New Economics Papers
on Law and Economics
Issue of 2008‒07‒30
seven papers chosen by
Jeong-Joon Lee, Towson University

  1. The Impact of Social Capital on Crime: Evidence from the Netherlands By Akçomak, I. Semih; ter Weel, Bas
  2. Caveat venditor: The conditional effect of relationship-specific investment on contractual behavior By Peter Murrell; Radu Paun
  3. Satisfaction with Democracy and Collective Action Problems: The Case of the Environment By Martin Halla; Friedrich Schneider; Alexander Wagner
  4. The Impact of Terrorism on the Defense Industry By Claude Berrebi; Esteban F. Klor
  5. Statute Law or Case Law? By Anderlini, Luca; Felli, Leonardo; Riboni, Alessandro
  6. Strategic Judgment Proofing By Yeon-Koo Che; Kathryn E. Spier
  7. Saving Your Home in Chapter 13 Bankruptcy By Michelle J. White; Ning Zhu

  1. By: Akçomak, I. Semih (Maastricht University); ter Weel, Bas (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This paper investigates the relation between social capital and crime. The analysis contributes to explaining why crime is so heterogeneous across space. By employing current and historical data for Dutch municipalities and by providing novel indicators to measure social capital, we find a link between social capital and crime. Our results suggest that higher levels of social capital are associated with lower crime rates and that municipalities’ historical states in terms of population heterogeneity, religiosity and education affect current levels of social capital. Social capital indicators explain about 10 percent of the observed variance in crime. It is also shown why some social capital indicators are more useful than others in a robustness analysis.
    Keywords: social capital, crime, the Netherlands
    JEL: A13 A14 K42 Z13
    Date: 2008–07
  2. By: Peter Murrell (Department of Economics, University of Maryland); Radu Paun (Competition Council, Romania)
    Abstract: We offer a new perspective on the effect of relationship-specific investment on contract complexity, which has broad implications because complex contracts and vertical integration are substitutes. A simple model using transaction cost economics (TCE) predicts that buyer and seller relationship-specific investments have opposite effects on contract complexity. The model also predicts the signs of biases in OLS estimates of the effect of relationship-specific investments: unobserved heterogeneity causes downward bias in the estimated difference between the effects of buyer and seller specific investment, reducing the probability of finding opposite effects. We examine these predictions using data on agreements made by Romanian firms. When accounting for unobserved heterogeneity, seller relationship-specific investment has a positive effect on contract complexity while buyer investment has a negative effect. OLS estimates do not generate this result. The unique contribution of the paper is in simultaneously implementing TCE empirically, countering the problem of unobserved heterogeneity, generating estimates of the effects of specific investment that have opposite signs on opposite sides of the agreement, and explaining patterns of bias in the OLS estimates. Additionally, regional variation in court quality affects the complexity of contracts, suggesting that even moderate amounts of legal reform can have appreciable effects.
    Keywords: transaction cost economics, TCE, contract, contract complexity, property-rights theory, relationship-specific investment, legal system, transition, Romania
    JEL: D23 K12 L14 L22 O17 P3
    Date: 2008–07
  3. By: Martin Halla (Department of Economics, Johannes Kepler University Linz, Austria); Friedrich Schneider (Department of Economics, Johannes Kepler University Linz, Austria); Alexander Wagner (Institute for Swiss Banking University of Zurich Plattenstrasse 14 CH-8032 Zurich Switzerland)
    Abstract: Using modern methods for analyzing multi-level data, we find that, by and large, citizens of OECD countries are more satisfied with the way democracy works in their country if more environmental policies are in place and if environmental quality is higher. We also document that parents care about carbon dioxide emissions more than non-parents and that those with a high willingness to pay for environmental quality deplore intervention through government policies.
    Keywords: Collective action problems, environmental economics and policy, satisfaction with democracy
    JEL: K32 P16 Q21 Q28
    Date: 2008–07
  4. By: Claude Berrebi; Esteban F. Klor
    Abstract: This paper analyzes the impact of terrorism on Israeli companies related to the defense, security or anti-terrorism industries, relative to its impact on the rest of the companies. The authors match every Israeli company to the American company with the closest expected return among all the companies that belong to the same industry and trade in the same market in order to isolate the effect of terrorism from other common industry shocks. The findings show that whereas terrorism had a significant negative impact of 5% on non defense-related companies, it had a significantly positive overall effect of 7% on defense-related companies.
    Keywords: terror, defense sector, financial markets
    JEL: D74 G14 K42 L64 P16
    Date: 2008–07
  5. By: Anderlini, Luca; Felli, Leonardo; Riboni, Alessandro
    Abstract: In a Case Law regime Courts have more flexibility than in a Statute Law regime. Since Statutes are inevitably incomplete, this confers an advantage to the Statute Law regime over the Case Law one. However, all Courts rule ex-post, after most economic decisions are already taken. Therefore, the advantage of flexibility for Case Law is unavoidably paired with the potential for time-inconsistency. Under Case Law, Courts may be tempted to behave myopically and neglect ex-ante welfare because, ex-post, this may afford extra gains from trade for the parties currently in Court. The temptation to behave myopically is traded off against the effect of a Court's ruling, as a precedent, on the rulings of future Courts. When Case Law matures this temptation prevails and Case Law Courts succumb to the time-inconsistency problem. Statute Law, on the other hand pairs the lack of flexibility with the ability to commit in advance to a given (forward looking) rule. This solves the time-inconsistency problem afflicting the Case Law Courts. We conclude that when the nature of the legal environment is sufficiently heterogeneous and/or changes sufficiently often, the Case Law regime is superior: flexibility is the prevailing concern. By the same token, when the legal environment is sufficiently homogeneous and/or does not change very often, the Statute Law regime dominates: the ability to overcome the time-inconsistency problem is the dominant consideration.
    Keywords: Case Law; Flexibility; Incomplete Laws; Precedents; Rigidity; Statute Law; Time-Inconsistency
    JEL: C79 D74 D89 K40 L14
    Date: 2008–07
  6. By: Yeon-Koo Che; Kathryn E. Spier
    Abstract: A liquidity-constrained entrepreneur needs to raise capital to finance a business activity that may cause injuries to third parties -- the tort victims. Taking the level of borrowing as fixed, the entrepreneur finances the activity with senior (secured) debt in order to shield assets from the tort victims in bankruptcy. Interestingly, senior debt serves the interests of society more broadly: it creates better incentives for the entrepreneur to take precautions than either junior debt or outside equity. Unfortunately, the entrepreneur will raise a socially excessive amount of senior debt. Giving tort victims priority over senior debtholders in bankruptcy prevents over-leveraging but leads to suboptimal incentives. Lender liability exacerbates the incentive problem even further. A Limited Seniority Rule, where the firm may issue senior debt up to an exogenous limit after which any further borrowing is treated as junior to the tort claim, dominates these alternatives. Shareholder liability, mandatory liability insurance and punitive damages are also discussed.
    JEL: D21 D62 G32 G38 K13 K22
    Date: 2008–07
  7. By: Michelle J. White; Ning Zhu
    Abstract: This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed debtors save their homes. Filing under Chapter 13 stops lenders from foreclosing and gives debtors extra time to repay mortgage arrears, but does not reduce the total amount owed. We develop a model of debtors' decisions to default on their mortgages and file for bankruptcy and we evaluate it using a new dataset of debtors who filed for bankruptcy under Chapter 13 in 2006. We also examine the effect of allowing "strip-down" of residential mortgages in Chapter 13, so that bankruptcy judges could reduce the total amount owed. The paper documents that 96% of Chapter 13 filers are homeowners and that more than 90% of Chapter 13 plans involve repayment of mortgages or car loans. The model predicts that introducing strip-down would allow an additional 100,000 debtors to save their homes each year.
    JEL: G33 G38 K35 R31
    Date: 2008–07

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