New Economics Papers
on Law and Economics
Issue of 2012‒07‒01
five papers chosen by
Jeong-Joon Lee, Towson University

  1. Combating Money Laundering and the Financing of Terrorism: A Survey By Stefan Haigner; Friedrich Schneider; Florian Wakolbinger
  2. In Dubio Pro Reo. Behavioral explanations of pro-defendant bias in procedures By Antonio Nicita; Matteo Rizzolli
  3. Warning, Learning and Compliance: Evidence from Micro-data on Driving Behavior By Marcello Basili; Filippo Belloc; Simona Benedettini; Antonio Nicita
  4. The Hold-up Problem Under Common Agency By Antonio Nicita; Simone Sepe
  5. Hold-up and Externality: the Firm as a Nexus of Incomplete Rights? By Antonio Nicita; Matteo Rizzolli

  1. By: Stefan Haigner; Friedrich Schneider; Florian Wakolbinger
    Abstract: Policy programs on anti-money laundering and combating the financing of terrorism (AML/CFT) have largely called for preventive measures like keeping record of financial transactions and reporting suspicious ones. In this survey study, we analyze the extent of global money laundering and terrorist financing and discuss the preventive policies and their evaluations. Moreover, we investigate whether more effective tax information exchange would bolster AML/CFT policies in that it reduced tax evasion, thus the volume of transnational financial flows (i.e. to and from offshore financial centres) and thus in turn cover given to money laundering and terrorist financing. We conclude that such a strategy can reduce financial flows, yet due to a "weakest link problem" even a few countries not participating can greatly undo what others have achieved.
    Keywords: money laundering, terrorist financing, tax information exchange
    JEL: K42 H26 H56
    Date: 2012
  2. By: Antonio Nicita; Matteo Rizzolli
    Abstract: The standard model of optimal deterrence predicts that the probability of wrongful conviction of the innocent is, at the margin, as detrimental to deterrence as the wrongful acquittal of guilty individuals. We extend the model in several directions: using expected utility as well as nonexpected utility to consider the role of risk aversion, non-linear probability weighting and loss aversion. We also consider how relevant emotions such as guilt, shame and indignation play out. Several of these factors support the intuition that wrongful convictions of the innocent do have a larger detrimental impact on deterrence and thus the policy implications are reconciled with the widely shared maxim in dubio pro reo. We then draw some theoretical implications such as a novel justification for the different standards of proof in criminal vs civil law as well as other policy implications.
    Keywords: wrongful convictions, Type I errors, wrongful acquittals, Type II errors, evidence, optimal under-deterrence, behavioral economics, risk aversion, loss aversion, prospect theory, prelec function
    JEL: K14 K41 K42
    Date: 2012–05
  3. By: Marcello Basili; Filippo Belloc; Simona Benedettini; Antonio Nicita
    Abstract: In many contexts, warning systems of law enforcement are used to let uninformed individuals learn what is illegal, while sanctions are applied only after a number of repeated violations. Surprisingly no em- pirical evidence is available so far, over the learning impact of warnings. This paper is a first attempt to empirically investigate the warning’s effect on individuals’ behavior employing a unique database on a traffic law enforcement system, which constitutes an extraordinary nat- ural laboratory to test whether experience warning induces learning. Specifically, we use six-year longitudinal data on about 50000 drivers under the Italian point-record system of traffic law. Our statistical re- sults show that warned drivers become more compliant. To the extent individuals learn through their repeated behavior, a warning system makes it possible to apply sanctions only to (presumably) informed violators.
    Keywords: warning, law enforcement, mixture models
    JEL: K42 C14
    Date: 2012–05
  4. By: Antonio Nicita; Simone Sepe
    Abstract: Many real world transactions occur in a common agency environment in which an agent interacts with several principals having competing interests. The hold-up literature, however, has so far neglected to investigate common agency transactions. In this paper, we consider the hold-up problem that arises in a context where there are a monopolistic seller and multiple buyers on the one side and all the parties on the other are required to make specific self-investments. Our contribution is twofold. First, we show that absent initial contracts (i.e., preliminary agreements) between the parties, total efficiency increases when the buyers act competitively using implicit contractual coordination, i.e., contractual menus. Second, we show that introducing initial simple contracts allows parties to reach the first best only under cooperative common agency. Absent this machinery, competition among the principals emerges as a more efficient governance structure for common agency in incomplete transactions.
    Keywords: incomplete contracts, common agency, mechanism design
    JEL: K12 L22 J41 C70
    Date: 2012–05
  5. By: Antonio Nicita; Matteo Rizzolli
    Abstract: The Coasean theory of the firm (Coase, 1937) has flourished with the theory of incomplete contracts. Transaction costs in the form of enforcement costs have been deemed to be the main determinants of the decision to ‘make’ versus ‘buy’. Surprisingly, this stream of literature has almost neglected that transaction costs may also generate incomplete property rights (Coase, 1960). As firm’s activities entail both contractual and property rights, these two domains interfere each other on the decision to carry out a transaction within the firm. When property rights are incomplete, potential externalities may increase the cost of using the price mechanism to procure the assets needed in a given transaction. The resulting 'Coasean firm' would not only centralize incomplete contracts under a unified governance system, but it will also aggregate incomplete property rights under a unified ownership structure.
    Keywords: incomplete property, Coase, Transaction Cost Economics, theory of the firm
    JEL: K12 L22 J41 C70
    Date: 2012–05

This issue is ©2012 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.