New Economics Papers
on Law and Economics
Issue of 2008‒12‒14
nine papers chosen by
Jeong-Joon Lee, Towson University

  1. When Does Legal Origin Matter? By Mohammad Amin; Priya Ranjan
  2. Conditional Corruption By Bin Dong; Uwe Dulleck; Benno Torgler
  3. Errors in Judicial Decisions By Joep Sonnemans; Frans van Dijk
  5. Trial and settlement negotiations between asymmetrically skilled parties By Bertrand Chopard; Thomas Cortade; Eric Langlais
  6. Asymmetric information, self-serving bias and the pretrial negotiation impasse By Eric Langlais
  7. 'Consumer' versus 'Customer': the Devil in the Detail By Pinar Akman
  8. The UK Cartel Offence: Lame Duck or Black Mamba? By Andreas Stephan
  9. Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis By Michelle J. White

  1. By: Mohammad Amin (World Bank); Priya Ranjan (Department of Economics, University of California-Irvine)
    Abstract: A vast literature documents better economic institutions in common law compared with civil law countries. The present paper argues that legal origin alone is insufficient to explain differences in the quality of economic institutions across countries. Rather, it is the interaction between legal origin and the quality of political institutions that is important. Empirical evidence from a cross-section of 90 countries on entry regulation, a measure of how business friendly economic institutions are towards firms, strongly supports our claim. For example, we find that the number of procedures required to start a business are lower in common law compared with civil law countries by 2.5 procedures or 24.3% of the sample mean. However, this difference varies sharply across the sample of countries with high and low levels of political accountability. It equals a large 3.4 procedures (37% of the sample mean) for the former and a mere 1.1 procedures (9.7% of the sample mean) for the latter. We conclude that legal origin matters for the quality of economic institutions but only when political accountability is high. We provide a plausible explanation for this phenomenon based on recent findings in the literature on political economy.
    Keywords: Legal origin; Regulation,; Political institutions
    JEL: H11 K2 P48 P51
    Date: 2008–12
  2. By: Bin Dong; Uwe Dulleck; Benno Torgler
    Abstract: We argue that the decision to bribe bureaucrats depends on the frequency of corruption within a society. We provide a behavioral model to explain this conduct: engaging in corruption results in a disutility of guilt. This implies that people observe a lower probability to be involved in corruption if on average the guilt level of others within a country is higher. We also explore whether - and to what extent - group dynamics or socialization and past experiences affect corruption. In other words, we explore theoretically and empirically whether corruption is contagious and whether conditional cooperation matters. We use the notion of “conditional corruption” for these effects. The empirical section presents evidence using two data sets at the micro level and a large macro level international panel data set covering almost 20 years. The results indicate that the willingness to engage in corruption is influenced by the perceived activities of peers and other individuals. Moreover, the panel data set at the macro level indicates that the past level of corruption has a strong impact on the current corruption level.
    Keywords: corruption; contagion effect; conditional cooperation; interdependent preferences
    JEL: K42 D72 D64 O17 J24
    Date: 2008–11
  3. By: Joep Sonnemans (CREED, Amsterdam School of Economics, University of Amsterdam); Frans van Dijk (Council for the Judiciary, The Hague, the Netherlands)
    Abstract: In criminal cases the task of the judge is to transform the uncertainty about the facts into the certainty of the verdict. In this experiment we examine the relationship between evidence of which the strength is known, subjective probability of guilt and verdict for abstract cases. We look at two situations: (1) all evidence is given and (2) evidence can be acquired. Roughly half of the participants do not base their decision on a subjective belief of the probability of guilt. The others underestimate in general the probability of guilt, but this is more than compensated by a tendency to convict at too low probability of guilt. In the situation where evidence can be acquired, participants do not acquire enough evidence.
    Keywords: Decision under uncertainty; judicial decisions; experiment
    JEL: C91 D81 K4
    Date: 2008–09–19
  4. By: Rohan Pitchford; Mark L. J. Wright
    Abstract: Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internation- ally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model affirms the conventional wisdom that delay increases with more creditors, and with the advent of "vulture" creditors. Contrary to conventional wisdom, putting collective ac- tion clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consoli- date debt with high - and disperse debt with low - creditor bargaining power. Whether secondary markets reduce or increase delay, depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.
    JEL: D23 D78 F34 K12 K33
    Date: 2008–10
  5. By: Bertrand Chopard; Thomas Cortade; Eric Langlais
    Abstract: Parties engaged in a litigation generally enter the discovery process with different informations regarding their case and/or an unequal endowment in terms of skill and ability to produce evidence and predict the outcome of a trial. Hence, they have to bear different legal costs to assess the (equilibrium) plaintiff’s win rate. The paper analyses pretrial negotiations and revisits the selection hypothesis in the case where these legal expenditures are private information. This assumption is consistent with empirical evidence (Osborne, 1999). Two alternative situations are investigated, depending on whether there exists a unilateral or a bilateral informational asymmetry. Our general result is that efficient pretrial negotiations select cases with the smallest legal expenditures as those going to trial, while cases with largest costs prefer to settle. Under the one-sided asymmetric information assumption, we find that the American rule yields more trials and higher aggregate legal expenditures than the French and British rules. The two-sided case leads to a higher rate of trials, but in contrast provides less clear-cut predictions regarding the influence of fee-shifting.
    Keywords: litigation, unilateral and bilateral asymmetric information, legal expenditures
    JEL: D81 K42
    Date: 2008
  6. By: Eric Langlais
    Abstract: There is evidence that asymmetric information does exist between litigants: not in a way supporting Bebchuk (1984)’s assumption that defendants’ degree of fault is private information, but more likely as a result of parties’ predictive capacity about the outcome at trial (Osborne, 1999). In this paper, we investigate the incidence of one component of this asymmetric predictive power, which has been examplified in experimental economics. We assume that litigants assess their priors on the plaintiff’s prevailing rate at trial in a way consistent with the self-serving bias, which is the source of the asymmetric information. We compare the predictions of this model regarding the influence of individual priors with those in the literature. Finally, we analyse the influence of another reason for probability distorsion, i.e. risk aversion in the sense of Yaari (1987).
    Keywords: litigation, pretrial bargaining, self-serving bias, risk aversion
    JEL: D81 K42
    Date: 2008
  7. By: Pinar Akman (Centre for Competition Policy, University of East Anglia)
    Abstract: The ultimate objective of EC competition rules is arguably the enhancement of ‘consumer welfare’. In EC competition law, however, ‘consumer’ merely means ‘customer’. Not being limited to final consumers, the concept also encompasses intermediate customers. Moreover, according to the EC Commission, under Article 82EC, harm to intermediate customers is generally presumed to create harm to consumers and where intermediate customers are not competitors of the dominant undertaking, there is no requisite to assess the effects of conduct on users further downstream. This paper questions the appropriateness of this presumption in light of recent advances in economics, specifically that of vertical restraints and in particular non-linear pricing. It uses this literature to show that there are many instances where an increase (decrease) in ‘customer welfare’ does not cause an increase (decrease) in ‘consumer welfare’. In these cases, the presumption is devoid of economic justification and likely to lead to decisional errors. The paper concludes that if the law is to serve the interests of ‘real’ consumers, the EC Commission should reconsider this presumption and its interpretation of the ‘consumer’ in ‘consumer welfare’. Until then, it remains questionable and objectionable whose interests EC competition law and in particular, Article 82EC, serve.
    Keywords: Article 82EC, abuse of dominance, consumer welfare, customer welfare, final consumers, intermediate customers
    JEL: K21
    Date: 2008–11
  8. By: Andreas Stephan (Centre for Competition Policy, University of East Anglia)
    Abstract: A criminal offence requiring Ghosh dishonesty was introduced in the UK by the Enterprise Act 2002, primarily to enhance cartel deterrence as a complement to corporate fines. Yet the first convictions resulted from a US plea bargain in 2008. This paper identifies three obstacles to enhancing deterrence through the cartel offence. First, Norris v USA and a public survey suggest relatively weak perceptions of cartels persist in the UK. It was envisaged that convictions would remedy this, but prosecutors will continue to be very selective about the cases they bring to trial if there are doubts as to whether price fixing alone is viewed as objectively dishonest. Secondly, any increase in criminal enforcement risks discouraging leniency applications to the European Commission, because corporate immunity granted on the Community level does not automatically protect employees from criminal prosecution in national courts. There is also no conclusive mechanism for direct settlement, as there is in the US. Thirdly, sizeable benefits and purportedly low detection rates mean deterrence may be weak if custodial sentences do not become the norm. Further sanctions such as Director Disqualification Orders can play an important role in ensuring cartelists do not seek immediate reemployment at a high level.
    Keywords: cartel offence, deterrence, dishonesty, Enterprise Act 2002, Norris v USA
    JEL: K14 K21 L40 L41
    Date: 2008–11
  9. By: Michelle J. White
    Abstract: This paper discusses four bankruptcy-related policy issues. First, what is the economic rationale for having a bankruptcy procedure at all and what defines an economically efficient bankruptcy procedure? Second, why did the number of U.S. bankruptcy filings increase so dramatically between 1980 and 2005? Third, a major bankruptcy reform went into effect in the U.S. in 2005—what did it do and how did it affect credit and mortgage markets? Finally, the paper discusses the mortgage crisis, the high social cost of foreclosures, and the difficulty of avoiding foreclosure by voluntarily renegotiation of mortgage contracts, even when such renegotiations are in the joint interest of debtors and creditors. I also discuss the pros and cons of government programs to refinance mortgages and the possibility of giving bankruptcy judges new power to change the terms of mortgage contracts in bankruptcy.
    JEL: E44 K35 R31
    Date: 2008–12

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