New Economics Papers
on Law and Economics
Issue of 2008‒05‒17
six papers chosen by
Jeong-Joon Lee, Towson University

  1. From Negative to Positive Integration? European State Aid Control Through Soft and Hard Law By Blauberger, Michael
  2. How Doing Business Jeopardizes Institutional Reform By Benito Arruñada
  3. Corporate Governance and Incentive Contracts: Historical Evidence from a Legal Reform By Christian Bayer; Carsten Burhop
  4. The Principle of Democratic Teleology in International Law By Niels Petersen
  5. On the Role of Inequalities in Legal Systems: A Tocquevilian View By Bertrand Crettez; Bruno Deffains
  6. Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma? By Régis Blazy; Bertrand Chopard; Agnès Fimayer; Jean-Daniel Guigou

  1. By: Blauberger, Michael
    Abstract: Abstract European state aid control, a part of competition policy, typically follows the logic of negative integration. It significantly constrains the potential for Member States to distort competition by reducing their ability to subsidize industry. In addition, this paper argues, ambiguous Treaty rules and heterogeneous Member States' preferences have enabled the European Commission to act as a supranational entrepreneur, not only enforcing the prohibition of distortive state aid, but also developing its own vision of "good state aid policy. In order to prevent or to settle political conflict about individual decisions, the Commission has sought to establish more general criteria for the state aid which it still deems admissible. These criteria have been codified into a complex system of soft law and, more recently, hard state aid law. The Commission has thus created positive integration "from above" and increasingly influences the objectives of national state aid policies.   Zusammenfassung Als Teil der europäischen Wettbewerbspolitik folgt die Beihilfekontrolle der Logik negativer Integration. Sie beschränkt die Möglichkeiten der Mitgliedstaaten erheblich, Unternehmen zu subventionieren und so den Wettbewerb zu verzerren. Darüber hinaus, so das Argument des Papiers, konnte die Europäische Kommission aufgrund auslegungsbedürftiger Vertragsregeln und angesichts heterogener Interessen der Mitgliedstaaten als supranationaler Entrepreneur handeln und hat dabei nicht nur das Verbot wettbewerbsverzerrender Beihilfen durchgesetzt, sondern auch ihre eigene Vision "guter" Beihilfepolitik entwickelt. Um politische Konflikte über Einzelentscheidungen zu vermeiden beziehungsweise beizulegen, hat die Kommission schrittweise allgemeine Kriterien für zulässige staatliche Beihilfen formuliert. Diese Kriterien wurden zu einem komplexen System von weichem und neuerlich auch hartem Beihilferecht ausdifferenziert. Die Kommission hat dadurch positive Integration "von oben" geschaffen und beeinflusst zunehmend die Ziele staatlicher Beihilfepolitik.  
    Keywords: state aids; competition policy; industrial policy; European Commission; positive integration; negative integration; regulatory politics; soft law
    Date: 2008–04–28
  2. By: Benito Arruñada
    Abstract: Simplifying business formalization and eliminating outdated formalities is often a good way of improving the institutional environment for firms. Unfortunately, the World Bank’s Doing Business project is harming such policies by promoting a reform agenda that gives them priority even in countries lacking functional business registers, so that the reformed registers keep producing valueless information, but faster. Its methodology also promotes biased measurements that impede proper consideration of the essential tradeoffs in the design of formalization institutions. If Doing Business is to stop jeopardizing its true objectives and contribute positively to scientific progress, institutional reform and economic development, then its aims, governance and methodology need to change.
    Keywords: Starting business, doing business, informal economy, company registers
    JEL: K22 K23 L59 O17
    Date: 2008–05
  3. By: Christian Bayer (IGIER – Università Commerciale Luigi Bocconi, Italy); Carsten Burhop (Max Planck Institute for Research on Collective Goods)
    Abstract: This paper proposes to exploit a reform in legal rules of corporate governance to identify contractual incentives from the correlation of executive pay and firm performance. In particular, we refer to a major shift in the legal and institutional environment, the reform of the German joint-stock companies act in 1884. We analyze a sample of executive pay for 46 firms for the years 1870 to 1911. In 1884, a law reform substantially enhanced corporate control, strengthened the monitoring incentives of shareholders, and reduced the discretionary power of executives in Germany. Pay-performance sensitivity decreased significantly after this reform. While executives received a bonus of about three to five per cent in profits before 1884, after the reform this parameter decreased to a profit share of about two per cent. At least the profit share that is eliminated by the reform must have been incentive pay before. This incentive mechanism was replaced by other elements of corporate governance.
    Keywords: pay-performance sensitivity, natural experiment, legal reform, corporate governance
    JEL: G30 J33 N23
    Date: 2008–03
  4. By: Niels Petersen (Max Planck Institute for Research on Collective Goods)
    Abstract: In the early 1990s, after the fall of the Berlin wall, legal scholars initiated a debate on the existence of a right to democratic governance in international law. Many of the adherents to the democratic entitlement school seem to assume that democratization is a simple shift in the political status, a change from one form of government to another. This contribution seeks to analyze this underlying assumption by taking a look at the current discussion on democratization theory in the political sciences. Through this lens, it will reconsider the international practice and the corresponding legal documents related to the existence of a possible democracy principle. In this respect, a special emphasis will be put on three areas of potential precedents – resolutions of the UN General Assembly, the practice of regional organizations such as the Organization of American States or the African Union, and military interventions in the name of democracy. The analysis will show that the legitimacy principle of international law is, at the same time, more modest and more demanding than the claim of the democratic entitlement school. It will be argued that democracy is no strict obligation, but rather a teleological principle. States are obliged to develop towards democracy and to consolidate and to optimize democracy, once electoral institutions have been established.
    Date: 2008–04
  5. By: Bertrand Crettez; Bruno Deffains
    Abstract: The present paper proposes to interpret the differences in legal systems between common-law and civil- law nations as arising from the importance given to adjudication in comparison with statute laws. It focuses on the relative costs of legal change by adjudication (case law development) when compared with legislation (statutory law development). The main argument is that the public concern with equality is a major determinant of the relative cost of adjudication in a legal system. We develop a model of the legal process that illustrates Tocqueville's fundamental intuition with regard to the uniformity of legal rules, and as a consequence, the relative importance of adjudication and legislation.
    Keywords: Inequality, Law and Economics, Adjudication, Legislation
    JEL: K40
    Date: 2008
  6. By: Régis Blazy (CREFI-LSF, University of Luxembourg); Bertrand Chopard; Agnès Fimayer; Jean-Daniel Guigou
    Abstract: We study the French dilemma associated with court administered resolution of corporate financial distress of firms, in which bankruptcy courts have to combine both social efficiency (maintaining employment) and ex post financial efficiency (determining the best issue for financial distress, proxied here by the global recovery rate). We discuss this dilemma empirically, using a large sample of decisions of French commercial courts concerning the future of bankrupt firms (reorganization, sale as a going concern or liquidation). Addressing this dilemma, we discuss the determinants of bankruptcy courts’ selection between rival offers in sales as a going concern. Finally, we evaluate the financial cost of the French pro debtor system through the recovery rates of various claimants. Our main results are: (1) French commercial courts actively work to protect employment by facilitating continuation and reducing the domino effects of bankruptcy. (2) the courts’ choice between rival buyout offers confirms that social considerations prevail in the arbitration of bankruptcy courts. (3) Continuations through reorganization plans generate the highest recovery rates for all classes of creditors. (4) Contrary to the expected trade-off between social and financial efficiency, courts also enact measures to increase debt recovery once continuation has been chosen. However, for sales, recovery rates are inhibited by asset illiquidity and/or by the courts’ attempt to promote a firm’s continuation through sales at a low price.
    Keywords: Bankruptcy, Reorganization, Liquidation, Recovery rate.
    JEL: G33 K22
    Date: 2007

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.