New Economics Papers
on Law and Economics
Issue of 2010‒04‒17
nine papers chosen by
Jeong-Joon Lee, Towson University

  1. Mobile termination, network externalities, and consumer expectations By Hurkens, Sjaak; Lopez, Angel
  2. The (Hidden) Financial Flows of Terrorist Organizations: A Literature Review and Some Preliminary Empirical Results By Schneider, Friedrich
  3. Testing Enforcement Strategies in the Field: Legal Threat, Moral Appeal and Social Information By Gerlinde Fellner; Rupert Sausgruber; Christian Traxler
  4. Garden Leave vs. Covenants not to Compete By Timothy J. Perri
  5. Crime and arrests: deterrence or resource reallocation? By Thomas A. Garrett; Lesli S. Ott
  6. Breach Remedies Including Hybrid Investments By Daniel Göller; Alexander Stremitzer
  7. The impact of judicial objective function on the enforcement of environmental standards. By Thomas BLONDIAU; Sandra ROUSSEAU
  8. International framework for liquidity risk measurement, standards and monitoring: corporate governance and internal controls By Ojo, Marianne
  9. An Axiomatic Approach to the Measurement of Corruption: Theory and Applications By James E. Foster, Andrew W. Horowitz and Fabio Méndez

  1. By: Hurkens, Sjaak (IESE Business School); Lopez, Angel (IESE Business School)
    Abstract: We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers¿ expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.
    Keywords: Networks; Rational Expectations; Access Pricing; Interconnection; Regulation; Telecommunications;
    JEL: K23 L51 L96
    Date: 2010–03–03
  2. By: Schneider, Friedrich (University of Linz)
    Abstract: In this paper the financial means of international (mostly Islamistic) terror organizations are analysed. First, some short remarks about the organization of international terror organizations are made. Second and in a much more detailed way a literature review is provided about the financing of terrorist and organized crime organizations, their sources and the various methods they use. Third, a first attempt is made to estimate the financial means of terror organizations with the help of a latent estimation approach (MIMIC procedure). The figures show that Al Qaeda and other terror organizations have sufficient financial means. Third, some remarks are made about the negative effects of terror on the economy in highly developed countries and some strategies are presented to combat the financing of terrorism.
    Keywords: financial flows of terrorist organizations, Hawala banking, money laundering, organized crime, kinds of terrorist financing
    JEL: K42 H56 O17
    Date: 2010–03
  3. By: Gerlinde Fellner (Department of Economics, Vienna University of Economics and Business); Rupert Sausgruber (Department of Public Economics, University of Innsbruck); Christian Traxler (Max Planck Institute for Research on Collective Goods,Bonn)
    Abstract: We run a large-scale natural field experiment to evaluate alternative strategies to enforce compliance with the law. The experiment varies the text of mailings sent to potential evaders of TV license fees. We find a strong alert effect of mailings, leading to a substantial increase in compliance. Among different mailing conditions a legal threat that stresses a high detection risk has a significant and highly robust deterrent effect. Neither appealing to morals nor imparting information about others' behavior enhances compliance. However, the information condition has a positive effect in municipalities where evasion is believed to be common. Overall, the economic model of crime performs remarkably well in explaining our data.
    Keywords: Field experiments, law enforcement, compliance, deterrence
    JEL: K42 C93
    Date: 2009–09
  4. By: Timothy J. Perri
    Abstract: Garden leave (GL)---when workers are paid but do not work---may be preferred by firms since courts are more likely to enforce GL than they are covenants not to compete (CNCs). We consider when GL is more profitable than a CNC. Also, assuming it is optimal to offer GL or a CNC, we find (1) the optimal length of either GL or a CNC is the same, (2) firms share fewer trade secrets with GL than with a CNC, and (3) the extent of innovation will be higher with a CNC than with GL. Key Words: Covenants not to compete; Garden leave
    JEL: K12
    Date: 2010
  5. By: Thomas A. Garrett; Lesli S. Ott
    Abstract: We use monthly time-series data for 20 large U.S. cities to test the deterrence hypothesis (arrests reduce crimes) and the resource reallocation hypothesis (arrests follow from an increase in crime). We find (1) weak support for the deterrence hypothesis, (2) much stronger support for the resource reallocation hypothesis, and (3) differences in city-level estimates suggest much heterogeneity in the crime and arrest relationship across regions.
    Keywords: Crime ; Cities and towns
    Date: 2010
  6. By: Daniel Göller (University of Bonn); Alexander Stremitzer (Yale Law School)
    Abstract: We show that parties in bilateral trade can rely on the default common law breach remedy of ‘expectation damages’ to induce simultaneously first-best relationship-specific investments of both the selfish and the cooperative kind. This can be achieved by writing a contract that specifies a suffciently high quality level. In contrast, the result by Che and Chung (1999) that ‘reliance damages’ induce the firstbest in a setting of purely cooperative investments, does not generalize to the hybrid case. We also show that if the quality specified in the contract is too low, ‘expectation damages’ do not necessarily induce the ex-post effcient trade decision in the presence of cooperative investments.
    Keywords: breach remedies, incomplete contracts, hybrid investments, cooperative investments, selfish investments
    JEL: K12 L22 J41 C70
    Date: 2009–10
  7. By: Thomas BLONDIAU; Sandra ROUSSEAU
    Abstract: We investigate the influence of a judge’s objective function on the type of sanctions used for enforcing environmental standards. We focus on the difference between monetary and non-monetary penalties. Therefore, we examine the extent to which judges take social costs of sanctions into account when making judgments in court in the context of environmental violations. Furthermore, we conduct an empirical analysis to test the main findings of the theoretical model using court data from several Belgian jurisdictions. We find that besides minimizing environmental damages judges also take social costs of sanctions into account in their decisionmaking. The first part of this paper uses quantitative methods to assess the success of party affiliation, personal interests and the economic profile of the constituencies in predicting voting behavior. Thanks to the detailed censuses of 1846 on agriculture, industry and population, it is possible to typify the economic make-up of the electoral districts in much more detail than in the British case. However, the analysis of roll-call voting proves that party affiliation and personal and constituency economic interests are insufficient to explain the shift towards free trade. The second part of the paper then discusses the role played by political strategy and ideas in the liberalization of corn tariffs, using a qualitative analysis of the debates on tariff policy. The large number of votes over a forty year period allows us to document the relationship between ideas and interests in a new way.
    Keywords: Environmental policy; monitoring and enforcement; non-monetary sanctions
    JEL: K32 K41 K42 Q58
    Date: 2009–12
  8. By: Ojo, Marianne
    Abstract: This paper is structured in accordance with identified components which are considered to be essential to the successful implementation of the (two fold) topics of discussion of this paper, namely, monitoring and liquidity risk measurements. The importance of successfully communicating results obtained from monitoring and measuring such risks, and the role of corporate governance in ensuring such effective communication, constitutes a recurring theme throughout this paper. The identified components are as follows: i) Corporate governance (ii) Internal controls (iii) Disclosure (iv) Management of risk (v) Substance over form (vi) Transparency As well as highlighting the interdependence of these components, the paper also aims to accentuate the importance of individual components. Whilst no hierarchy of importance is assigned to these components, corporate governance and internal controls are two components which are analysed in greater depth (than other components). Furthermore, corporate governance could be accorded a status of greater importance than internal controls having regard to the fact that whilst internal controls relate to a very vital control aspect of an organisation, corporate governance relates to all processes – be it decision making, control, production, performance, within a company/bank. The paper will also attempt to demonstrate that it is possible to implement a system of regulation which combines increased formalised procedures and/or detailed rules - whilst giving due consideration to the substance of transactions.
    Keywords: corporate governance; internal controls; monitoring; liquidity; regulation
    JEL: K2 G3
    Date: 2010–04
  9. By: James E. Foster, Andrew W. Horowitz and Fabio Méndez
    Abstract: In this paper we demonstrate that the axiomatic measurement approach developed in the poverty and inequality literature can be usefully applied to the measurement of corruption. We develop a conceptual framework for organizing corruption data and discuss several objective, aggregate corruption measures consistent with axiomatic requirements. We then provide an empirical application of the methodology and estimate the respective corruption measures for a sample of over 25 countries during the year 2000. Our empirical analysis reveals significant discrepancies between the country rankings generated by these measures and those provided by the Corruption Perception Index (CPI) from Transparency International. To our knowledge, this paper represents a first analysis of corruption measurement using an axiomatic framework.
    Keywords: corruption, illegal behaviour, corruption measurement, legal institutions
    JEL: K42 O17 P37
    Date: 2009–05

This issue is ©2010 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.