New Economics Papers
on Law and Economics
Issue of 2007‒09‒02
twelve papers chosen by
Jeong-Joon Lee, Towson University

  1. Cocaine Production and Trafficking: What do we know? By Daniel Mejía; Carlos Esteban Posada
  2. The End of Comparative Law By Mathias M. Siems
  3. Legal Origin, Shareholder Protection and the Stock Market: New Challenges from Time Series Analysis By Sonja Fagernäs; Prabirjit Sarkar; Ajit Singh
  4. Reflexive Governance and European Company Law By Simon Deakin
  5. Varieties of Capitalism and the Learning Firm: Corporate Governance and Labour in the Context of Contemporary Developments in European and German Company Law By Peer Zumbansen
  6. Strategic Judicial Decision Making By Pablo T Spiller; Rafael Gely
  7. Riding High - Success in Sports and the Rise of Doping Cultures By Strulik, Holger
  8. Sports and the Law: Using Court Cases to Teach Sports Economics By Victor Matheson
  9. Organized business, political regimes and property rights across the Russian Federation By Pyle, William
  10. Divorce and the Excess Burden of Lawyers By Martin Halla
  11. Salience and Taxation: Theory and Evidence By Raj Chetty; Adam Looney; Kory Kroft
  12. Mass Torts and the Incentives for Suit, Settlement, and Trial By Andrew F. Daughety; Jennifer F. Reinganum

  1. By: Daniel Mejía; Carlos Esteban Posada
    Abstract: The main purpose of this chapter is to summarize the information currently available on cocaine production and trafficking. The chapter starts by describing the available data on cocaine production and trade, the collection methodologies, (if available) used by different sources, the main biases in the data, and the accuracy of different data sources. Next, the chapter states some of the key empirical questions and hypotheses regarding cocaine production and trade and takes a first look at how well the data matches these hypotheses. Also, the chapter states some of the main puzzles in the cocaine market and studies some of the possible explanations. These puzzles and empirical questions should guide future research into our understanding of the key determinants of illicit drug production and trafficking. Finally, the chapter studies the different policies that producer countries have adopted to fight against cocaine production and the role consumer countries play in the implementation of anti-drug policies.
    Keywords: Cocaine; Narcotraffic; War on Drugs. Classification JEL: K42; C81; H56.
  2. By: Mathias M. Siems
    Abstract: Following the 1900 congress in Paris, the beginning of the 20th century saw comparative law emerge as a significant discipline. This paper suggests that the early 21st century is seeing the decline, or maybe even the 'end', of comparative law. In contrast to other claims which see the 21st century as the 'era of comparative law', there are at least four trends which give rise to pessimism: 'the disregard', 'the complexity', 'the simplicity', and 'the irrelevance' of comparative law. These phenomena will be explained in the body of this paper; the concluding part considers suggestions as to how to proceed further.
    Keywords: Comparative law, numerical comparative law, legal culture, law and finance, World Bank, harmonisation, convergence, governance.
    JEL: K00 K20 N20 N40 P51
    Date: 2007–03
  3. By: Sonja Fagernäs; Prabirjit Sarkar; Ajit Singh
    Abstract: This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.
    Keywords: Stock Market, Corporate Governance, Financial Development, Leximetrics
    JEL: F02 F36 E44 G11 O16 K22
    Date: 2007–06
  4. By: Simon Deakin
    Abstract: The use of reflexive forms of regulation is growing within the EU, in particular as the open method of coordination ('OMC') is applied to a growing number of contexts including employment policy, social inclusion, enterprise promotion, environmental protection, energy policy, and fundamental human rights. Company law, however, seems to be an exception to this: recent activity has taken the form of 'hard law' harmonization through directives, coupled with the stimulation of regulatory competition through judgments of the European Court of Justice in relation to freedom of movement, stemming from the Centros case. There is a very limited 'company law OMC' in the form of the deliberations of the European Corporate Governance Forum, but there is little evidence here of what proponents of the OMC call 'learning from diversity'; instead, the Forum appears to envisage the elimination of country-specific practices which it refers to as 'distortions of competition'. This paper argues that the lack of a meaningful company law OMC is likely to prove a more serious long-term obstacle to capital market integration than the persistence of inter-country variations in corporate governance practices. The example of labour law shows how functional convergence and a coordinated raising of standards can be achieved by the dovetailing of the OMC with social policy directives. By contrast, the recent failure of the Takeover Directive to impose a uniform model of takeover regulation indicates the limits of top-down modes of harmonization. At the same time, the case of labour law highlights the importance of placing the OMC within a wider framework of legal support for fundamental rights, of the kind which is capable of providing a countervailing force against court-led deregulation.
    Keywords: reflexive governance, company law, labour law, European Union
    JEL: K22 K31
    Date: 2007–06
  5. By: Peer Zumbansen
    Abstract: Research in corporate governance and in labour law has been characterized by a disjuncture in the way that scholars in each field are addressing organizational questions related to the business enterprise. While labour has eventually begun to shift perspectives from aspirations to direct employee involvement in firm management, as has been the case in Germany, to a combination of 'exit' and 'voice' strategies involving pension fund management and securities litigation, it remains to be seen whether this new stream will unfold as a viable challenge to an otherwise exclusionary shareholder value paradigm. At the same time, recent suggestions made by Delaware Chancery Court Vice Chancellor Strine, to dare think about potentially shared commitments between management and labour - and UCLA's Stephen Bainbridge's response - underline the viability - and, the contestedness - of attempts at moving the corporate governance debate beyond the confines of corporate law proper. While such a wider view had already famously been encouraged by Dean Clarke in his 1986 treatise on Corporate Law (p. 32), mainstream corporate law does not seem to have endorsed this perspective. This paper takes the questionable divide between management and labour within the framework of a limiting corporate governance concept as starting point to explore the institutional dynamics of the corporation, hereby building on the theory of the innovative enterprise, as developed by management theorists Mary O'Sullivan and William Lazonick. Largely due to the sustained distance between corporate and labour law scholars, neither group has effectively addressed their common blind spot: a better understanding of the business enterprise itself. In midst of an unceasing flow of affirmations of the finance paradigm of the corporation on the one hand and 'voice' strategies by labour on the other, it seems to fall to management theorists to draw lessons from the continuing co-existence of different forms of market organization, in which companies appear to thrive. Exploring the conundrum of 'risky' business decisions within the firm, management theorists have been arguing for the need to adopt a more sophisticated organizational perspective on companies operating on locally, regionally and transnationally shaped, often highly volatile market segments. Research by comparative political economists has revealed a high degree of connectivity between corporate governance and economic performance without, however, arriving at such favourable results only for shareholder value regimes. Such findings support the view that corporate governance regimes are embedded in differently shaped regulatory frameworks, characterized by distinct institutions, both formal and informal, and enforcement processes. As a result of these findings, arguments to disassociate issues of corporate governance from those of the firm's (social) responsibility [CSR] have been losing ground. Instead, CSR can be taken to be an essential part of understanding a particular business enterprise. It is the merging of a comparative political economy perspective on the corporation with one on the organizational features, structures and processes of the corporation, which can help us better understand the distribution of power and knowledge within the 'learning firm'.
    Keywords: Corporate Governance, organizational theory, innovative enterprise, learning firm, employee involvement, corporate social responsibility, European/German corporate governance
    JEL: G23 K22
    Date: 2007–06
  6. By: Pablo T Spiller; Rafael Gely
    Date: 2007–08–24
  7. By: Strulik, Holger
    Abstract: This article develops a socio-economic model that analyzes the doping decision of professional athletes. In their decision to use performance enhancing drugs athletes do not only evaluate the costs and benefits (in terms of potential rank improvement). They also take into account peer-group approval of using drugs. Peer-group approval is modelled as a lagged endogenous variable that depends on the share of drug using athletes in the history of a sport. This way, the model can explain multiple equilibria as "doping cultures". Besides the comparative statics of the equilibrium (how can a doping culture be eliminated?) the article also investigates how the doping decision is affected by standards set by the respective leader in a sport, e.g. Olympic qualification marks, and by the taste of victory, i.e. the disproportionate public veneration of winners.
    Keywords: sport, doping, approval, social dynamics, weak athletes, superheroes
    JEL: A13 D71 K40 L83 M50
    Date: 2007–08
  8. By: Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: The purpose of this paper is two-fold. First, it lays forth a rationale for the use of court cases in teaching a sports economics class. Second, it provides an overview of the most important cases related to sports economics. Court classes allow students to develop critical reading and reasoning skills while allowing the instructor to present readings outside the standard textbook that are accessible to most undergraduates. A sports economics course with a focus on legal issues also broadens the course to fit better within a liberal arts education rather than being a narrow speciality field.
    Keywords: sports, court cases, legal economics
    JEL: L83 K21 K31 K40
    Date: 2007–09
  9. By: Pyle, William (BOFIT)
    Abstract: Abstract: This article explores the inter-relationship of collective action within the business community, the nature of the political regime and the security of firms’ property rights. Drawing on a pair of surveys recently administered in Russia, we present evidence that post-communist business associations have begun to coordinate business influence over state actors in a manner that is sensitive to regional politics. A firm’s ability to defend itself from government predation and to shape its institutional environment as well as its propensity to invest in physical capital are strongly related to both its membership in a business association and the level of democratization in its region. Of particular note, the positive effect of association membership on securing property rights increases in less democratic regions. The evidence, that is, suggests that collective action in the business community substitutes for democratic pressure in constraining public officials.
    Keywords: collective action; property rights; political institutions; business associations
    JEL: D70 K40 P48
    Date: 2007–08–29
  10. By: Martin Halla (Johannes Kepler University of Linz and IZA)
    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 microdata 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
  11. By: Raj Chetty; Adam Looney; Kory Kroft
    Abstract: A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and nearby control stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption significantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience affects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.
    JEL: D11 H0 J0 K34
    Date: 2007–08
  12. By: Andrew F. Daughety (Department of Economics, Vanderbilt University); Jennifer F. Reinganum (Department of Economics, Vanderbilt University)
    Abstract: We explore how the incentives of a plaintiff and her attorney, when considering filing suit and bargaining over settlement, can differ between those suits associated with stand-alone torts cases and those suits involving mass torts. We contrast Òindividual-based liability determinationÓ (IBLD), wherein a clear description of the mechanism by which a defendant's actions translate into a plaintiff's harm is available, with Òpopulation-based liability determinationÓ (PBLD), wherein cases rely upon the prevalence of harms in the population to persuade a judge or jury to draw an inference of causation or fault. We show that PBLD creates a positive externality for the plaintiff's side that is inherent in many mass tort settings; this externality induces an increased propensity to file suit, higher settlement demands and greater joint payoffs for plaintiffs and their attorneys. Consequently, the defendant in a PBLD case faces an increased ex ante expected cost compared with the IBLD regime, thereby increasing incentives to take care. However, PBLD need not always imply an increased likelihood of trial relative to IBLD for any filed case (though it may lead to more cases being filed); the heightened aggressiveness of the plaintiff and her attorney can actually lead to a reduction in the likelihood of trial. Thus, PBLD can be more, or less, efficient than IBLD (in the sense of reducing trial costs), when considering cases that would be filed in both possible regimes.
    Keywords: Liability determination, settlement bargaining <br><br>
    JEL: K13 K41 D82
    Date: 2007–08

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