New Economics Papers
on Law and Economics
Issue of 2007‒10‒27
ten papers chosen by
Jeong-Joon Lee, Towson University

  1. Hold-up, Asset Ownership, and Reference Points By Oliver Hart
  2. A Retail Benchmarking Approach to Eficient Two-Way Access Pricing By Doh-Shin Jeon; Sjaak Hurkens
  3. The anatomy of U.S. personal bankruptcy under Chapter 13 By Hülya Eraslan; Wenli Li; Pierre-Daniel G. Sarte
  4. The Impact of Potential Labor Supply on Licensing Exam Difficulty in the US Market for Lawyers By Mario Pagliero
  5. The value of private banks in corporate governance: Evidence from the Armstrong investigation By Cantillo, Miguel
  6. Private takings By Ed Nosal
  7. The Informal Sector By Aureo de Paula; Jose A. Scheinkman
  8. The Incapacitation Effect of Incarceration: Evidence From Several Italian Collective Pardons By Alessandro Barbarino; Giovanni Mastrobuoni
  9. Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools By Jo Seldeslachts; Joseph A. Clougherty; Pedro Pita Barros
  10. Quantifying the Benefits of Entry into Local Phone Service, By Nicholas Economides; V. Brian Viard; Katja Seim

  1. By: Oliver Hart
    Abstract: We study two parties who desire a smooth trading relationship under conditions of value and cost uncertainty. A rigid contract fixing price works well in normal times since there is nothing to argue about. However, when value or cost is exceptional, one party will hold up the other , damaging the relationship and causing deadweight losses as parties withhold cooperation. We show that a judicious allocation of asset ownership can help by reducing the incentives to engage in hold up. In contrast to the literature, the driving force in our model is payoff uncertainty rather than noncontractible investments.
    JEL: D23 D86 K12
    Date: 2007–10
  2. By: Doh-Shin Jeon; Sjaak Hurkens
    Abstract: We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network covera
    Keywords: Networks, Access Pricing, Interconnection, Competition
    JEL: D4 K21 L41 L51 L96
    Date: 2007–10–18
  3. By: Hülya Eraslan; Wenli Li; Pierre-Daniel G. Sarte
    Abstract: By compiling a novel dataset from bankruptcy court dockets recorded in Delaware between 2001 and 2002, we build and estimate a structural model of Chapter 13 bankruptcy. This allows us to quantify how key debtor characteristics, including whether they are experiencing bankruptcy for the first time, their past due secured debt at the time of filing, and income in excess of that required for basic maintenance, affect the distribution of creditor recovery rates. The analysis further reveals that changes in debtors' conditions during bankruptcy play a nontrivial role in governing Chapter 13 outcomes, including their ability to obtain a financial fresh start. Our model then predicts that the more stringent provisions of Chapter 13 recently adopted, in particular those that force subsets of debtors to file for long-term plans, do not materially raise creditor recovery rates but potentially make discharge less likely for that subset of debtors. This finding also arises in the context of alternative policy experiments that require bankruptcy plans to meet stricter standards in order to be confirmed by the court.
    Keywords: Bankruptcy
    Date: 2007
  4. By: Mario Pagliero
    Abstract: This paper provides the first empirical evidence of a positive impact of the quality and number of potential entrants on entry requirements in professional markets. The estimated effects are so large that increases in the quality of candidates are completely offset by increases in exam difficulty and therefore do not lead to any long run increase in the number of successful candidates. Variations in the number of candidates are also significantly (but not completely) offset by changes in exam difficulty. About one third of the additional candidates that otherwise would have passed the examination fail because of the increase in standards. These results are not in line with public interest theory of licensing. The classic rent seeking view of licensing can explain some (but not all) of the results.
    Keywords: professional licensing, legal market, bar exam, minimum standards, entry regulation.
    JEL: L4 L5 J4 K2
    Date: 2007
  5. By: Cantillo, Miguel (IESE Business School)
    Abstract: The paper studies the market reaction to the withdrawal of a prominent private bank -Kuhn Loeb- from the board of several firms. The event study shows that although Kuhn Loeb added significant value to the firms where it had a board seat, most of this value came from reduced industry competition. Moreover, it seems that weaker competition manifested itself in monopoly rather than monopsony power. This article analyzes the event's context -the Armstrong Investigation in 1905- and the political currents that eventually prevented private banks from being activist shareholders in the United States.
    Keywords: Antitrust; Corporate governance; Financial history;
    JEL: G21 G24 K21 L41 N21
    Date: 2007–07–17
  6. By: Ed Nosal
    Abstract: This paper considers the implications associated with a recent Supreme Court ruling that can be interpreted as supporting the use of eminent domain in transferring the property rights of one private agent—a landowner—to another private agent—a developer. Compared to voluntary exchange, when property rights are transferred via eminent domain, landowners’ investments in their properties become more inefficient and, as a result, any any benefit associated with mitigating the holdout problem between landowners and the developer is reduced. Social welfare can only increase if the holdout problem is significant; otherwise, social welfare will fall when property rights are transferred via eminent domain.
    Keywords: Eminent domain
    Date: 2007
  7. By: Aureo de Paula (Department of Economics, University of Pennsylvania); Jose A. Scheinkman (Department of Economics, Princeton University)
    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. A novel theoretical contribution in this paper is a model that 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 also 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, but instead the value added tax is applied at some stage of production at a rate that is estimated by the State, this chain effect vanishes.
    Keywords: Informal Sector, VAT, Tax Avoidance
    JEL: H2 H3 K4
    Date: 2007–08–27
  8. By: Alessandro Barbarino; Giovanni Mastrobuoni
    Abstract: Incarceration of criminals reduces crime through two main channels, deterrence and incapac- itation. Because of a simultaneity between crime and incarceration–arrested criminals increase the prison population–it is difficult to measure these effects. This paper estimates the incapaci- tation effect on crime using a unique quasi-natural experiment, namely the recurrent collective pardoning between 1962 and 1995 of up to 35 percent of the Italian prison population. Since these pardons are enacted on a national level, unlike in Levitt (1996), we can control for the endogeneity of these laws that might be driven by criminals’ expectations: it is optimal to com- mit crimes shortly before a collective pardon gets enacted. This effect represents a deterrence effect, which, if not properly controlled for, would bias our IV estimates towards zero. The incapacitation effect is large and precisely estimated. The elasticity of crime with respect to prison population ranges, depending on the type of crime, between 0 and 49 percent. These numbers are increasing during our sample period, which suggests that habitual criminals are now more likely to be subject to pardons than in the past. A benefit-cost analysis suggests that pardons, seen as a short term solution to prison overcrowding, are inefficient.
    Keywords: Crime, Pardon, Amnesty, Deterrence, Incapacitation
    JEL: K40 K42 H11
    Date: 2007
  9. By: Jo Seldeslachts; Joseph A. Clougherty; Pedro Pita Barros
    Abstract: Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions - Prohibitions, Remedies, and Monitorings - to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not. <br> <br> <i>ZUSAMMENFASSUNG - (Auflagen heute, Untersagung morgen: Abschreckungswirkung von Wettbewerbs-intrumenten) <br>Wettbewerbspolitik ist nicht nur Regulierung von wettbewerbsfeindlichem Verhalten, sondern hat auch eine wesentliche Abschreckungswirkung. Weder Wissenschaftler noch politische Entscheidungsträger haben die Abschreckungswirkung von Wettbewerbspolitik vollständig untersucht, da es sehr schwierig ist diese Wirkung empirisch nachzuweisen. Wir untersuchen die Wirkung verschiedener wettbewerbspolitischer Maßnahmen - Untersagung, Auflagen und Monitoring - um Unternehmen von Zusammenschlüssen abzuhalten. Wir nutzen einen Panel-Datensatz, um den Einfluss von Wettbewerbspolitik auf die künftige Anzahl von Firmenzusammenschlüssen zu bewerten. Wir zeigen, dass die Untersagung von Zusammenschlüssen die Fusionsankündigung in der Zukunft reduziert, und dass Fusionsauflagen künftige Ankündigungen schwach ansteigen lassen. Anders gesagt: Untersagungen haben eine führen zu Abschreckungswirkung, Auflagen nicht.</i>
    Keywords: merger policy tools, deterrence effects, cross-section/time-series data
    JEL: L40 L49 K21
    Date: 2007–02
  10. By: Nicholas Economides (Stern School of Business, NYU); V. Brian Viard (Graduate School of Business, Stanford University); Katja Seim (Stanford University)
    Abstract: In this paper, we evaluate the consumer welfare effects of entry into residential local phone service in New York State. Residential local phone service competition was an important goal of the 1996 Telecommunications Act. We provide a detailed evaluation of its effects on consumer welfare using household-level data on service choices from the third quarter of 1999 to the first quarter of 2003. Our results indicate that as a result of entry households that subscribe to one of the entrants' services gain on average an equivalent of $2.33 per month in overall welfare from local telecommunications services, or 6.2% of the households' average bill. Averaged across all households including those that remain with the incumbent, households gain the equivalent of $0.83 per month, although benefits vary dramatically across households. Since residential local phone service is sold under a menu of nonlinear tariffs, we develop a method for estimating a mixed discrete/continuous demand model. The econometric model incorporates the simultaneity of the discrete plan and continuous consumption choices by consumers. We allow for flat-rate plans, bundling of services, and unobservable firm quality. Taking advantage of the detailed nature of the data, we decompose the households' overall gains from entry and find that benefits due to firm differentiation and new plan introductions exceed those from price effects.
    Keywords: Entry, Nonlinear Pricing, Telecommunications, Discrete/Continuous Demand
    JEL: D43 K23 L11 L13 L96
    Date: 2007–10

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