New Economics Papers
on Law and Economics
Issue of 2007‒08‒08
fourteen papers chosen by
Jeong-Joon Lee, Towson University

  1. Terrorism and Business By Bruno S. Frey
  2. United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran By Alvin K. Klevorick; Alan O. Sykes
  3. Using Job Changes to Evaluate the Bias of the Value of a Statistical Life By Hannes Spengler; Sandra Schaffner
  4. Integration through de-legislation? An irritated heckler By Joerges, Christian
  5. The Deterrent Effects of Prison: Evidence from a Natural Experiment By Francesco Drago; Roberto Galbiati; Pietro Vertova
  6. Divorce and the Excess Burden of Lawyers By Martin Halla
  7. Complementary Platforms By Jo Reynaerts; Patrick Van Cayseele
  8. The Effect of Bank Competition on the Bank's Incentive to Collateralize By Hainz, Christa
  9. Legal versus Normative Incentives under Judicial Error By Bruno Deffains; Claude Fluet
  10. Increasing the efficiency of the 'Studi di Settore' might backfire. By Marchese, Carla; Privileggi, Fabio
  11. Nepal's constitutional transition By Luther, Joerg; Francavilla, Domenico
  12. Patent Activity and Technical Change By Robert L. Basmann; Michael McAleer; Daniel Slottje
  13. Cycles of violence, and terrorist attacks index for the State of Massachusetts By Gómez-Sorzano, Gustavo
  14. Crime and Circumstance: The Effects of Infant Health Shocks on Fathers’ Criminal Activity By Hope Corman; Kelly Noonan; Nancy E. Reichman; Ofira Schwartz-Soicher

  1. By: Bruno S. Frey
    Abstract: Deterrence has been a crucial element in fighting terrorism, both in politics and in rational choice analyses of terrorism. However, there are two strategies that are superior to deterrence. The first one is to make terrorist attacks less devastating and less attractive to terrorists through decentralization. The second one is to raise the opportunity cost – rather than the material cost – for terrorists. These alternative strategies will effectively dissuade potential terrorists. It is here argued that they not only apply to society as a whole but can also usefully be applied by business enterprises.
    Keywords: Terrorism; Deterrence; Decentralization; Opportunity Cost; Business; Enterprises.
    JEL: D74 H56 K42
    Date: 2007–07
  2. By: Alvin K. Klevorick (Yale University); Alan O. Sykes (Stanford University)
    Abstract: E. Hoffmann-La Roche Ltd. v. Empagran S.A. concerned a private antitrust suit for damages against a global vitamins cartel. The central issue in the litigation was whether foreign plaintiffs injured by the cartel’s conduct abroad could bring suit in U.S. court, an issue that was ultimately resolved in the negative. We take a welfarist perspective on this issue and inquire whether optimal deterrence requires U.S. courts to take subject matter jurisdiction under U.S. law for claims such as those in Empagran. Our analysis considers, in particular, the arguments of various economist amici in favor of jurisdiction and arguments of the U.S. and foreign government amici against jurisdiction. We explain why the issue is difficult to resolve, and identify several economic concerns, which the amici did not address, that may counsel against jurisdiction. We also analyze the legal standard enunciated by the Supreme Court and applied on remand by the DC Circuit, and we argue that its focus on "independent" harms and "proximate" causation is problematic and does not provide an adequate economic foundation for resolving the underlying legal issues. A revised version of this paper is forthcoming in ANTITRUST STORIES from Foundation Press, edited by Daniel Crane and Eleanor Fox.
    Keywords: Antitrust, Cartels, Competition policy, International trade
    JEL: F13 K21 L41
    Date: 2007–07
  3. By: Hannes Spengler; Sandra Schaffner
    Abstract: This paper presents a new approach to obtain unbiased estimates of the value of a statistical life (VSL) with labor market data. Investigating job changes, we combine the advantages of recent panel studies, which allow to control for unobserved heterogeneity of workers, and conventional cross-sectional estimations, which primarily exploit the variation of wage and risk between different jobs. We find a VSL of 6.1 million euros from pooled cross-sectional estimation, 1.9 million euros from the static first-differences panel model and 3.5 million euros from the job-changer specification. Thus, ignoring individual heterogeneity causes overestimates of the VSL, whereas identifying the wage-risk tradeoff not only by means of between job variation (job-changer model) but also on the basis of noisy variation on the job (panel models) may lead to underestimates of the VSL. Our results can be used to perform cost-benefit analyses of public projects aimed at reducing fatality risks, e.g., in the domains of health, environmental or traffic policy.
    Keywords: Value of a statistical life (VSL), compensating wage differentials, work accidents, job changes
    JEL: I10 J17 J28 K00
    Date: 2007
  4. By: Joerges, Christian
    Abstract: This paper is about the difficult relationship between law and governance in the European Union. The turn to governance which the Prodi Commission has forcefully propagated is a continuation of much older developments. By means of these developments the European Community (now Union) has sought to compensate for the inadequacies found within its institutional design (in particular, within the Community Method); a design which has had constantly to be adapted to the ever more intense and complex regulatory needs of the integration project. These constant institutional innovations were functional necessities and the turn to governance seems to be irresistible and irreversible. Such innovation, however, is not easily reconcilable with the Union’s commitment to the rule of law, or with the very idea of law-mediated, politically accountable rule. These tensions are addressed in two steps. The first concerns the national level and is a mainly methodological reminder: many of the governing techniques that are today defined as governance can also be found within national systems and were, furthermore, the subject of intensive debate in the 80s within discussion on proceduralizing and reflexive methodologies which sought to capture the specifics of a – then so perceived – post-interventionist law. The second step concerns the European Union. Here, a methodological approach is insufficient. It must instead be accompanied by a re-conceptualisation of European law as a new type of supranational conflict of laws. This law seeks to realize what the Constitutional Treaty had called the “motto of the Union”, namely a reconciliation of “unity and diversity”. It is submitted that a re-conceptualisation of European law in terms of conflict-of-laws would not only help to rescue the rule of law but would also increase our capacity to cope with the unresolved substantive tensions within the European polity.
    Keywords: comitology; Europeanization; governance; multilevel governance; open coordination; private international law; rule of law
    Date: 2007–07–17
  5. By: Francesco Drago (University of Naples Parthenope and IZA); Roberto Galbiati (European University Institute); Pietro Vertova (University of Bergamo and Bocconi University)
    Abstract: In this paper we test for the theory of deterrence. We exploit the natural experiment provided by the Collective Clemency Bill passed by the Italian Parliament in July 2006. As a consequence of the provisions of the bill, expected punishment to former inmates recommitting a crime can be considered as good as randomly assigned. Based on a unique data set on post-release behaviour of former inmates, we find that an additional month in expected sentence reduces the propensity to recommit a crime by 1.24 percent: this corroborates the general deterrence hypothesis. However, this effect depends on the time previously served in prison: the behavioural response to an additional month of expected sentence decreases with the length of the prison spell. This second result can be hardly reconciled with the specific deterrence hypothesis according to which a stronger past experience of punishment should increase the sensitivity to future expected sanctions.
    Keywords: crime, deterrence, natural experiment, recidivism
    JEL: K42
    Date: 2007–07
  6. By: Martin Halla (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We present a model where divorcing spouses can choose to hire lawyers in their divorce process. Spouses encounter incentives as in the classical prisoners’ dilemma: Despite the zero sum nature of the game and the lawyers’ fees, each spouse has an incentive to hire a lawyer. We propose a simple institutional setting allowing for joint lawyers in order to overcome this socially inefficient situation. This model is estimated and tested with rich micro-data from court records. Employing a multiple treatment matching procedure we estimate the causal effect of lawyers on the division of matrimonial property, on the length of the divorce process and on the quality of the divorce settlement.
    Keywords: litigation; lawyers; divorce settlements; dispute resolution; family law; multiple treatment matching
    JEL: K41 J12 J52 K36 C72
    Date: 2007–07
  7. By: Jo Reynaerts; Patrick Van Cayseele
    Abstract: We introduce an analytical framework close to the canonical model of platform competition investigated by Rochet and Tirole (2006) to study pricing decisions in two-sided markets when two or more platforms are needed simultaneously for the successful completion of a transaction. The model developed is a natural extension of the Cournot-Ellet theory of complementary monopoly featuring clear cut asymmetric single- and multihoming patterns across the market. The results indicate that the so-called anticommons problem generalizes to two-sided markets because individual platforms do not take into account the negative pricing externality they exert on the other platforms. As a result, mergers between such platforms may be welfare enhancing, but involve redistribution of surplus from one side of the market to the other. Moreover, the limit of an atomistic allocation of property rights however is not monopoly pricing, indicating that there also exist differences with the received theory of complementarity.
    Keywords: Two-Sided Markets, Complements, The Anticommons Problem
    JEL: D43 D62 K11 L13 L4 L5
    Date: 2007
  8. By: Hainz, Christa
    Abstract: It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project's risk than entrepreneurs. We study the bank's choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
    Keywords: Collateralization; screening; incentives; bank competition
    JEL: D82 G21 K00
    Date: 2007–07
  9. By: Bruno Deffains; Claude Fluet
    Abstract: We analyze the complementarity between legal incentives (the threat of being held liable for damages) and normative incentives (the fear of social disapproval or stigma) in situations where instances of misbehavior are not perfectly observable. There may be multiple equilibria within a given legal regime, as well as multiple socio-legal equilibria. In particular, there are high stigma-high evidentiary standard regimes versus low stigma-low standard ones. We argue that this may explain some of the differences between common law and civil law regarding the notions of fault or negligence. Our analysis also provides an explanation for trends currently observed in civil-law systems, in particular the weakening of evidentiary requirements in tort cases.
    Keywords: Social interactions, socio-legal multiplier, stigma, judicial error, evidentiary standard
    JEL: D8 K4 Z13
    Date: 2007
  10. By: Marchese, Carla; Privileggi, Fabio
    Abstract: The Studi di Settore are used by the Italian tax administration to calculate reference revenue levels for small businesses. Recently new rules have been introduced in order to render the Studi di Settore more efficient in producing realistic estimates, with the aim of reducing the "legalized evasion" that might arise in case of a systematic downward bias. Voices of the involved categories, however, convinced the Government to partially step back. Building upon the standard firm's tax evasion model of Cowell (2003) and the approach of Santoro (2006) we show that, under given conditions, an efficiency increase might backfire implying a larger overall tax evasion and a smaller tax revenue.
    JEL: H25 H26 K42
    Date: 2007–07
  11. By: Luther, Joerg; Francavilla, Domenico
    Abstract: The political situation of Nepal has changed rapidly in 2006. Civil war ended by virtue of a shared constitutional agreement for future peace and development of democracy. In the current transitional phase, constitutional legality and the rule of law may be difficult to preserve. However, the transition will be successful only if the new Constitution can be seen as unquestionably based on people's sovereignty. This article tries to address a set of specific constitutional questions: (1) Why did the Constitution of 1990 fail? (2) How did the country step into the constitutional transition? (3) Does the Interim Constitution suffer a lack of legitimacy? (4) What about the future role of Parliament? (5) Is Hindu Monarchy over? (6) How Military can be brought to democratic civil control? (7) What kind of electoral system is needed for the Constituent Assembly? (8) How can the future constitution guarantee justice for the violations of human rights and political crimes of the past? (9) How can the Constitution Making Process develop inclusive democracy? (10) Has Federalism a chance? The answers reflect from a European perspective on ideas that are now discussed in Nepal about the constitutional process and could be useful even elsewhere.
    JEL: D63 D74 H11 K10 N45 P48
    Date: 2007–07
  12. By: Robert L. Basmann (Binghampton University); Michael McAleer (School of Economics and Commerce); Daniel Slottje (Southern Methodist University and FTI Consulting)
    Abstract: As creations of the mind, intellectual property includes industrial property and copyrights. This paper presents an aggregate production function of the generalized Fechner-Thurstone (GFT) form to analyze the impact of an important component of intellectual industrial property, namely patent activity, on technical change in the USA for the period 1947-1981. Patents should alter isoquant maps, and measuring their elasticities is both intuitively and empirically appealing. We define a technology-changer as a variable that has an impact on the elasticity of the marginal rate of technical substitution (MRTS) between inputs of the GFT production function over time. Various types of US patent grant activity, specifically total, domestic, foreign, successful and unsuccessful patent applications, are used as instruments for the technology-changer. Using the GFT specification, the impacts of various technology-changers on the elasticity of the mrts between inputs are estimated directly. It is found that granted (or successful) patents, patents granted to foreign companies and individuals, total patent applications, and even unsuccessful patent applications, have significant impacts on the rates at which inputs are substituted for each other over time in production.
    Keywords: GFT production function, patent activity, innovation, technical change, technology-changers, elasticity of the marginal rate of technical substitution.
    JEL: D24 L23 K1
    Date: 2007
  13. By: Gómez-Sorzano, Gustavo
    Abstract: Abstract: I apply the Beveridge-Nelson business cycle decomposition method to the time series of per capita murder in the State of Massachusetts. (1933-2005). Separating out “permanent” from “cyclical” murder, I hypothesize that the cyclical part coincides with documented waves of organized crime, internal tensions, breakdowns in social order, crime legislation, social, and political unrest, and recently with the periodic terrorist attacks to the U.S. The estimated cyclical component of murder warns that terrorist attacks in the U.S. from 1940 to 2005, have affected Massachusetts creating estimated turning point dates clearly marked by the most tragic terrorist attacks to the nation: the shut down in power in NYC in 1965, the World Trade Center Bombing in 1993, and 9/11 2001. The index for Massachusetts foretold with amazing precision those attacks, and must be used as a proxy for attacks for the Whole U.S along with indexes already constructed for the nation ( and, New York City ( The indexes must be used as dependent variables in structural models for terrorist attacks and in models assessing the effects of terrorism on the U.S. economy.
    Keywords: : A model of cyclical terrorist murder in Colombia; 1950-2004. Forecasts 2005-2019; the econometrics of violence; terrorism; and scenarios for peace in Colombia from 1950 to 2019; scenarios for sustainable peace in Colombia by year 2019; decomposing violence: terrorist murder in the twentieth in the United States; using the Beveridge and Nelson decomposition of economic time series for pointing out the occurrence of terrorist attacks; decomposing violence: terrorist murder and attacks in New York State from 1933 to 2005; terrorist murder; cycles of violence; and terrorist attacks in New York City during the last two centuries.
    JEL: N40 K14 O51 N42 H56 D74 C20 K42 C22 C29
    Date: 2007–01–21
  14. By: Hope Corman (Rider University and National Bureau of Economic Research); Kelly Noonan (Rider University and National Bureau of Economic Research); Nancy E. Reichman (Robert Wood Johnson Medical School); Ofira Schwartz-Soicher (Robert Wood Johnson Medical School)
    Abstract: Few studies in the economics literature have linked individuals’ criminal behavior to changes in their personal circumstances. Life shocks, such as natural or personal disasters, could reduce or sever a person’s connections to his/her family, job, or community. With fewer connections, crime may become a more attractive option. This study addresses the question of whether an exogenous shock in life circumstances affects criminal activity. Specifically, we estimate the effects of the birth of a child with a random and serious health problem (versus the birth of a healthy infant) on the likelihood that the child’s father becomes or remains involved in illegal activities. Controlling for the father’s pre-birth criminal activity, we find that the shock of having a child with a serious health problem increases both the father’s post-birth conviction and incarceration by 1 to 8 percentage points, depending on the measure of infant health used.
    Date: 2006–12

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.
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