New Economics Papers
on Law and Economics
Issue of 2009‒02‒28
nineteen papers chosen by
Jeong-Joon Lee, Towson University

  1. Relaxed Dismissal Protection: Effects on the Hiring and Firing Behaviour of Small Firms By Stefan Bauernschuster
  2. Sentence Reductions and Recidivism: Lessons from the Bastille Day Quasi Experiment By Maurin, Eric; Ouss, Aurelie
  3. Tracing the Base: A Topographic Test for Collusive Basing-Point Pricing By Iwan Bos; Maarten Pieter Schinkel
  4. Deterrence and Displacement in Auto Theft By Marco Gonzalez-Navarro
  5. Exit and Voice in a Marriage Market By Akiko Maruyama; Takashi Shimizu; Kazuhiro Yamamoto
  6. Economic incongruities in the European patent system By Mejer, Malwina; van Pottelsberghe, Bruno
  7. The Future of Securities Regulation By Zingales, Luigi
  8. Non-comparative versus Comparative Advertising as a Quality Signal By Emons, Winand; Fluet, Claude
  9. Labor Laws and Innovation By Acharya, Viral V; Baghai-Wadji, Ramin; Subramanian, Krishnamurthy
  10. Control Rights over Intellectual Property: Corporate Venturing and Bankruptcy Regimes By Bhattacharya, Sudipto; Guriev, Sergei
  11. Multiple-Bank Lending, Creditor Rights and Information Sharing By Bennardo, Alberto; Pagano, Marco; Piccolo, Salvatore
  12. Complementary Patents and Market Structure By Schmidt, Klaus M.
  13. Democracy and Reforms By Amin, Mohammad; Djankov, Simeon
  14. Terror and the Costs of Crime By Gould, Eric D; Stecklov, Guy
  15. What Drives International Financial Flows? Politics, Institutions and Other Determinants By Papaioannou, Elias
  16. Legal Standards, Enforcement and Corruption By Immordino, Giovanni; Pagano, Marco
  17. Corporate Fraud, Governance and Auditing By Immordino, Giovanni; Pagano, Marco
  18. Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes By Galasso, Alberto; Schankerman, Mark
  19. Litigation and Regulation By Joshua Schwartzstein; Andrei Shleifer

  1. By: Stefan Bauernschuster (University of Jena, Graduate College "The Economics of Innovative Change")
    Abstract: Small firms are seen as important drivers of dynamics and innovation. They need to be particularly flexible and be able to react quickly to new challenges. This paper uses the latest change in dismissal protection legislation in Germany as a natural experiment and tries to find causal effects on the hiring and firing behaviour of small firms. Using a difference-in-differences approach, I find only small but positive effects on the total number of hirings. However, there are substantial substitution effects from temporary contract hirings to permanent contract hirings. The results remain robust when using count data models and applying fixed effects specifications.
    Keywords: Employment Protection, Small Business, Worker Flows
    JEL: J38 K31 M21
    Date: 2009–02–20
  2. By: Maurin, Eric (PSE); Ouss, Aurelie (PSE)
    Abstract: This paper exploits the collective pardon granted to individuals incarcerated in French prisons on the 14th of July, 1996 (Bastille Day) to identify the effect of collective sentence reductions on recidivism. The collective pardon generated a very significant discontinuity in the relationship between the number of weeks of sentence reduction granted to inmates and their prospective date of release. We show that the same discontinuity exists in the relationship between recidivism probability five years after the release and prospective date of release. Overall, the Bastille Day quasi experiment suggests that collective sentence reductions increase recidivism and do not represent a cost-effective way to reduce incarceration rates or prisons' overcrowding.
    Keywords: crime, prison, deterrence effect, recidivism
    JEL: K42
    Date: 2009–02
  3. By: Iwan Bos (University of Amsterdam); Maarten Pieter Schinkel (University of Amsterdam)
    Abstract: Basing-point pricing is known to have been abused by geographically dispersed firms in order to eliminate competition on transportation costs. This paper develops a topographic test for collusive basing-point pricing. The method uses transaction data (prices, quantities) and customer project site locations to recover the basing-point(s) from which delivered prices were calculated. These bases are compared to the locations of the production mills in a test that discriminates between competitive and collusive basing-point pricing. We define a measure for the likelihood of collusion that can be used to screen industries that traditionally apply delivered pricing for the presence of cartels. We operationalize this screen with a software. The test is hard to beat for cartels using this otherwise elusive form of price-fixing. When a cartel was found to have abused the basing-point system, our method can be used to estimate antitrust damages.
    Keywords: basing-point pricing; cartels; detection; antitrust; damages
    JEL: L41 K42 C12
    Date: 2009–01–20
  4. By: Marco Gonzalez-Navarro (Princeton University)
    Abstract: Lojack is a stolen vehicle tracking technology that achieves extremely high recovery rates. Ayres and Levitt (1998) show that introduction of the system produced large reductions in vehicle thefts in areas where it was implemented in the United States. The reduced theft risk was shared by all vehicle owners, not only those who bought Lojack. This paper, in contrast, uses the introduction of Lojack to a publicly known set of Ford car models in some Mexican states to show that Lojack generates negative externalities if thieves can distinguish between Lojack and non-Lojack-equipped cars. The empirical analysis suggests that, although Lojack-equipped vehicles experienced a reduction in theft risk of 55%, most of the averted thefts were replaced by thefts of non-Lojack-equipped automobiles in neighboring states. The increase in thefts in non Lojack-serviced states was especially strong for the same car models that in Lojack-serviced states were sold equipped with Lojack.
    JEL: K42 H23
    Date: 2008–10
  5. By: Akiko Maruyama (National Graduate Institute for Policy Studies (GRIPS)); Takashi Shimizu (Faculty of Economics, Kansai University); Kazuhiro Yamamoto (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we present a model in which agents choose voice, exit, or stay options when their marital condition becomes bad. The "voice" option can be interpreted as a spouse's effort or "investment" in the household to resolve his/her dissatisfaction and improve the marital condition. If a spouse hopes to divorce, he/she chooses "exit" option. If a spouse does not hopes to express his/her opinion and to divorce, he/she chooses "stay" option. We focus on the role of "exit" and "voice" in a marriage and investigate the effects of divorce law which is based on fault or no-fault on divorce rates. Our paper shows that divorce rates tend to be too higher under unilateral divorce law in the non-transferable utility case. On the other hand, mutual-consent divorce law generates multiple equilibria and then divorce rates are inefficient even in the transferable utility case. In this multiple equilibria case, divorce rates are determined by social factors as culture, norm, and religion, etc.
    Keywords: Exit; Voice; Divorce law
    JEL: D1 K0 R2
    Date: 2009–02
  6. By: Mejer, Malwina; van Pottelsberghe, Bruno
    Abstract: This paper argues that the consequences of the ‘fragmentation’ of the European patent system are more dramatic than the mere prohibitive costs of maintaining a patent in force in many jurisdictions. First, detailed analysis of judicial systems in several European countries and four case studies provide evidence suggesting that heterogeneous national litigation costs, practices and outcome induce a high level of uncertainty. Second, a high degree of managerial complexity results from systemic incongruities due to easier ‘parallel imports’, possible ‘time paradoxes’ and the de facto paradox of having EU-level competition policy and granting authority ultimately facing national jurisdictional primacy on patent issues. These high degrees of uncertainty and complexity contribute to reduce the effectiveness of the European patent system and provide additional arguments in favour of the Community patent and a centralized litigation in Europe.
    Keywords: enforcement; European patent system; litigation process; patent cost; uncertainty
    JEL: K41 O34 P14
    Date: 2009–01
  7. By: Zingales, Luigi
    Abstract: The U.S. system of security law was designed more than 70 years ago to regain investors’ trust after a major financial crisis. Today we face a similar problem. But while in the 1930s the prevailing perception was that investors had been defrauded by offerings of dubious quality securities, in the new millennium, investors’ perception is that they have been defrauded by managers who are not accountable to anyone. For this reason, I propose a series of reforms that center around corporate governance, while shifting the focus from the protection of unsophisticated investors in the purchasing of new securities issues to the investment in mutual funds, pension funds, and other forms of asset management.
    Keywords: coorporate goverance; security regulation
    JEL: G18 G38 K22
    Date: 2009–01
  8. By: Emons, Winand; Fluet, Claude
    Abstract: Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristic quality. The difference in the quality levels determines how the firms share the market. Firms know the quality levels, consumers do not. Under non-comparative advertising a firm may signal its own quality. Under comparative advertising firms may signal the quality differential. In both scenarios the firms may attempt to mislead at a cost. If firms advertise, in both scenarios equilibria are revealing. Under comparative advertising the firms never advertise together which they may do under non-comparative advertising.
    Keywords: advertising; costly state falsification; signalling
    JEL: D82 K41 K42
    Date: 2009–01
  9. By: Acharya, Viral V; Baghai-Wadji, Ramin; Subramanian, Krishnamurthy
    Abstract: Can stringent labor laws be efficient? Possibly, if they provide firms with a commitment device to not punish short-run failures and thereby incentivize the pursuit of value-maximizing innovative activities. In this paper, we provide empirical evidence that strong labor laws indeed appear to have an ex ante positive incentive effect by encouraging the innovative pursuits of firms and their employees. Using patents and citations as proxies for innovation and a time-varying index of labor laws, we find that innovation is fostered by stringent labor laws, especially by laws governing dismissal of employees. We provide this evidence using levels-on-levels, changes-on-changes, and finally difference-in-difference regressions that exploit staggered country-level law changes. We also find that stringent labor laws disproportionately influence innovation in those sectors of the economy that are more innovation intensive. Finally, we find that while the overall effect of stringent labor laws is to dampen economic growth, laws that govern dismissal of employees are an exception: dismissal laws promote economic growth, consistent with the evidence that they encourage firm-level innovation.
    Keywords: Entrepreneurship; Growth; Labor laws; Law and finance; R&D; Technological change
    JEL: F30 G31 J5 J8 K31
    Date: 2009–02
  10. By: Bhattacharya, Sudipto; Guriev, Sergei
    Abstract: We develop a theory of control rights in the context of licensing interim innovative knowledge for further development, which is consistent with the inalienability of initial innovator’s intellectual property rights. Control rights of a downstream development unit, a buyer of the interim innovation, arise from its ability to prevent the upstream research unit from forming financial coalitions at the ex interim stage of bargaining, over the amount and structure of licensing fees as well as the mode of licensing, based either on trade secrets or on patents. We model explicitly the equilibrium choice of the temporal structure of licensing fees, and show that the innovator’s ex interim financial constraint is more likely to bind when the value of her innovation is low. By constraining the financial flexibility of the upstream unit vis-a-vis her choice over the mode of licensing of her interim knowledge, the controlling development unit is able to reduce the research unit’s payoff selectively in such contingencies. This serves to incentivise the research unit to expend more effort ex ante, to generate more promising interim innovations. We further show that such interim-inefficient control rights can nevertheless be renegotiation-proof.
    Keywords: control rights; corporate venturing; patents; trade secrets
    JEL: D23 K12 O32
    Date: 2008–08
  11. By: Bennardo, Alberto; Pagano, Marco; Piccolo, Salvatore
    Abstract: When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves 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: creditor rights; information sharing; multiple-bank lending; non-exclusivity; seniority
    JEL: D73 K21 K42 L51
    Date: 2009–02
  12. By: Schmidt, Klaus M.
    Abstract: Many high technology goods are based on standards that require access to several patents that are owned by different IP holders. We investigate the royalties chosen by IP holders under different market structures. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders (or a patent pool) solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always encourages entry and innovation.
    Keywords: complementary patents; IP rights; licensing; patent pool; standards; vertical integration
    JEL: K11 L15 L24 O31 O32
    Date: 2008–10
  13. By: Amin, Mohammad; Djankov, Simeon
    Abstract: We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on micro-economic reforms from the World Bank’s Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms.
    Keywords: Democracy; Reform; Regulation
    JEL: K20 L51 P11 P16
    Date: 2009–01
  14. By: Gould, Eric D; Stecklov, Guy
    Abstract: This paper argues that terrorism, beyond its immediate impact on innocent victims, also raises the costs of crime, and therefore, imposes a negative externality on potential criminals. Terrorism raises the costs of crime through two channels: (i) by increasing the presence and activity of the police force, and (ii) causing more people to stay at home rather than going out for leisure activities. Our analysis exploits a panel of 120 fatal terror attacks and all reported crimes for 17 districts throughout Israel between 2000 and 2005. After controlling for the fixed-effect of each district and for district-specific time trends, we show that terror attacks reduce property crimes such as burglary, auto-theft, and thefts-from-cars. Terror also reduces assaults and aggravated assaults which occur in private homes, but increases incidents of trespassing and "disrupting the police." Taken as a whole, the results are consistent with a stronger deterrence effect produced by an increased police presence after a terror attack. A higher level of policing is likely to catch more people trespassing, and at the same time, reduce the number of property crimes. The decline in crimes committed in private houses is likely an indication that the tendency for individuals to stay home after a terror attack further increases the costs of crime.
    JEL: K42
    Date: 2009–02
  15. By: Papaioannou, Elias
    Abstract: This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of initial levels of institutional quality on future bank lending. Third, instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows. The results thus suggest that institutional underdeveloped can explain a significant part of Lucas (1990) paradox of why doesn’t capital flow from rich to poor countries. The analysis also does a first-step towards understanding which exactly institutional features affect international banking.
    Keywords: banks; capital flows; institutions; international finance; law and finance; politics
    JEL: F21 F34 G21 K00
    Date: 2008–10
  16. By: Immordino, Giovanni; Pagano, Marco
    Abstract: Stricter laws require more incisive and costlier enforcement. Since enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per-capita income and decreasing in officials' corruption. In contrast to the "tollbooth view" of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials' corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation show that standards correlate positively with per-capita income, and negatively with corruption, consistently with the model's predictions for benevolent governments
    Keywords: corruption; enforcement; legal standards; tollbooth view
    JEL: D73 K42 L51
    Date: 2008–12
  17. By: Immordino, Giovanni; Pagano, Marco
    Abstract: We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them.
    Keywords: accounting fraud; auditing; corporate governance; managerial compensation; regulation
    JEL: G28 K22 M42
    Date: 2008–12
  18. By: Galasso, Alberto; Schankerman, Mark
    Abstract: We study how fragmentation of patent rights (‘patent thickets’) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ‘pro-patent shift’ of CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets.
    Keywords: anti-commons; litigation; patent thickets; patents; settlement
    JEL: K41 L24 O31 O34
    Date: 2008–08
  19. By: Joshua Schwartzstein; Andrei Shleifer
    Abstract: We ask whether regulation can usefully supplement litigation in a model of optimal social control of harmful externalities. In our model, firms choose activity levels in addition to precautions. In contrast to the usual analysis, we assume that social returns to activity are higher than private returns before taking harmful externalities into account. We also assume that both courts and regulators make errors in assessing whether it is efficient for a given firm to take precautions. We show that regulation can, in some circumstances, improve resource allocation. Regulatory preemption of litigation may be efficient when social returns to activity exceed the expected harm that could result from a firm taking too few precautions. The optimal structure of law enforcement is influenced by the divergence between private and social returns to activity as well as the competence of regulators and courts.
    JEL: D62 K13 K40 L51
    Date: 2009–02

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