effort, whereas increasing her human capital can induce her to increase her conflict effort. We then analyze which conditions need to be present to induce the individuals to invest into their social capital.
    Keywords: Contests, conflict reduction, education, human capital, social capital, morality
    JEL: D72 D74 I28 K42 Z13
    Date: 2007–03
  8. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Two suppliers of a homogenous good know that, in the second period, they will be able to collude. Gains from collusion are split according to the Nash bargaining solution. In the first period, either of them is able to invest into process innovation. Innovation changes the status quo pay-off, and thereby affects the distribution of the gains from collusion. The resulting innovation incentive is strictly smaller than in the competitive case.
    Keywords: Duopoly, Collusion, Innovation Incentives
    JEL: D43 K21 L13 O31
    Date: 2007–05
  9. By: Christine Neill; Andrew Leigh
    Abstract: Using time series analysis on data from 1979-2004, Baker and McPhedran (2006) argue that the stricter gun laws introduced in the National Firearms Agreement (NFA) post- 1996 did not affect firearm homicide rates, and may not have had an impact on the rate of gun suicide or accidental death by shooting. We revisit their analysis, and find that their results are not robust to: (a) using a longer time series; or (b) using the log of the rate rather than the level (to take account of the fact that the rate cannot fall below zero). We also show that claims that the authors had allowed both for method substitution and for underlying trends in suicide or homicide rates are misleading. The high variability in the data and the fragility of the results with respect to different specifications suggest that time series analysis cannot conclusively answer the question of whether the NFA led to lower gun deaths. Drawing strong conclusions from simple time series analysis is not warranted, but to the extent that this evidence points anywhere, it is towards the firearms buyback reducing gun deaths.
    Keywords: firearms ownership, homicide, suicide
    JEL: I12 K14
    Date: 2007–06
  10. By: Amegashie, J. Atsu
    Abstract: In a world where the private protection of property is costly, government redistribution can lead to an increase in aggregate output. This result is not new. The novelty of this paper lies in specifying the conditions under which this efficiency-enhancing redistribution improves everyone’s welfare including the welfare of those whose labor finances the redistributive program (i.e., the rich) and how this is affected by the protection of property rights. The state may directly enhance economic rights through investments in security and the protection of property or it may indirectly do so through the redistribution of income. Under certain conditions, redistribution becomes desirable in situations where the state has exhausted its ability to enhance efficiency through the direct enforcement of property rights. In this case, redistribution can make all members of a society better off. Specifically, this occurs when the cost of predation is sufficiently low and the technology of private protection of property rights is sufficiently weak. The adverse effects of redistribution may be the consequence but not the cause of state failure. The real cause is a corrupt and inept state.
    Keywords: efficiency; incomplete property rights; predation; redistribution; welfare.
    JEL: D6 K0 H2
    Date: 2006–02–24
  11. By: Spencer J. Henson (Department of Food, Agricultural and Resource Economics, University of Guelph, Ontario Canada); Julie Caswell (Department of Resource Economics, University of Massachusetts, Amherst, MA); John A. L. Cranfield (Department of Food, Agricultural and Resource Economics, University of Guelph, Ontario Canada); Aamir Frazil (Public Health Agency of Canada, Guelph, Ontario Canada); Valerie J. Davidson (School of Engineering, University of Guelph, Ontario Canada); Sven M. Anders (Department of Rural Economy, University of Alberta, Edmonton Canada); Claudia Schmidt (Department of Food, Agricultural and Resource Economics, University of Guelph, Ontario Canada)
    Abstract: To lower the incidence of human food-borne disease, experts and stakeholders have urged the development of a science- and risk-based management system in which food-borne hazards are analyzed and prioritized. A literature review shows that most approaches to risk prioritization developed to date are based on measures of health outcomes and do not systematically account for other factors that may be important to decision making. The Multi-Factorial Risk Prioritization Framework developed here considers four factors that may be important to risk managers: public health, consumer risk perceptions and acceptance, market-level impacts, and social sensitivity. The framework is based on the systematic organization and analysis of data on these multiple factors. The basic building block of the information structure is a three-dimensional cube based on pathogen-food-factor relationships. Each cell of the cube has an information card associated with it and data from the cube can be aggregated along different dimensions. The framework is operationalized in three stages, with each stage adding another dimension to decision-making capacity. The first stage is the information cards themselves that provide systematic information that is not pre-processed or aggregated across factors. The second stage maps the information on the various information cards into cobweb diagrams that create a graphical profile of, for example, a food-pathogen combination with respect to each of the four risk prioritization factors. The third stage is formal multi-criteria decision analysis in which decision makers place explicit values on different criteria in order to develop risk priorities. The process outlined above produces a ‘List A’ of priority food-pathogen combinations according to some aggregate of the four risk prioritization factors. This list is further vetted to produce ‘List B’, which brings in feasibility analysis by ranking those combinations where practical actions that have a significant impact are feasible. Food-pathogen combinations where not enough is known to identify any or few feasible interventions are included in ‘List C’. ‘List C’ highlights areas with significant uncertainty where further research may be needed to enhance the precision of the risk prioritization process. The separation of feasibility and uncertainty issues through the use of ‘Lists A, B, and C’ allows risk managers to focus separately on distinct dimensions of the overall prioritization. The Multi-Factorial Risk Prioritization Framework provides a flexible instrument that compares and contrasts risks along four dimensions. Use of the framework is an iterative process. It can be used to establish priorities across pathogens for a particular food, across foods for a particular pathogen and/or across specific food-pathogen combinations. This report provides a comprehensive conceptual paper that forms the basis for a wider process of consultation and for case studies applying the framework.
    Keywords: risk analysis, risk prioritization, food-borne pathogens, benefits and costs
    JEL: I18 L51 Q00 K32 H11
    Date: 2007–05
  12. By: Deša Mlikotin Tomić (Faculty of Economics and Business, University of Zagreb); Marta Božina (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper examines the impact of regulation on market competition and market performances. It analyses the importance of strict financial regulation for a well performing economy. Heavy regulation decreases market flexibility, vital in the financial sector and decreases the possibility of competition. In a rigid legal environment economic actors will be drawn to the possibility of avoiding legal rules, and operate in a informal manner. At the same time regulation is necessary to enable financial stability, market integrity and confidence. This aspects are very important in transition countries which are on the way to implement and accept the modern market mechanism which are replacing state economy. The paper discusses the legal tendencies in regulating the financial sector in EU, the benchmark for Croatian legislation. In order to understand the scope and to be able to advocate this legislation and institutions a sight on its roots and development in US is also laid down. In spite of the outmost goal of transparency the European legislation is rather complicated and reveals more the interests of biggest stakeholders and professional rent seeking groups than genuine public and small investor’s expectation. In assessing concrete legal solutions, European directives are so far the only international model of financial supervision in a predominantly national regulatory environment. The question about its positive effects inducing economic growth at the top although intricate on such level of abstraction is not yet too confirmed. It is not about bundle of legislation but its nature and pace of implementation that will gradually induce confidence and investment. In order to achieve that open and right questions are to be publicly advocated rather than premature and anticipating statements. The question posed is if regulation is a core factor in good financial and overall economic performance in countries around the world, or is it only a trend in EU and transition countries.
    Keywords: regulation, informality, competition, securities, insider trading market, financial sector regulation, comitology
    JEL: K22
    Date: 2007–05–31

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.