New Economics Papers
on Law and Economics
Issue of 2009‒01‒03
eleven papers chosen by
Jeong-Joon Lee, Towson University

  1. Contracts as Reference Points: Experimental Evidence By Fehr, Ernst; Hart, Oliver; Zehnder, Christian
  2. Speed Discounting and Racial Disparities: Evidence from Speeding Tickets in Boston By Anbarci, Nejat; Lee, Jungmin
  3. Multiple-Bank Lending, Creditor Rights and Information Sharing By Alberto Bennardo; Marco Pagano; Salvatore Piccolo
  4. Measuring the Size of the Informal Economy: A Critical Review By George M. Georgiou
  5. The Economics of Crime and Money Laundering: Does Anti-Money Laundering Policy Reduce Crime? By Joras Ferwerda
  6. Corruption and Positive Selection in Privatization By Raluca E. Buia; M. Cristina Molinari
  7. Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes By Alberto Galasso; Mark Schankerman
  8. Does Planning Regulation Protect Independent Retailers? By Raffaella Sadun
  9. "Currency Manipulation" and World Trade By Robert W. Staiger; Alan O. Sykes
  10. Innovation and Optimal Punishment, with Antitrust Applications By Keith N. Hylton; Haizhen Lin
  11. Convictions versus Conviction Rates: The Prosecutor’s Choice By Eric Rasmusen; Manu Raghav,; Mark Ramseyer

  1. By: Fehr, Ernst (University of Zurich); Hart, Oliver (Harvard University); Zehnder, Christian (University of Lausanne)
    Abstract: In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts – which would dominate rigid contracts under standard assumptions –cause a significant amount of shading on ex post performance while under rigid contracts much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract.
    Keywords: contracts, reference points, experiment
    JEL: C7 D00 D2 D8 K00
    Date: 2008–12
  2. By: Anbarci, Nejat (Deakin University); Lee, Jungmin (Florida International University)
    Abstract: Law enforcement officers are allowed to exercise a significant amount of street-level discretion in a variety of ways. In this paper, we focus on a particular prominent kind of discretionary behavior by traffic officers when issuing speeding tickets, speed discounting. Officers partially forgive motorists by writing a lower speed level than the speed that officers observe. Verifying the level of speed discounting by different groups of officers and motorists and ascertaining the presence of racial disparities in this lenient policing are the main objectives of this paper. We find that minority officers, particularly African-Americans, are harsher on all motorists but even harsher on minority motorists regarding speed discounting. The minority-on-minority disparity appears to be stronger in situations involving Hispanic officers, infrequently ticketing officers, male motorists, those driving old vehicles, and minority neighborhoods.
    Keywords: police discretion, disparate treatment, racial bias, speeding tickets
    JEL: J70 K42
    Date: 2008–12
  3. By: Alberto Bennardo (Università di Salerno, CSEF, and CEPR); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Salvatore Piccolo (Università di Napoli Federico II, CSEF, and TSE)
    Abstract: When a customer can borrow from several competing banks, lending by each of them raises the customer’s default risk. If creditor rights are poorly protected, this contractual externality can generate equilibria with rationing, as well as others with excessive lending or non-competitive rates. Information sharing among banks about clients’ past indebtedness reduces interest and default rates, improves entrepreneurs’ access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients’ subsequent indebtedness, the credit market may achieve full efficiency.
    Keywords: information sharing, multiple banks, creditor rights, seniority, non-exclusivity
    JEL: D73 K21 K42 L51
    Date: 2008–12–31
  4. By: George M. Georgiou (Publications Section, Central Bank of Cyprus)
    Abstract: There has been a burgeoning number of studies attempting to measure the size of the ‘black’ economy. These are based on a variety of methodologies and provide a range of estimates, not just across countries but also within the same countries and often by the same author(s). This raises a number of issues: What is meant by the term ‘black’ economy? Is it an appropriate description? What, if any, is the theory underlying the estimates of informal economic activity? This discussion paper examines these and other issues, and concludes that whilst the existence of what we prefer to call the ‘informal’ or ‘grey’ economy in most countries is incontrovertible, there is a lack of consensus on the appropriate methodology for estimating its size. More importantly, the large number of studies so far are simply exercises in measurement without theory, though we are sceptical that even with strong theoretical underpinnings it is possible to provide accurate estimates of a complicated web of informal activities.
    JEL: E26 H26 K42
    Date: 2007–05
  5. By: Joras Ferwerda
    Abstract: Anti-money laundering policy has become a major issue in the Western world, especially in the United States after 9-11. Basically all countries in the world are more or less forced to cooperate in the global fight against money laundering. In this paper, the criminalization of money laundering is modelled, assuming rational behaviour of criminals, following the law and economics strand of the literature which is described as the economics of crime. The theoretical model shows that a) the probability to be caught for money laundering, b) the sentence for money laundering, c) the probability to be convicted for the predicate crime and d) the transaction costs of money laundering are negatively related to the amount of crime. Under the assumption that these factors are all positively influenced by a stricter anti-money laundering policy, the hypothesis empirically tested in this paper is that anti-money laundering policy deters potential criminals from illegal behavior and therefore lowers the crime rate. Since the data on anti-money laundering policy, used in the literature so far, is not all-embracing, a new unique indicator is constructed by using all the information from the mutual evaluation reports on money laundering of the FATF, IMF and World Bank. This unique dataset is used in an empirical estimation based on a Mundlak specification to test the effect of antimoney laundering policy on the crime rate. Among the four policy areas measured- the role of laws, the institutional framework, the duties of the private sector in law enforcement, and international cooperation, the latter turned out to be the most important policy area for reducing crime. This should be an extra incentive for countries and international organizations to continue their efforts to promote and develop international cooperation in the fight against money laundering.
    Keywords: Anti-Money Laundering Policy and Crime
    JEL: K42 F59
    Date: 2008–11
  6. By: Raluca E. Buia (Advanced School of Economics, University Of Venice Cà Foscari); M. Cristina Molinari (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We consider the supply of a public good based on a publicly-owned facility. The Government has a choice between provision in-house and privatizing the facility and then outsourcing the production. In particular, we focus on corruption in the decision to privatize and on its effect on social welfare when there is asymmetric information on the public and private manager's efficiency. Our analysis shows that a corrupt Government, that chooses to privatize only in exchange for a bribe, makes a positive selection on the private firm's efficiency and, thus, may raise expected social welfare above what an honest Government could get.
    Keywords: Corruption, Privatization, Private vs. public provision.
    JEL: D73 H44 K42 L33
    Date: 2008
  7. By: Alberto Galasso; Mark Schankerman
    Abstract: We study how fragmentation of patent rights ('patent thickets') and the formation of theCourt of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, andthus the speed of technology diffusion through licensing. We develop a model of patentlitigation which predicts faster settlement agreements when patent rights are fragmented andwhen there is less uncertainty about court outcomes, as was associated with the 'pro-patentshift' of CAFC. The model also predicts that the impact of fragmentation on settlementduration should be smaller under CAFC. We confirm these predictions empirically using adataset that covers nearly all patent suits in U.S. federal district courts during the period1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking intoaccount both reduction in duration per dispute and the increase in the number of requiredpatent negotiations associated with patent thickets.
    Keywords: patents, anti-commons, patent thickets, litigation, settlement
    JEL: K41 L24 O31 O34
    Date: 2008–08
  8. By: Raffaella Sadun
    Abstract: Entry regulations against big-box retailers have been introduced in many countries to protectsmaller independent stores. Using a new dataset from the UK, I show that in fact these entryregulations have been associated with greater employment declines in independent storesthey were meant to protect. The reason is that when large retail chains are prevented fromentering a new area with a big-box store, they typically enter instead using a smaller in-townstore format. These smaller format stores compete more directly with independent stores. Tocausally identify this impact I use the changing nature of local political control in the UKfrom 1993 to 2003. Since local politicians directly control planning regulation in the UK, andpolitical parties have very different views on the ideal amount of planning control, thisprovides exogenous variation in the ease of entry for big-box retailers. I estimate that 15% ofthe employment decline experienced by independent retailers between 1998 and 2004 can beattributed to the perverse effect of planning regulation.
    Keywords: Zoning, Location, Retail, Regulation
    JEL: K2 L10 L81 L51
    Date: 2008–08
  9. By: Robert W. Staiger; Alan O. Sykes
    Abstract: Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China have been advanced. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. Our conclusions are at odds with much of what is currently being said by proponents of counter-measures against China. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. The real effects of China's policies are potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame).
    JEL: F02 F13 F31 K33
    Date: 2008–12
  10. By: Keith N. Hylton (Boston University Law School); Haizhen Lin (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper modifies the optimal penalty analysis by incorporating investment incentives with external benefits. In the models examined, the recommendation that the optimal penalty should internalize the marginal social harm is no longer valid as a general rule. We focus on antitrust applications. In light of the benefits from innovation, the optimal policy will punish monopolizing firms more leniently than suggested in the standard static model. It may be optimal not to punish the monopolizing firm at all, or to reward the firm rather than punish it. We examine the precise balance between penalty and reward in the optimal punishment scheme.
    Keywords: optimal law enforcement, optimal antitrust penalty, monopolization, innovation, internalization, strict liability, static penalty
    JEL: D42 K14 K21 K42 L41 L43
    Date: 2008–11
  11. By: Eric Rasmusen (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Manu Raghav, (Department of Economics and Management, Depauw University); Mark Ramseyer (Harvard Law School)
    Abstract: Is it better to move first, or second— to innovate, or to imitate? We look at this in a context with both asymmetric information and payoff externalities. Suppose two players, one with superior information about market quality, consider entering one of two new markets immediately or waiting until the last possible date. We show that the more accurate the informed player’s information, the more he wants to delay to keep his information private. The less-informed player also wants to delay, but in order to learn. The less accurate the informed player’s information, the more both players want to move first to foreclose a market. More accurate information can lead to inefficiency by increasing the players’ incentive to delay. Thus, a moderate delay cost can increase industry profits.
    Date: 2008–12

This issue is ©2009 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.
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