New Economics Papers
on Law and Economics
Issue of 2007‒08‒27
eight papers chosen by
Jeong-Joon Lee, Towson University

  1. Shareholder Access to Manager-Biased Courts and the Monitoring/Litigation Tradeoff By Sergey Stepanov
  2. Leniency Programs in a Multimarket Setting: Amnesty Plus and Penalty Plus By Catherine ROUX; Thomas VON UNGERN-STERNBERG
  3. Why Is Law Enforcement Decentralized? By Guillaume Cheikbossian; Nicolas Marceau
  4. Optimal Property Rights in Financial Contracting By Kenneth Ayotte; Patrick Bolton
  5. Strategic Judicial Decision Making By Pablo T. Spiller; Rafael Gely
  6. Strengthening the governance and performance of state-owned financial institutions By Scott, David H.
  7. Anticompetitive Litigation and Antitrust Liability. By Christopher C. Klein
  8. Gambling Policy in the European Union: Monopolies, Market Access, Economic Rents, and Competitive Pressures among Gaming Sectors in the Member States By William R. Eadington

  1. By: Sergey Stepanov (New Economic School and CEFIR)
    Abstract: Adequate access to courts by minority shareholders is commonly viewed as an important element of a good corporate governance system. Should shareholders be provided with easy access to courts when judges are unlikely to punish opportunistic managers? It might seem that having an extra instrument of protection is always better as long as it provides some protection against managerial self-dealing. We present a model, which shows that facilitating shareholder litigation in a system where courts are biased towards managers can actually lower efficiency, as it can lead to either excessive litigation or excessive monitoring of managers by shareholders. The latter effect arises when litigation is very costly for the firm, but cheap for an individual shareholder. In this case, easy litigation does not lead to a greater reliance on the judiciary and results in more, rather than less, concentrated ownership. This is the effect of the optimal adjustment of the ownership structure to an increase in shareholders’ willingness to bring suits when courts are manager-biased. Our model implies that removing impediments to shareholder litigation in countries where courts are reluctant to protect shareholders may increase the cost of corporate governance there.
    Keywords: corporate governance, shareholder protection, shareholder litigation, monitoring, biased courts
    JEL: G32 G34 K41
    Date: 2007–08
  2. By: Catherine ROUX; Thomas VON UNGERN-STERNBERG
    Abstract: We examine the effect of Amnesty Plus and Penalty Plus on firms' initial selfreporting decision, in one market, by altering their whistle-blowing incentives in another market. Amnesty Plus and Penalty Plus are proactive US strategies which aim at triggering multiple confessions by increasing the incentives of already convicted firms to report in a second market where they collude. Predictably, conditional on the conviction of one cartel, Amnesty Plus and Penalty Plus strengthen firms' incentives to report the remaining cartel. However, Amnesty Plus and Penalty Plus have an ambiguous impact on firms' incentives to apply for amnesty in the first place: On the one hand, Amnesty Plus and Penalty Plus may help to sustain a cartel, otherwise reported under the EC Leniency Program. On the other hand, Amnesty Plus and Penalty Plus may induce immediate reporting of both cartels whereas only one of them would have been reported under the EC Leniency Program.
    Keywords: Amnesty Plus; Leniency Program; Multimarket Contact; Self-reporting
    JEL: K21 K42 L41
    Date: 2007–03
  3. By: Guillaume Cheikbossian; Nicolas Marceau
    Abstract: Law enforcement is decentralized. It is so despite documented interjurisdictional externalities which would justify its centralization. To explain this fact, we construct a political economy model of law enforcement. Under decentralization, law enforcement in each region is in accord with the preferences of regional citizens, but interjurisdictional externalities are neglected. Under centralization, law enforcement for all regions is chosen by a legislature of regional representatives which may take externalities into account. However, the majority rule applies for decisions made by the central legislature and this implies that the allocation of enforcement resources may be skewed in favour of those who belong to the required majority. We show that the choice between centralization and decentralization depends on the technology of law enforcement and the nature of the interjurisdictional externalities.
    Keywords: Crime, Law enforcement, Decentralization, Externalities
    JEL: K42
    Date: 2007
  4. By: Kenneth Ayotte; Patrick Bolton
    Abstract: In this paper we propose a theory of optimal property rights in a financial contracting setting. Following recent contributions in the property law literature, we emphasize the distinction between contractual rights, that are only enforceable against the parties themselves, and property rights, that are also enforeceable against third parties outside the contract. Our analysis starts with the following question: which contractual agreements should the law allow parties to enforce as property rights? Our proposed answer to this question is shaped by the overall objective of minimizing due diligence (reading) costs and investment distortions that follow from the inability of third-party lenders to costlessly observe pre-existing rights in a borrower's property. Borrowers cannot reduce these costs without the law's help, due to an inability to commit to protecting third-parties from redistribution. We find that the law should take a more restrictive approach to enforcing rights against third-parties when these rights are i) more costly for third-parties to discover, ii) more likely to redistribute value from third-parties, and iii) less likely to increase efficiency. We find that these qualitative principles are often reflected in observed legal rules, including the enforceability of negative covenants; fraudulent conveyance; corporate veil-piercing; and limits on assignability.
    JEL: K11 K12
    Date: 2007–08
  5. By: Pablo T. Spiller; Rafael Gely
    Abstract: This survey paper starts from the basic, and intuitive, assumption that judges are human and as such, can be modeled in the same fashion we model politicians, activists, managers: driven by well-defined preferences, behaving in a purposive and forward-looking fashion. We explore, then, the role politics play in judicial decision-making. We provide a brief overview of what is called the "strategic approach," compare it to alternative approaches to understand judicial behavior, and offer some concluding thoughts about the future of positive analyses of judicial decision-making.
    JEL: K0 K4
    Date: 2007–08
  6. By: Scott, David H.
    Abstract: Corporate governance arrangements define the responsibilities, authorities and accountabilities of owners, boards of directors, and executive managers of a company. Good corporate governance is as important for state financial institutions as for private sector companies. Many of the problems that commonly afflict state financial institutions can be associated with, if not attributed directly to, weaknesses in corporate governance. This note draws on guidelines recently published by the OECD and the Basel Committee for Banking Supervision to compile a comprehensive corporate governance evaluation framework relevant to state-owned commercial and development finance institutions. It highlights aspects of this framework that are considered to be of particular importance to state financial institutions by citing innovative practices in a number of countries. Finally, it presents a detailed case study of the governance arrangements in place at the Development Bank of Southern Africa.
    Keywords: National Governance,Corporate Law,Emerging Markets,Debt Markets,Banks & Banking Reform
    Date: 2007–08–01
  7. By: Christopher C. Klein
    Abstract: The U.S. Supreme Court held that litigation for anticompetitive ends (“sham litigation”) must be “baseless” in order to face antitrust liability. The filing of such suits continues apace, as does the legal commentators’ debate, but economic analysis has lagged. Here, a game theoretic model is constructed in which plaintiffs file suit to achieve collateral gains and defendants may countersue for damages under the Sherman Act. In equilibrium, settlement fails and all suits are litigated, but the threat of countersuit deters low-expected-value plaintiffs. As the legal standard for sham litigation approaches “baselessness,” this deterrence effect is weakened and litigation may increase.
    Keywords: antitrust, sham litigation, countersuit
    JEL: K21 L41
    Date: 2007–08
  8. By: William R. Eadington (Department of Economics, University of Nevada, Reno)
    Abstract: This study examines the conflicts within the European Union regarding protected status accorded to legal commercial gaming industries and the principles of harmonization that direct EU economic policy. Member States are permitted to constrain competition for gambling services as long as the primary purpose is to protect citizens from unintended negative consequences associated with the activities. Also, because of monopoly status, high tax rates, or government ownership, many EU gaming industries have become major contributors to government coffers or for funding for “good causes.” Legal challenges by private companies trying to participate in these protected markets have led to decisions by the European Court of Justice that have questioned such protected status. A number of key economic metrics for European gaming industries are presented, and competitive dimensions of EU casino industries are examined in comparisons to trends elsewhere.
    Keywords: regulation, gambling, European Union, harmonization
    JEL: K23 L43 L83
    Date: 2007–08

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