New Economics Papers
on Law and Economics
Issue of 2007‒06‒23
seven papers chosen by
Jeong-Joon Lee, Towson University

  1. Active Courts and Menu Contracts* By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  2. The Value Added Tax: Its Causes and Consequences By Michael Keen; Ben Lockwood
  3. The cost of lying By Lundquist, Tobias; Ellingsen, Tore; Gribbe, Erik; Johannesson, Magnus
  4. The Economics of Criminal Procedure By Thomas Miceli
  5. Legal Change: Integrating Selective Litigation, Judicial Preferences, and Precedent By Thomas Miceli
  6. Effectiveness of Competition Law: A Panel Data Analysis By Franz Kronthaler
  7. The winding road to industrial safety. Evidence on the effects of environmental liability on accident prevention in Germany. By Onno Hoffmeister; Reimund Schwarze

  1. By: Luca Anderlini; Leonardo Felli; Andrew Postlewaite
    Abstract: We describe and analyze a contractual environment that allows a role for an active court.The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). Anactive court can improve on the outcome that the parties would achieve without it. Theinstitutional role of the court is to maximize the parties' welfare under a veil ofignorance.In Anderlini, Felli, and Postlewaite (2006) the possibility of "menu contracts" betweenthe informed buyer and the uninformed seller is described but not analyzed. Here, wefully analyze this case.We find that if we maintain the assumption that one of the potential objects of trade is notcontractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact.If however we let all "widgets" be contractible ex-ante, then multiple equilibria obtain. Inthis case the role for an active court is to ensure the inefficient pooling equilibria do notexist alongside the superior ones in which separation occurs.
    Keywords: Optimal Courts, Informational Externalities, Ex-ante Welfare, Informed Principal, Menu Contracts.
    JEL: C79 D74 D89 K40 L14
    Date: 2006–10
  2. By: Michael Keen; Ben Lockwood
    Abstract: Almost unknown in 1960, the value added tax (VAT) is now found in more than 130 countries, raises around 20 percent of the world’s tax revenue, and has been the centerpiece of tax reform in many developing countries. This paper explores the causes and consequences of the remarkable rise of the VAT. A key question is whether it has indeed proved, as its proponents claim, an especially effective form of taxation. To address this, it is first shown that a tax innovation—such as the introduction of a VAT—reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This observation leads to the estimation, on a panel of 143 countries for 25 years, of a system of equations describing both the probability of VAT adoption and the revenue impact of the VAT. The results point to a rich set of determinants of VAT adoption, this being more likely, for example, if a country has a program with the IMF and the less open it is to international trade. In the revenue equation, the presence of a VAT does indeed have a significant impact, but also a complex one, with a negative intercept effect counteracted by positive effects that are greater the higher are per capita income and, more tentatively, openness. While the sign of the revenue impact of the VAT is thus in general ambiguous, most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so (though this is less apparent in sub-Saharan Africa), and most without it seem likely to gain from its adoption.
    Keywords: Value added tax; tax reform
    JEL: H20 H21
    Date: 2007
  3. By: Lundquist, Tobias (Dept. of Economics, Stockholm School of Economics); Ellingsen, Tore (Dept. of Economics, Stockholm School of Economics); Gribbe, Erik (Dept. of Economics, Stockholm School of Economics); Johannesson, Magnus (Dept. of Economics, Stockholm School of Economics)
    Abstract: We experimentally investigate the effect of cheap talk in a bargaining game with one-sided asymmetric information. A seller has private information about his or her skill and is provided an opportunity to communicate this information to a buyer through a written message. Four different treatments are compared; one without communication, one with free-form communication, and two treatments with pre-specified communication in the form of promises of varying strength. Our results suggest that lying about private information is costly and that the cost of lying increases with the size of the lie and the strength of the promise. Freely formulated messages lead to the fewest lies and the most efficient outcomes.
    Keywords: Deception; Communication; Lies; Promises; Experiments
    JEL: C91 D82
    Date: 2007–06–12
  4. By: Thomas Miceli (University of Connecticut)
    Abstract: Criminal procedure concerns the rules regarding the treatment of criminal defendants during the time from their arrest until the determination of a final verdict. From an economic perspective, the goal of this process is to achieve the most accurate determination of guilt at the lowest possible cost. The process encompasses plea bargaining, the bail system, rules regarding the determination of guilt at trial, and appeal. Criminal procedure also affects deterrence because it ultimately determines the expected punishment imposed on offenders. However, uncertainty in enforcement necessarily leads to a conflict between the goals of deterrence and error avoidance.
    Keywords: Criminal procedure, plea bargaining, rules of evidence
    JEL: K40 K42
    Date: 2007–06
  5. By: Thomas Miceli (University of Connecticut)
    Abstract: The claim that the common law displays an economic logic is a centerpiece of the positive economic theory of law. A key question in this literature is whether this outcome is due to the conscious efforts of judges, or the result of invisible hand processes. This paper develops a model in which to two effects combine to determine the direction of legal change. The main conclusions are, first, that judicial bias can prevent the law from evolving toward efficiency if the fraction of judges biased against the efficient rule is large enough; and second, that precedent affects the rate of legal change but not its direction.
    Keywords: Legal change, judicial decision making, precedent
    JEL: K40 K41
    Date: 2007–06
  6. By: Franz Kronthaler
    Abstract: The paper explores what macroeconomic factors can tell us about the effectiveness of recently enacted national competition laws. Qualitative evidence suggests that numerous countries fall short in implementing competition law. Furthermore, there seems to be significant differences between countries. To examine what factors might contribute to the explanation of effectiveness of competition law panel regression analysis is used. The results indicate that the level of economic development matters, however the institutional learning curve is also relevant. Furthermore, larger countries should be more concerned with competition advocacy activities than smaller countries and it seems to be the case that the problem of capture of competition law is serious in countries with high levels of corruption.
    Keywords: Competition law enforcement, developing and transition countries
    JEL: K21 L40
    Date: 2007–06
  7. By: Onno Hoffmeister; Reimund Schwarze
    Abstract: The German Environmental Liability Law (ELL) of 1991 has introduced far-reaching civil liability for environmental damages with the aim to increase firms’ efforts to prevent accidents. Previous studies find poor evidence that this goal has actually been achieved. One and a half decades after the introduction of that law, we undertake a new attempt to investigate the impact of the ELL on accident prevention. Our analysis is based on annual data on the number of environmental accidents per year, reported to the monitoring agency ZEMA, and the risk premium imposed by a large German insurer on environmental liability insurance (ELI). As reliable accident reporting has begun only after the implementation of the new law into practice, pre- and post-reform levels of accident prevention cannot be directly compared. However, the time series of ELI premiums cuts across these two periods. Once we examine the relationship between the ELI premium and accident prevention and observe the effect of the reform impulse on the former, we are able to model the dynamics of the adjustment process induced by the ELL. According to our results, the average number of environmental accidents per year has decreased from 29 before to 17 and a half after the reform. Our dynamic analysis reveals an overshooting of the insurance premiums in the first years after the reform and a successive decrease from 1997 onwards. The premiums and firms’ prevention efforts achieved a new equilibrium in 2000.
    Keywords: Environmental liability, accident prevention, empirical analysis, Germany.
    JEL: K32 K13 Q58
    Date: 2007–06

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