New Economics Papers
on Law and Economics
Issue of 2007‒10‒13
eight papers chosen by
Jeong-Joon Lee, Towson University

  1. Reference Points and the Theory of the Firm By Oliver D. Hart
  2. The Informal Sector By Áureo de Paula; José A. Scheinkman
  3. Trade Shocks and Labor Adjustment: Theory By Stephen Cameron; Shubham Chaudhuri; John McLaren
  4. Damages for Breach of Contract, Impossibility of Performance and Legal Enforceability By Germán Coloma
  5. Multiple safety net regulators and agency problems in the EU: is Prompt Corrective Action a partial solution? By Mayes, David G; Nieto, Maria J; Wall , Larry
  6. Rules for Border-Crossing Factor Movements By Horst Siebert
  7. Liability Insurance under the Negligence Rule By Marie-Cécile Fagart; Claude Fluet
  8. Economics and Terrorism: What We Know, What We Should Know and the Data We Need By Llussá, Fernanda; Tavares, José

  1. By: Oliver D. Hart
    Abstract: In this article I argue that it has been hard to make progress on Coase's theory of the firm agenda because of the difficulty of formalizing haggling costs. I propose an approach that tries to move things forward using the idea of aggrievement costs, and apply it to the question of whether a transaction should be placed inside a firm (in-house production) or in the market place (outsourcing).
    JEL: D23 D86 K12
    Date: 2007–10
  2. By: Áureo de Paula; José A. Scheinkman
    Abstract: This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a limitation on size. As a result informal firms are smaller and have a lower capital labor ratio. When education is an imperfect proxy for ability, we show that the interaction of the manager's education and formality has a positive correlation with firm size. These implications are supported by our empirical analysis. The second model highlights the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream sectors. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, this chain effect vanishes.
    JEL: H2 K4
    Date: 2007–10
  3. By: Stephen Cameron; Shubham Chaudhuri; John McLaren
    Abstract: We construct a dynamic, stochastic rational expectations model of labor reallocation within a trade model that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) Gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behaviour of both models is similar. It is shown that the equilibrium solves a particular planner's problem, thus facilitating analytical results, econometric estimation, and simulation of the model for policy analysis.
    JEL: F16 F42 J60 K11
    Date: 2007–10
  4. By: Germán Coloma
    Abstract: This paper develops a game-theoretic model of a contract between a creditor and a debtor where equilibrium depends on the damage rule chosen for breach-of-contract situations, the use of impossibility-of-performance excuses and the level of legal contract enforceability. We find that, under perfect legal enforceability, the different alternative damage rules (based on expectation or reliance damages, with or without performance excuses) are able to induce an efficient performance by the contracting parties. But we also find that, if legal enforceability is imperfect, then a rule based on expectation damages with an excuse for impossibility of performance is able to work more efficiently than the other alternative damage rules.
    Keywords: breach of contact, impossibility of performance, legal enforceability
    JEL: K12
    Date: 2007–10
  5. By: Mayes, David G (University of Auckland and Bank of Finland); Nieto, Maria J (Banco de España); Wall , Larry (Federal Reserve Bank of Atlanta)
    Abstract: Prompt Corrective Action (PCA) provides a more efficient mechanism for dealing with problem banks operating in more than one European country. In a PCA framework, a bank’s losses are likely to be substantially reduced. This reduction in the losses to deposit insurance and governments will improve the problem of allocating those losses across the various insurance schemes and make it less likely that any deposit insurer will renege on its obligations in a cross-border banking crisis. This paper explores the institutional changes needed in Europe if PCA is to be effective in resolving the cross-border agency problems that arise in supervising and resolving cross-border banking groups. The paper identifies these changes starting with enhancements in the availability to prudential supervisors of information on banking groups’ financial condition. Next, the paper considers collective decision-making by prudential supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank of a cross-border banking group falls below the minimum capital standard. Finally, the paper analyses the coordination measures that should be implemented if PCA requires the bank to be resolved.
    Keywords: banking supervision; European Union; Prompt Corrective Action
    JEL: F20 G28 K23
    Date: 2007–06–12
  6. By: Horst Siebert
    Abstract: This paper analyzes rules for international factor movements, i.e. real capital flows together with the relocation of firms, the flow of technology and the migration of people. These rules have to make sure that individuals, individual countries as well as the world economy benefit from factor flows. They also define whether factors are accumulated, for instance whether new technology is found. Except for TRIMS, an international investment code has not been established. Conventions have been introduced to ease patent applications. TRIPS protects intellectual property. Rules for labor migration relate to the right of exit and to conditions of entry. Factor movements are interdependent among themselves and with trade. This implies a pecking order between trade, capital flows and migration.
    Keywords: International rules, institutional arrangements, capital flows, technology, patents, intellectual property rights, migration, pecking order between trade and factor flows
    JEL: F2 K O3 P
    Date: 2007–10
  7. By: Marie-Cécile Fagart; Claude Fluet
    Abstract: We analyze the efficiency properties of the negligence rule with liability insurance, when the tort-feasor's behavior is imperfectly observable both by the insurer and the court. Efficiency is shown to depend on the extent to which the evidence is informative, on the evidentiary standard for finding negligence, and on whether insurance contracts can condition directly on the same evidence as used by courts to assess behavior. When evidence is not directly contractible, the negligence rule with compensatory damages is generally inefficient and can be improved by decoupling liability from the harm suffered by the victim.
    Keywords: Negligence, liability insurance, evidentiary standard, moral hazard, judicial error, decoupling, prudence
    JEL: D82 K41 K42
    Date: 2007
  8. By: Llussá, Fernanda; Tavares, José
    Abstract: In this paper we organize the literature on the economics of terrorism around seven different topics, offering a comprehensive view of the literature with a view to identifying questions that remain unanswered. The chosen topic areas are: The Measurement of Terrorist Activity, The Nature of Terrorists, The Utility Cost of Terrorism, The Impact of Terrorism on Aggregate Output, Terrorism and Specific Sectors of Activity, Terrorism and Economic Policy, and Counter-Terrorism. In a sense, we proceed from measurement issues to studies of the characteristics of terrorists and terrorist organizations, the consequences of terrorism on individual utility and, aggregate output and on specific sectors of activity, as well as the impact of terrorism on fiscal and monetary policies. We conclude with an examination of the economics literature on counter-terrorism measures. For each of the topics above, we present what the literature has achieved, the important questions that remain open and the type of data that would help researchers make progress. In our discussion, we identify the main papers in the literature and the issue(s) where each made a contribution, presenting a brief individual summary for these papers, organized along the topic areas.
    Keywords: Counter-Terrorism; Economics of Terrorism; Nature of Terrorists; Output Costs; Utility Costs
    JEL: A12 D10 E20 H00 K00 O11
    Date: 2007–10

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.