New Economics Papers
on Law and Economics
Issue of 2010‒01‒23
five papers chosen by
Jeong-Joon Lee, Towson University

  1. Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability By Florian Baumann; Tim Friehe; Kristoffel Grechenig
  2. Design and Evolution in Institutional Development: The Insignificance of the English Bill of Rights By Peter Murrell
  3. The Closure Effect: Evidence from Workers Compensation Litigation By Henry Hyatt
  4. Extending the scope of prudential supervision: Regulatory developments during and beyond the “effective” periods of the Post BCCI and the Capital Requirements directives. By Ojo, Marianne
  5. The Effect of Learning Varies According to Locality: Micro Data Analysis of the Lawyer Market in Japan By Yamamura, Eiji

  1. By: Florian Baumann (Eberhard Karls University, Department of Economics); Tim Friehe (University of Konstanz, Department of Economics); Kristoffel Grechenig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.
    Keywords: Tort law; product liability, care level, asymmetric information, switching
    JEL: K13
    Date: 2010–01
  2. By: Peter Murrell (Department of Economics, University of Maryland)
    Abstract: A fundamental question in economic development is how societies first acquire a successful set of institutions. To examine this question, the paper focuses on a paradigmatic example, England in the years surrounding the Glorious Revolution of 1688. North and Weingast (1989) view the constitutional changes following 1688 as an explicit attempt to design a new polity, having the effect of radically altering the functioning of the English political and economic system. The rise of England as a world economic power followed. In contrast, Hayek (1960) views the late 17th century changes as simply summarizing what was already in existence, a product of experience accumulated through trial and error and selective survival of productive institutions, ideas, and habits. This paper argues that the English experience of institutional development cannot be described as creation by design. The rise of England fits Hayek's evolutionary perspective. This conclusion rests on three composite pieces of evidence. First, a search for structural breaks in myriad data sets reveals that socioeconomic change was under way well before 1688. Second, an examination of the historical context and institutional content of each clause of the critical laws shows either that the clauses were already a part of effective law by 1688 or that they did not survive as viable constitutional measures. Third, an analysis of institutional and administrative innovations shows that many key developments affecting government finance were a product of the era before 1688.
    Keywords: Institutions, institutional development, constitutions, Glorious Revolution, design, evolution, Hayek, Bill of Rights
    JEL: O1 N0 O52 K1 N43 N13 H1 P5 B31
    Date: 2009–12
  3. By: Henry Hyatt
    Abstract: Consideration of the "best interests" of Workers Compensation (WC) claimants often involves the assumption that those who receive benefits in a "lump-sum" behave "too myopically" with respect to labor supply. However, many attorneys argue that lump-sum settlements induce a beneficial "sense of closure." In this paper, I provide an empirical context for these ideas using a unique set of linked administrative databases owned by the State of California. Upon receipt of a court-approved lump-sum settlement, WC claimants immediately increase labor supply. No such change is found for claimants who receive a court-approved settlement in which the insurer provides benefits over time, suggesting that the method of litigation settlement is a determinant of labor supply.
    JEL: K41 J32 H53
    Date: 2010–01
  4. By: Ojo, Marianne
    Abstract: The main argument of this paper is, namely, the need for greater emphasis on disclosure requirements and measures – particularly within the securities markets. This argument is justified on the basis of lessons which have been drawn from the recent Financial Crises, one of which is the inability of bank capital requirements on their own to address funding and liquidity problems. The engagement of market participants in the corporate reporting process, a process which would consequently enhance market discipline, constitutes a fundamental means whereby greater measures aimed at facilitating prudential supervision could be extended to the securities markets. Auditors, in playing a vital role in financial reporting, as tools of corporate governance, contribute to the disclosure process and towards engaging market participants in the process. This paper will however consider other means whereby transparency and disclosure of financial information within the securities markets could be enhanced, and also the need to accord greater priority to prudential supervision within the securities markets. Furthermore, the paper draws attention to the need to focus on Pillar 3 of Basel II, namely, market discipline. It illustrates how through Pillar 3, market participants like credit agencies can determine the levels of capital retained by banks – hence their potential to rectify or exacerbate pro cyclical effects resulting from Pillars 1 and 2. The challenges encountered by Pillars 1 and 2 in addressing credit risk is reflected by problems identified with pro cyclicality, which are attributed to banks’ extremely sensitive internal credit risk models, and the level of capital buffers which should be retained under Pillar Two. Such issues justify the need to give greater prominence to Pillar 3. As a result of the influence and potential of market participants in determining capital levels, such market participants are able to assist regulators in managing more effectively, the impact of systemic risks which occur when lending criteria is tightened owing to Basel II's procyclical effects. Regulators are able to respond and to manage with greater efficiency, systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. This being particularly the case when such firms decide to cut back on lending activities, and the decisions of such firms cannot be justified in situations where such firms’ credit risk models are extremely sensitive – hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements. In elaborating on Basel II's pro cyclical effects, the gaps which exist with internal credit risk model measurements will be considered. Gaps which exist with Basel II's risk measurements, along with the increased prominence and importance of liquidity risks - as revealed by the recent financial crisis, and proposals which have been put forward to mitigate Basel II's procyclical effects will also be addressed.
    Keywords: Capital Requirements Directive (CRD); Post BCCI Directive; prudential supervision; liquidity; capital; maturity mismatches; regulation
    JEL: K2 G3 D82 D53 G2 F3 F21
    Date: 2010–01
  5. By: Yamamura, Eiji
    Abstract: Using individual level data, this paper examines how and to what extent behavior and perception of those bringing lawsuit’s differ between large district courts (competitive lawyer market) and medium or small district ones (less competitive lawyer markets). The major findings are; (1) in medium or small, but not large districts, trial experience discourages people from employing a lawyer. (2) A natural person is less likely to employ a lawyer than a legal entity in medium or small districts, but not in large ones. (3) The self-rated cost of searching for a lawyer is lower in large districts than small ones. It follows from these results that the lower competitive pressure in the lawyer markets in medium and small districts results in higher costs to employ a lawyer than is found in large districts.
    Keywords: Lawyer market; learning
    JEL: K49 P48
    Date: 2010–01–14

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