New Economics Papers
on Law and Economics
Issue of 2010‒06‒04
seven papers chosen by
Jeong-Joon Lee, Towson University

  1. A General Framework for Regulation and Liberalization in Network Industries By Christian Jaag; Urs Trinkner
  2. Litigation and Settlement under Court Error By Philipp Ackermann
  3. Insolvency and Biased Standards--The Case for Proportional Liability By Stremitzer, Alexander; Tabbach, Avraham
  4. Did bankruptcy reform cause mortgage default rates to rise? By Wenli Li; Michelle J. White; Ning Zhu
  5. Risk Management and Regulation Compliance with Tradable Permits under Dynamic Uncertainty By Pasquale Lucio Scandizzo; Odin K Knudsen
  6. Co-operative and competitive enforced self regulation: the role of governments, private actors and banks in corporate responsibility By Ojo, Marianne
  7. Understanding the Impact of Immigration on Crime By Spenkuch, Jörg L.

  1. By: Christian Jaag; Urs Trinkner
    Abstract: This paper provides a general framework to understand, assess and develop regulations in network industries.
    Keywords: Regulation, Network Industries, Universal Service, Access, Bottleneck
    JEL: K23 M21 L00 L51
    Date: 2009–08
  2. By: Philipp Ackermann
    Abstract: Settlements are often considered to be welfare-enhancing because they save time and litigation costs. In the presence of court error, however, this conclusion may be wrong. Court decisions create positive externalities for future litigants which will not occur if a dispute is settled out of court. Focusing on private litigation, we examine the impact of court error on the deterrent effect of the strict liability rule. In an asymmetric information setup both, underdeterrence and overdeterrence are possible under court error. Moreover, court error increases the likelihood of out-of-court settlements which can offset the positive externality of litigation.
    Keywords: litigation; settlement; asymmetric information; court error; strict liability rule
    JEL: K13 K41
    Date: 2010–02
  3. By: Stremitzer, Alexander (Yale University and University of Bonn); Tabbach, Avraham (Tel-Aviv University)
    Abstract: We analyze liability rules in a setting where injurers are potentially insolvent and where negligence standards may deviate from the socially optimal level. We show that proportional liability, which sets the measure of damages equal to the harm multiplied by the probability that it was caused by an injurer's negligence, is preferable to other existing negligence-based rules. Moreover, proportional liability outperforms strict liability if the standard of due care is not set too low. Our analysis also suggests that courts should rely on statistical evidence and bar individualized causal claims that link the harm suffered by a plaintiff to the actions of the defendant. Finally, we provide a result which might be useful to regulators when calculating minimum capital requirements or minimum mandatory insurance for different industries.
    JEL: K13
    Date: 2009–12
  4. By: Wenli Li; Michelle J. White; Ning Zhu
    Abstract: This paper argues that the U.S. bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession. When debtors file for bankruptcy, credit card debt and other types of debt are discharged - thus loosening debtors' budget constraints. Homeowners in financial distress can therefore use bankruptcy to avoid losing their homes, since filing allows them to shift funds from paying other debts to paying their mortgages. But a major reform of U.S. bankruptcy law in 2005 raised the cost of filing and reduced the amount of debt that is discharged. The authors argue that an unintended consequence of the reform was to cause mortgage default rates to rise. Using a large dataset of individual mortgages, they estimate a hazard model to test whether the 2005 bankruptcy reform caused mortgage default rates to rise. Their major result is that prime and subprime mortgage default rates rose by 14 percent and 16 percent, respectively, after bankruptcy reform. The authors also use difference-in-difference to examine the effects of three provisions of bankruptcy reform that particularly harmed homeowners with high incomes and/or high assets and find that the default rates of affected homeowners rose even more. Overall, they calculate that bankruptcy reform caused the number of mortgage defaults to increase by around 200,000 per year even before the start of the financial crisis, suggesting that the reform increased the severity of the crisis when it came.
    Keywords: Bankruptcy ; Law and legislation ; Foreclosure ; Default (Finance) ; Mortgage loans ; Global financial crisis
    Date: 2010
  5. By: Pasquale Lucio Scandizzo (Faculty of Economics, University of Rome "Tor Vergata"); Odin K Knudsen (JPMorgan Chase & Co)
    Abstract: In this paper, we explore the effects of dynamic uncertainty on the risk management of regulated industries and emission market. We consider as major sources of uncertainty the stochastic growth of demand for the industry output (e.g. electric energy) and the ensuing lack of information on the pollution levels of individual firms, their behavior and the behavior of the regulator. These sources of uncertainty are common in pollution permit trading as not only does the market respond to the volatility of fundamentals but also to the vagaries of the institutional structure, created by public policy and enforced through regulation. The paper shows that in the presence of strategic behavior on the part of the agents involved, even though both the level and the volatility of output increases over time, trading of permits is a highly effective instrument of risk management, since it allows the firms to pool the risks arising from the volatile environment, thereby simplifying enforcement, reducing emissions and improving resource allocation. Moreover, uncertainty plays a subtle influencing role, since on one hand it broadens the regulator’s deterrent power over potential polluters, while on the other it reduces the expected value of the sanction for the individual firm.
    Keywords: risk; permits; regulation; enforcement; dynamic uncertainty; option; pricing; equilibrium
    JEL: K34 H40 Q52
    Date: 2010–05–28
  6. By: Ojo, Marianne
    Abstract: In considering why practices which stimulate incentives for private agents to exert corporate control should be encouraged, this paper highlights criticisms attributed to government control of banks. However the theory relating to the “helping hand” view of government is advanced as having a fundamental role in the regulation and supervision of banks. Furthermore, governments have a vital role to play in corporate responsibility and regulation given the fact that banks are costly and difficult to monitor – this being principally attributed to the possibility that private agents will lack required incentives or the ability to supervise banks. Through its supervision of banks, governments also assume an important role where matters related to the fostering of accountability are concerned – not only because banks may have the power to affect firm performance, but also because some private agents are not able to afford internal monitoring mechanisms. Through the Enforced Self Regulation model, the paper attempts to highlight the role played by government in the direct monitoring of firms. In proposing the Co-operative and Competitive Enforced Self Regulation model, it attempts to draw attention to the fact that although such a model is based on a combination of already existing models and theories, the absence of effective enforcement mechanisms will restrict the maximisation potential of such a model. The primary theme of the paper relates to how corporate responsibility and accountability could be fostered through monitoring and the involvement of governments in the regulation of firms. It illustrates how structures which operate in various systems, namely, stock market economies and universal banking systems, function (and attempt) to address gaps which may arise as a result of lack of adequate mechanisms of accountability. Furthermore it draws attention to the impact of asymmetric information (generally and in these systems), on levels of monitoring procedures and how conflicts of interests which could arise between banks and their shareholders, or between governments and those firms being regulated by the regulator, could be addressed.
    Keywords: accountability; asymmetric information; universal banking; regulation; regulatory capture; government
    JEL: K2 G18 D82 G3 A10 G21 L1
    Date: 2010–05–27
  7. By: Spenkuch, Jörg L.
    Abstract: Since the 1960s both crime rates and the share of immigrants among the American population have more than doubled. Almost three quarters of Americans believe immigration increases crime, yet existing academic research has shown no such effect. Using panel data on US counties from 1980 to 2000, this paper presents empirical evidence on a systematic and economically meaningful impact of immigration on crime. Consistent with the economic model of crime this effect is strongest for crimes motivated by financial gain, such as motor vehicle theft and robbery. Moreover, the effect is only present for those immigrants most likely to have poor labor market outcomes. Failure to account for the cost of increased crime would overstate the “immigration surplus” substantially, but would most likely not reverse its sign.
    Keywords: immigration; crime; social cost of immigration
    JEL: K00 J01 J18
    Date: 2010–05–21

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