New Economics Papers
on Law and Economics
Issue of 2008‒05‒31
ten papers chosen by
Jeong-Joon Lee, Towson University

  1. Genes, Legitimacy and Hypergamy: Another Look at the Economics of Marriage By Saint-Paul, Gilles
  2. Can we do policy recommendations from a framed field experiment? The case of coca cultivation in Colombia By Ibanez, Marcela; Martinsson, Peter
  3. The Informal Sector, Third Version By Aureo de Paula; Jose A. Scheinkman
  4. Settlement By Andrew F. Daughety; Jennifer F. Reinganum
  5. Social Interaction in Tax Evasion By Lipatov, Vilen
  6. Credit Expansion, the Prisoner´s Dilemma, and Free Banking as Mechanism Design By van den Hauwe, Ludwig
  7. Cognitive dissonance, risk aversion and the pretrial negotiation impasse By Langlais, Eric
  8. The "judicial risk" and lay-offs in France from the point of view of the economics of uncertainty By Langlais, Eric
  9. Law and Systems for Intermediated Securities and the Relationship of Private Property Law to Securities Clearance and Settlement: United States, Japan, and the UNIDROIT Draft Convention By Charles W. Mooney, Jr.
  10. What Niklas Luhmann might have said of carbon trading By David Campbell; Matthias Klaes

  1. By: Saint-Paul, Gilles
    Abstract: In order to credibly "sell" legitimate children to their spouse, women must forego more attractive mating opportunities. This paper derives the implications of this observation for the pattern of matching in marriage markets, the dynamics of human capital accumulation, and the evolution of the gene pool. A key consequence of the trade-off faced by women is that marriage markets will naturally tend to be hypergamous - that is, a marriage is more likely to be beneficial to both parties relative to remaining single, the greater the man’s human capital, and the lower the woman’s human capital. As a consequence, it is shown that the equilibrium can only be of two types. In the "Victorian" type, all agents marry somebody of the same rank in the distribution of income. In the "Sex and the City" (SATC) type, women marry men who are better ranked than themselves. There is a mass of unmarried men at the bottom of the distribution of human capital, and a mass of single women at the top of that distribution. It is shown that the economy switches from a Victorian to an SATC equilibrium as inequality goes up. The model sheds light on how marriage affects the returns to human capital for men and women. Absent marriage, these returns are larger for women than for men but the opposite may occur if marriage prevails. Finally, it is shown that the institution of marriage may or may not favour human capital accumulation depending on how genes affect one’s productivity at accumulating human capital.
    Keywords: human capital accumulation; hypergamy; legitimacy; Marriage markets; overlapping generations
    JEL: D1 D13 D3 E24 I2 J12 J13 J16 K36 O15 O43
    Date: 2008–05
  2. By: Ibanez, Marcela (Department of Economics, School of Business, Economics and Law, Göteborg University); Martinsson, Peter (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Laboratory experiments are potentially effective tools for studying behavior in settings where little or no information would otherwise exist such as participation in illicit activities. However, using laboratory experiments to draw policy recommendations is highly debatable. We investigate the external validity of a framed field experiment that mimics coca cultivation and find evidence that behavior in the experiment is consistent with self-reported behavior. We use the experiment to discuss the effectiveness of carrot and stick policies on coca investments. The experiment indicates that subjects are more responsive to changes in the relative profit of cattle farming than to changes in the probability of coca eradication.
    Keywords: Coca cultivation; Colombia; Experiment; Public Bad
    JEL: C91 C93 D62 K42
    Date: 2008–05–27
  3. 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
  4. By: Andrew F. Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer F. Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: We develop and explore a new model of the economics of privacy. Previous work has focused on "privacy of type," wherein an agent privately knows an immutable characteristic. We consider "privacy of action," wherein privacy means that an agent's choice of action is unobservable to others. To show how a policy of privacy can be socially optimal, we assume that an agent derives utility from an action he takes, from the aggregate of all agents' actions, and from other agents' perceptions of the agent's type (that are based on his action). If his action is observable, then he distorts it (relative to his full-information optimal action) so as to enhance the perceptions that others have of him. This contributes to aggregate welfare through increasing the public good, but the disutility associated with the distortion of agents' actions is also a social cost. If his action is unobservable, then he can take his full-information optimal action and still be "pooled" with other types. When the disutility of distortion is high relative to the marginal utility of the public good, a policy of privacy is optimal. We also consider a policy of waivable privacy, and find that equilibria exist in which some, but not all, types waive privacy. More significantly, if policies of privacy or publicity are costlessly enforceable, then a policy of waivable privacy is never socially preferred. Finally, we consider a number of examples (some of which involve a public bad and/or social disapproval): open-source software development; charitable giving; recycling; consumption of health services; DNA dragnets; student rankings; constraints on information disclosure at trial; electricity and water usage during periods of voluntary rationing; shaming of speeders; and the use of earmarks by Congress.
    Keywords: Privacy, public goods, disclosure, signaling, esteem
    JEL: H41 K39 D82
    Date: 2008–05
  5. By: Lipatov, Vilen
    Abstract: We analyze the tax evasion problem with social interaction among the taxpayers. If the authority commits to a fixed auditing probability, a positive share of cheating is obtained in equilibrium. This stands in contrast to the existing literature, which yields full compliance of audited taxpayers who are rational and thus do not need to interact. When the authority adjusts the auditing probability every period, cycling in cheating-auditing occurs. Thus, the real life phenomenon of compliance fluctuations is explained within the model rather than by exogenous parameter shifts. Our analysis can also be applied to crime, safety regulations, employment and environmental protection, as well as other compliance problems.
    Keywords: tax evasion; learning; social interaction; behavioral rule; compliance
    JEL: C79 D83 K42 H26
    Date: 2008–03–28
  6. By: van den Hauwe, Ludwig
    Abstract: Despite the distinctive character of the Austrian approach to “microfoundations for macroeconomics”, the literature on free banking contains a number of arguments which make use of game-theoretic concepts and models such as the well-known Prisoner´s Dilemma model. While there can be no general a priori presumption against the possible usefulness of game-theoretic concepts for Austrian theorizing, in the context of the debate on free banking such concepts and models have been used with varying degrees of perspicacity. One example which is elaborated in the paper is concerned with the interaction configuration between independent banks in a fractional-reserve free banking system, which has sometimes been modeled as a One-Shot Prisoner´s Dilemma. This conceptualization does not provide a sufficient argument for the in-concert overexpansion thesis, nor for the thesis that fractional-reserve free banking will tend to lead to the establishment of a central bank. The author drops the implicit assumption that there exists a one-to-one correspondence between the outcome matrix and the utility matrix. When it is acknowledged that banks in a fractional-reserve free banking system need not necessarily adopt a “myopic”, self-regarding perspective but may recognize the long-run harmony of interests between the banking sector and society at large, a different conceptualization and a different matrix representation emerge.
    Keywords: Free Banking; Business Cycle Theory; Prisoner´s Dilemma; Mechanism Design;
    JEL: E32 E66 E58 E42 E31 G18 E52 D01 K39
    Date: 2008–02–21
  7. By: Langlais, Eric
    Abstract: There exist evidence that asymmetrical information do exist between litigants: not in a way supporting Bebchuk (1984)'s assumption that defendants' degree of fault is a private information, but more likely, as a result of parties' predictive power of the outcome at trial (Osborne, 1999). In this paper, we suggest an explanation which allows to reconcilie different results obtained in experimental economics. We assume that litigants assess their estimates on the plaintiff's prevailing rate at trial using a two-stage process. First, they manipulate the available information in a way consistent with the self-serving bias. Then, these priors are weighted according to the individual's attitude towards risk. The existence of these two different cognitive biases are well documented in the experimental literature. Within this framework, we study their influence in a model of litigation where the self-serving bias of one party is private information. We show that the influence of the former is consistent with the predictions of the "optimistic approach" of trials. However, we show that the existence of risk aversion and more generally non neutrality to risk, is more dramatic in the sense that it has more unpredictable effects.
    Keywords: litigation; pretrial bargaining; cognitive dissonance and self-serving bias; risk aversion.
    JEL: D81 K41
    Date: 2008–03
  8. By: Langlais, Eric
    Abstract: Does dismissal law create a "judicial risk" to which french firms are exposed? The paper discusses the different arguments (Blanchard and Tirole (2003), Cahuc and Kramarz (2004), Munoz-Perez and Serverin (2005)) using the empirical available evidence together with basic tools in economics of uncertainty. We show that data on jugement appeals in front of Prud'Hommes suggest that employees exhibit a less risk averse attitude (and to the limit, they behave in fact in a risk seeking way) than usually observed on markets for risk (such as financial or insurance markets). On the other hand, we show that the motive called in french dismissal law "personal motive" is not perceived as better than the "economic motive" soon as firms are supposed to behave in a risk averse way. Conversally, when we compare the expected cost of a dismissal associated to each motive, we find that the result of the comparison is very sensible to the employee' seniority, to the rejection rate of employees' demand in front of the Prud'Hommes, and/or to the indirect cost of the dismissal.
    Keywords: dismissal law; Prud'Hommes; judicial risk
    JEL: J63 J65 K31 J30
    Date: 2008–03
  9. By: Charles W. Mooney, Jr. (Visiting Scholar, Institute for Monetary and Economic Studies Bank of Japan (Fall 2006), Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Law School.)
    Abstract: This paper compares the private law of the United States and Japan that applies to the holding of securities through intermediaries, such as securities firms and banks. In particular, it focuses on Articles 8 and 9 of the United States Uniform Commercial Code and the Japanese Book-Entry Transfer Act. That act is now in effect in Japan for most securities other than equity securities and it will become operative for equities in January 2009. The paper also examines the proposed UNIDROIT Draft Convention on Substantive Rules regarding Intermediated Securities. The Convention will be discussed at a diplomatic conference to be held in Geneva in September 2008, with the goal of adopting a final text. It considers the Convention on alternative assumptions that the non-Convention law is the law of the United States or the law of Japan. It generally concludes that the functional approach (i.e., result- oriented, as opposed to doctrine- or theory-oriented) adopted by the Convention is successful and appropriate. Finally, the paper considers differences between United States law and Japanese law in the context of similarities and differences in the principal systems and practices for clearance and settlement of securities transactions in the United States and Japan.
    Keywords: book-entry, central securities depository, intermediary, securities, securities account, security interest, settlement
    Date: 2008–05
  10. By: David Campbell (University of Durham); Matthias Klaes (Keele University)
    Abstract: Ecological questions have proven particularly fruitful to illustrate Luhmann’s theory of society as an integrative perspective cutting across the scientific, economic, legal, and political domains. In this paper, we will discuss the development of carbon trading as a case study of how reflexive system rationality of the kind postulated by Luhmann becomes the defining characteristic of the spectacular failure of such trading as has taken place to date to even approximate any of it own stated goals. Paradoxically, regulatory attempts to provide for a market-based response to anthropogenic global warming have resulted in the emergence of carbon prices that are essentially planned at a level of ambition reminiscent of the twentieth century’s most extensive exercises in centralised command and control, due to structural couplings between the scientific, economic, political and legal systems and an ecology of organisations and institutions spread across them. As government-sponsored carbon trading is perhaps the most characteristic initiative of modern government, its discussion in Luhmann’s terms is significant for any evaluation of the relevance of his work.
    Keywords: globalisation, Luhmann, carbon trading, regulatory failure, Coase
    JEL: B41 B52 K0 Q5 Z1
    Date: 2008–06

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