New Economics Papers
on Law and Economics
Issue of 2008‒03‒01
six papers chosen by
Jeong-Joon Lee, Towson University

  1. Robust misspecification tests for the Heckman’s two-step estimator By Gabriel V. Montes-Rojas
  2. Learning about compliance under asymmetric information By Rousseau Sandra; Arguedasa Carmen
  3. Minimum Wage, Public Employment Offices and Unemployment Compensation: John R. Commons's View By Massimiliano Vatiero
  4. Exiting a lawless state By Stiglitz, Joseph E.; Hoff, Karla
  5. Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking By Bernhard Ganglmair
  6. Is Corruption an Efficient Grease ? By Pierre-Guillaume Méon; Laurent Weill

  1. By: Gabriel V. Montes-Rojas (Department of Economics, City University, London)
    Abstract: We construct and evaluate LM and Neyman’s C(a) tests based on bivariate Edgeworth expansions for the consistency of the Heckman’s two-step estimator in selection models, that is, for the marginal normality and linearity of the conditional expectation of the error terms. The proposed tests are robust to local misspecification in nuisance distributional parameters. Monte Carlo results show that instead of testing bivariate normality, testing marginal normality and linearity of the conditional expectations separately have a better size performance. Moreover, the robust variants of the tests have better size and similar power to non-robust tests, which determines that these tests can be successfully applied to detect specific departures from the null model of bivariate normality. We apply the tests procedures to women’s labor supply data.
    Keywords: Heckman’s two-step, LM tests, Neyman’s C(a) tests
    Date: 2008–02
  2. By: Rousseau Sandra (K.U.Leuven-Center for Economic Studies); Arguedasa Carmen (Departamento de Análisis Económico: Teoría Económica e Historia Económica, Universidad Autónoma de Madrid)
    Abstract: TOver time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms’ past performance relative to other competitors in the market. If a firm is less successful than its peers in reducing the externality, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked. We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.
    Keywords: Monitoring and enforcement; externalities; learning; mimicking
    JEL: D82 H83 K42
    Date: 2008–02
  3. By: Massimiliano Vatiero
    Abstract: In accordance with the concept of transaction as introduced by John R. Commons we willinvestigate the contractual and market remedies which labour law may implement to make ‘order’ in theemployer-employee relationship.In this view, one of the most important contractual remedies is the minimum wage. It demarks an inalienabledefault point under which wage bargaining can not drop. Unlike, employability represents the mostimportant concept in order to take into explicit account market dynamics. In this respect, employmentcompensation and public employment offices, involving parties’ outside options, are widely treated.Lastly, we will prove that these two kinds of legal intervention (contract and market regarding) are derivedfrom Commons distinction between liberty and freedom.
    Keywords: John R. Commons, employability, labour law and economics
    JEL: B25 B52 J38 J65 K31
    Date: 2007–11
  4. By: Stiglitz, Joseph E.; Hoff, Karla
    Abstract: An earlier paper showed that an economy could be trapped in an equilibrium state in which the absence of the rule of law led to asset-stripping, and the prevalence of asset-stripping led to the absence of a demand for the rule of law, highlighting a coordination failure. This paper looks more carefully at the dynamics of transition from a non-rule-of-law state. The paper identifies a commitment problem as the critical feature inhibiting the transition: the inability, under a rule of law, to forgive theft. This can lead to the perpetuation of the non-rule-of-law state, even when it might seem that the alternative is Pareto-improving.
    Keywords: Public Sector Corruption & Anticorruption Measures,National Governance,Labor Policies,Gender and Law,Economic Theory & Research
    Date: 2008–02–01
  5. By: Bernhard Ganglmair (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: In a repeat trade model with buyer's specific investment, a simple renegotiable contract implements an efficient outcome if premature termination of trade is governed by an appropriate contract breakup rule. In equilibrium, such a rule allows for termination with positive probability and gives the buyer a bargaining leverage over the seller when the contract is renegotiated ex-post. These returns ("breakup rents") from buyer's rent-seeking complement his ex-post bargaining power and restore his ex-ante investment incentives when he would otherwise underinvest due to a standard (ex-ante) hold-up problem. Buyer's opportunism thus creates social value and restores efficiency in case of frictionless renegotiation. When the contract is rigid and not renegotiable until after the first round of trade, however, a first-best breakup rule does not exist. A second-best rule trades off buyer's investment and seller's activity distortions that arise from excessive effort to curb the buyer's bargaining leverage. Conditions on existence of a first or second-best breakup rule as well as implications for the legal discussion on compliance standards for breach of contract are given.
    Keywords: Repeat transaction trade, contract breakup, specific investment, hold-up, rent-seeking, installment contracts, compliance standards, breach of contract
    JEL: D86 K12 L14
    Date: 2008–01
  6. By: Pierre-Guillaume Méon; Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
    Abstract: This paper tests whether corruption can be viewed as an efficient grease in the wheels of an otherwise deficient institutional framework. It does so by analyzing the interaction between aggregate efficiency, corruption, and other dimensions of governance for a panel of 54 countries both developed and developing. Using three measures of corruption and five measures of other aspects of governance, we repeatedly observe that corruption is always detrimental in countries where institutions are effective, but that it may be positively associated with efficiency in countries where institutions are ineffective. We thus find evidence of the grease the wheels hypothesis.
    Keywords: Governance, corruption, income, aggregate productivity, efficiency.
    JEL: C33 K4 O43 O47
    Date: 2008

This issue is ©2008 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.