New Economics Papers
on Law and Economics
Issue of 2008‒02‒09
twelve papers chosen by
Jeong-Joon Lee, Towson University

  1. Assessing Urban Crime And Its Control: An Overview By Philip J. Cook
  2. I'd rather be Hanged for a Sheep than a Lamb: The Unintended Consequences of 'Three-Strikes' Laws By Radha Iyengar
  3. Where do firms incorporate? Deregulation and the cost of entry By Marco Becht; Colin Mayer; Hannes F. Wagner
  4. Why Kill Politicians? A Rational Choice Analysis of Political Assassinations By Bruno S. Frey
  5. Terrorism and Business By Bruno S. Frey
  6. Bankruptcy: Is It Enough to Forgive or Must we Also Forget? By Piero Gottardi; Ronel Elul
  7. Bounds on repayment behavior: evidence for the consumer credit market By Mario Padula; Charles Grant
  8. Geography vs. institutions at the village level By M. Grimm; S. Klasen
  9. Why Plea-Bargaining Fails to Achieve Results in So Many Criminal Justice Systems: A New Framework for Assessment By Nuno Garoupa; Frank H Stephen
  10. The Scope of Criminal Law and Criminal Sanctions: an Economic View and Policy Implications By Roger Bowles; Michael Faure; Nuno Garoupa
  11. Some Reflections on the Economics of Prosecutors: Mandatory v Selective Prosecution By Nuno Garoupa
  12. Exploiting Plaintiffs Through Settlement: Divide and Conquer By Yeon-Koo Che; Kathryn E. Spier

  1. By: Philip J. Cook
    Abstract: Urban crime rates in the United States fell markedly during the 1990s and remain at historically low levels. The statistical evidence presented here indicates that that decline, like the crime surge that preceded it, has been largely uncorrelated with changes in socioeconomic conditions across cities. The ups and downs of crime have a considerable effect on residential location and property values. The police represent the largest public expenditure in city-level crime control efforts, and they are increasingly held accountable for reducing crime rates. Indeed, there is considerable evidence that an increase in police expenditures does pay off in the form of lower crime rates. This is an incomplete story, however. Assessments of police effectiveness typically neglect the considerable role of private and community-level protection and control efforts, not to mention the vital importance of (uncompensated) private inputs into police investigations. In areas with endemically high violence rates, the reluctance of witnesses to cooperate remains a serious problem.
    JEL: K42 L1
    Date: 2008–02
  2. By: Radha Iyengar
    Abstract: Strong sentences are common "tough on crime" tool used to reduce the incentives for individuals to participate in criminal activity. However, the design of such policies often ignores other margins along which individuals interested in participating in crime may adjust. I use California's Three Strikes law to identify several effects of a large increase in the penalty for a broad set of crimes. Using criminal records data, I estimate that Three Strikes reduced participation in criminal activity by 20 percent for second-strike eligible offenders and a 28 percent decline for third-strike eligible offenders. However, I find two unintended consequences of the law. First, because Three Strikes flattened the penalty gradient with respect to severity, criminals were more likely to commit more violent crimes. Among third-strike eligible offenders, the probability of committing violent crimes increased by 9 percentage points. Second, because California's law was more harsh than the laws of other nearby states, Three Strikes had a "beggar-thy-neighbor" effect increasing the migration of criminals with second and third-strike eligibility to commit crimes in neighboring states. The high cost of incarceration combined with the high cost of violent crime relative to non-violent crime implies that Three Strikes may not be a cost-effective means of reducing crime.
    JEL: J22 J58 K14
    Date: 2008–02
  3. By: Marco Becht; Colin Mayer; Hannes F. Wagner
    Abstract: We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of their real seat. We analyze foreign incorporations in the U.K., where incorporations of limited liability companies can be arranged at low cost. Using data for over 2 million companies from around the world incorporating in the U.K., we find a large increase in cross-country incorporations from E.U. Member States following the ECJ rulings. In line with regulatory cost theories, incorporations are primarily driven by minimum capital requirements and setup costs in home countries. We record widespread use of special incorporation agents to facilitate legal mobility across countries.
    Keywords: Incorporation, costs of regulation, regulatory competition
    JEL: G38 K22
    Date: 2008
  4. By: Bruno S. Frey
    Abstract: In the course of history a large number of politicians has been assassinated. A rational choice analysis is used to distinguish the expected marginal benefits of killing, and the marginal cost of attacking a politician. The comparative analysis of various equilibria helps us to gain insights into specific historical events. The analysis suggests that – in addition to well-known security measures – an extension of democracy, a rule by a committee of several politicians, more decentralization via the division of power and federalism, and a strengthening of civil society significantly reduce politicians’ probability of being attacked and killed.
    Keywords: Rational choice, democracy, dictatorship, assassination, deterrence
    JEL: D01 D70 K14 K42 Z10
    Date: 2007–05
  5. 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
  6. By: Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Ronel Elul (Federal Reserve Bank of Philadelphia)
    Abstract: In many countries, lenders are not permitted to use information about past defaults after a specified period of time has elapsed. We model this provision and determine conditions under which it is optimal. We develop a model in which entrepreneurs must repeatedly seek external funds to finance a sequence of risky projects under conditions of both adverse selection and moral hazard. We show that forgetting a default makes incentives worse, ex-ante, because it reduces the punishment for failure. However, following a default it is generally good to forget, because by improving an entrepreneur’s reputation, forgetting increases the incentive to exert effort to preserve this reputation. Our key result is that if agents are sufficiently patient, and low effort is not too inefficient, then the optimal law would prescribe some amount of forgetting — that is, it would not permit lenders to fully utilize past information. We also argue that forgetting must be the outcome of a regulatory intervention by the government — no lender would willingly agree to ignore information available to him.
    Keywords: Bankruptcy, Information, Incentives, Fresh Start
    JEL: D86 G33 K35
    Date: 2007
  7. By: Mario Padula (Department of Economics, University Of Venice Cà Foscari); Charles Grant (Department of Economics, University of Reading)
    Abstract: How does the punishment for default affect repayment behavior? We use administrative data, provided by the leading Italian lender of unsecured credit to the household sector, to analyze households repayment behavior. Administrative data are particularly well suited to study what factors are responsible for default, but raise a fundamental econometric problem, since they identify the determinants of repayment behavior only for those who are granted credit. To overcome this problem, we provide upper and lower bounds on the determinants of repayment behavior. Moreover, we show how to use the restrictions from the theory to narrow the bounds.
    Keywords: Manski Bounds, Consumer Credit, Default
    JEL: D14 K42 O17
    Date: 2007
  8. By: M. Grimm; S. Klasen
    Abstract: There is a well-known debate about the respective roles of geography versus institutions in explaining the long-term development of countries. These debates have usually been based on cross-country regressions where questions about parameter heterogeneity, unobserved heterogeneity, and endogeneity cannot easily be controlled for. The innovation of Acemoglu, Johnson and Robinson (2001) was to address this last point by using settler mortality as an instrument for endogenous institutions and found that this supported their line of reasoning. We believe there is value-added to consider this debate at the micro level within a country as particularly questions of parameter heterogeneity and unobserved heterogeneity are likely to be smaller than between countries. Hence, we examine the determinants of economic development across villages on the Indonesian Island of Sulawesi and find technology adoption to play a crucial role. We show that geography-induced migration together with population size foster through their effect on institutions technology adoption.
    Keywords: geography, land rights, migration, technology adoption, agricultural development, Indonesia
    JEL: K11 O12 Q12
    Date: 2007
  9. By: Nuno Garoupa (University of Illinois College of Law, IMDEA, Madrid); Frank H Stephen (School of Law University of Manchester)
    Abstract: The economics of plea-bargaining is largely over-optimistic and contrasts with legal scholarship on the topic. We have shown that part of the reason is that it still relies heavily on the \'efficient prosecutor\' model and only recently has started looking at the possible advantages of judicial scrutiny. As a consequence, the economics of plea-bargaining has largely failed to influence the debate in Europe and around the world. Further, it was unable to predict the relative failure of Italy (and possibly France), although there is an ex post rationalization (bargaining as an inadequate solution to delays in trial rather than as a device to generate prosecutorial efficient allocation of resources). This paper proposes a new approach based on viewing the contract, which is at the heart of the plea-bargain, as being located in a wider nexus of relationships involving parties who are not directly (or effectively) represented at the bargaining table. By looking in detail to the contract between defendant and his lawyer, the role of the prosecutor, and third party effects, we have provided a richer model that is more skeptical of the efficiency of plea-bargaining. We also point out that a successful transplant of plea-bargaining from the United States to civil law jurisdictions such as France and Italy will very much depend on a reform of criminal procedure that addresses the agency costs we have identified.
    Date: 2008–02–07
  10. By: Roger Bowles (Centre for Criminal Justice Economics and Psychology, University of York); Michael Faure (Law School, Maastricht University, The Netherlands); Nuno Garoupa (College of Law, University of Illinois & IMDEA, Madrid)
    Abstract: This paper considers why some harm-generating activities are controlled by criminal law and criminal sanctions while others are subject to some other mechanism such as civil law, administrative law, regulation or the tax system. It looks at the question from the perspective of the law and economics approach. We seek to identify the comparative benefits of using the criminal law relative to other enforcement mechanisms and – more broadly – why certain specific behaviours are criminalized. The paper argues that an economic approach emphasizing the relative merits of alternative legal instruments for bringing about harm reduction can provide an explanation for a number of recent legal developments. It argues also that the willingness of legislators to combine the use of sanctions traditionally used in one area of the law with sanctions from other areas is more readily explicable in economic terms than in other terms.
    Date: 2008–02–07
  11. By: Nuno Garoupa (College of Law, University of Illinois & IMDEA, Madrid)
    Abstract: Mandatory prosecution is inefficient according to legal economists. We argue that when prosecutors are fairly insulated from their performance or are highly risk averse mandatory prosecution is better than selective prosecution. This result has important implications for comparative law since mandatory prosecution generally prevails in civil law jurisdictions whereas selective prosecution is typical of common law jurisdictions.
    Keywords: prosecutors; mandatory prosecution; selective prosecution; civil law; common law
    JEL: K4
    Date: 2008–02–07
  12. By: Yeon-Koo Che (Department of Economics, Columbia University); Kathryn E. Spier (Harvard Law School)
    Abstract: This paper considers settlement negotiations between a single defendant and N plaintiffs when there are fixed costs of litigation. When making simultaneous take-it-or-leave-it offers to the plaintiffs, the defendant adopts a divide and conquer strategy. Plaintiffs settle their claims for less than they are jointly worth. The problem is worse when N is larger, the offers are sequential, and the plaintiffs make offers instead. Although divide and conquer strategies dilute the defendant's incentives, they increase the settlement rate and reduce litigation spending. Plaintiffs can raise their joint payoff through transfer payments, voting rules, and covenants not to accept discriminatory offers.
    Date: 2007

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