New Economics Papers
on Law and Economics
Issue of 2010‒07‒17
seven papers chosen by
Jeong-Joon Lee, Towson University

  1. Divorce decisions, divorce laws and social norms By Victor Hiller; Magali Recoules
  2. Optimal Attorney Advertising By Michael P. Stone
  3. Do Laws Affect Attitudes? - An assessment of the Norwegian prostitution law using longitudinal data By Jakobsson, Niklas; Kotsadam, Andreas
  4. The Law and Economics of International Sex Slavery: Prostitution Laws and Trafficking for Sexual Exploitation By Jakobsson, Niklas; Kotsadam, Andreas
  5. Targeted Enforcement and Aggregate Emissions With Uniform Emission Taxes By Coria, Jessica; Villegas-Palacio, Clara
  6. Optimal Contract Design with Unilateral Market Option By Antonio Nicita; Simone Sepe
  7. The role of central banks and competition policies in the rescue and recapitalisation of financial institutions during (and in the aftermath of) the Financial Crisis By Ojo, Marianne

  1. By: Victor Hiller (LEM - Université Paris II Panthéon-Assas); Magali Recoules (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This article focuses on the three way relationship between change in divorce law, evolution of divorce rate and evolution of the cultural acceptance of divorce. We consider a heterogeneous population in which individuals differ in terms of the subjective loss they suffer when divorced, this loss being associated with stigmatizing social norms. The proportion of each type of individual evolves endogenously through a cultural transmission process. Divorce law is chosen by majority voting between two alternatives : mutual consent and unilateral divorce. In this framework, evolutions of divorce rate and divorce law may be jointly affected by the cultural dynamics within the society. In particular, we are able to reproduce the fact that divorce rate often raises before a legislation change. Indeed, the shift from consensual to unilateral divorce has an accelerating effect on the increase in divorce rate but is not the driving force behind this evolution.
    Keywords: Marriage and divorce, divorce legislation, cultural evolution, social norms.
    Date: 2010–04
  2. By: Michael P. Stone (University of Connecticut)
    Abstract: Attorney advertising routinely targets tort victims. In this paper, a theoretical model is developed which incorporates advertising intensity, litigation costs, and an endogenous number of lawsuits. Since advertising induces victims to bring suit, it increases the level of injurer care. However, litigation costs are incurred. At the optimum, the marginal benefit of deterrence equals the sum the marginal costs of litigation and advertising. It is shown that even though blanket prohibitions on attorney advertising are suboptimal, ethical regulations which increase the marginal cost of advertising may be justified. Nevertheless, despite the widespread use of legal services advertising, it is unclear whether law firms are currently advertising excessively or inefficiently low. Whether firms are advertising excessively from a social standpoint is a purely empirical question.
    Keywords: Tort, Liability, Advertising, Attorneys, Lawyer, Legal Services
    JEL: K13 L84
    Date: 2010–07
  3. By: Jakobsson, Niklas (Department of Economics, School of Business, Economics and Law, Göteborg University); Kotsadam, Andreas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The question of whether laws affect attitudes has inspired scholars across many disciplines, but empirical knowledge is sparse. Using longitudinal survey data from Norway and Sweden, collected before and after the implementation of a Norwegian law criminalizing the purchase of sexual services, we assess the short-run effects on attitudes using a difference-in-differences approach. In the general population, the law did not affect moral attitudes toward prostitution. However, in the Norwegian capital, where prostitution was more visible before the reform, the law made people more negative toward buying sex. This supports the claim that proximity and visibility are important factors for the internalization of legal norms.<p>
    Keywords: attitudes; norms; law; prostitution
    JEL: K14 K40
    Date: 2010–07–07
  4. By: Jakobsson, Niklas (Department of Economics, School of Business, Economics and Law, Göteborg University); Kotsadam, Andreas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Trafficking in humans for sexual exploitation is an economic activity driven by profit motives. Laws regarding commercial sex influence the profitability of trafficking. Using cross country data we show that trafficking of persons for commercial sexual exploitation is least prevalent in countries where prostitution is illegal, most prevalent in countries where prostitution is legalized, and in between in those countries where prostitution is legal but procuring illegal. Case studies of countries that have changed legal framework support the claims on the direction of causality as well as the causal mechanisms. The results suggest that criminalizing buying and/or selling sex may reduce the amount of trafficking to a country.<p>
    Keywords: law and economics; prostitution; sexual exploitation; sex slavery; trafficking
    JEL: F22 K14
    Date: 2010–07–07
  5. By: Coria, Jessica (Department of Economics, School of Business, Economics and Law, Göteborg University); Villegas-Palacio, Clara (Facultad de Minas. Universidad Nacional de Colombia &)
    Abstract: In practice, targeted monitoring seems to be a strategy frequently used by regulators. In this paper, we study the effects of targeted monitoring strategies on the adoption of a new abatement technology and, consequently, on the aggregate emissions level when firms are regulated with uniform taxes. The results suggest that a regulator aiming to stimulate technology adoption should decrease the adopters’ monitoring probability and/or increase the non-adopters’ monitoring probability. In contrast to previous literature, we find that, in some cases, a regulator whose objective is to minimize aggregate emissions should exert a stronger monitoring pressure on firms with higher abatement costs.<p>
    Keywords: technology adoption; environmental policy; imperfect compliance; targeted enforcement
    JEL: K31 K42 L51 Q55
    Date: 2010–07–07
  6. By: Antonio Nicita; Simone Sepe
    Abstract: Contrary to previous literature, we show that the assignment of authority decision matters in optimal contract design with bilateral specific self-investments. This is the case when we enlarge the set of the states of nature, to explicitly consider the event that a party's market option turns out to be binding ex-post. We show that, under this setting, simple contracts protected by specific performance remedies may generate hold-up and thus parties' incentives to under-invest. However, investment efficiency is enhanced when authority is assigned to the party with ex-post binding market option. Our results suggest a neglected rationale for vertical integration as a remedy against hold-up
    Keywords: incomplete contracts, outside options, mechanism design
    JEL: K12 L22 J41 C70
    Date: 2010–05
  7. By: Ojo, Marianne
    Abstract: Recent years have witnessed a change in focus from considerations of factors which could impede competition, for example over-regulation, to the need to strike a balance between over-regulation and insufficient regulation – in order to provide the right level of safety for consumers (such that they are protected from risky investments). A driving force behind the need for deregulation over the past two decades has been the objective and desire to foster competition. Re-regulation thereafter assumed centre stage in some jurisdictions in response to the need to manage cross sector services' risks more efficiently. Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. The importance attached to maintaining and promoting financial stability - as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However increased government and central bank intervention also simultaneously trigger the usual concerns – which include moral hazard and the danger of serving as long term substitutes for market discipline. An interesting observation derives from the relationship between State aid grants, competition, and the potential to induce higher risk taking levels. Whilst the need to promote and maintain financial stability is paramount, safeguards need to be implemented and enforced to ensure that measures geared towards the aim of sustaining system stability (measures such as lender of last resort arrangements and State rescues) do not unduly distort competition as well as induce higher risk taking levels. This paper will draw attention to safeguards which have been provided by the Commission where approval is considered for the grant of State aid to financial institutions whose problems are attributable to inefficiencies, poor asset liability management or risky strategies. Whether the distinction drawn by the Commission – with regards to the preferential grant of recapitalisation packages to fundamentally sound banks (which require less restructuring measures)is justified, will also be considered. How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is.
    Keywords: Competition; central banks; recapitalisation; stability; regulation; financial crises; fundamentally sound financial institutions
    JEL: K2 E58 G18
    Date: 2010–07–06

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