New Economics Papers
on Law and Economics
Issue of 2013‒09‒24
eighteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. The effect of third-party funding of plaintiffs on settlement By Andrew Daughety; Jennifer Reinganum
  2. The Impact of Frivolous Lawsuits on Deterrence: Do They Have Some Redeeming Value? By Michael P. Stone; Thomas J. Miceli
  3. Do 'Broken Windows' Matter? Identifying Dynamic Spillovers in Criminal Behavior By Gregorio Caetano; Vikram Maheshri
  4. Design standards and technology adoption: Welfare effects of increasing environmental fines when the number of firms is endogenous By Baumann, Florian; Friehe, Tim
  5. The Perverse Effects of Job-Security Provisions on Job Security in Italy: Results from a Regression Discontinuity Design By Hijzen, Alexander; Mondauto, Leopoldo; Scarpetta, Stefano
  6. Implications of fiscal constraints By Fernando Martin
  7. Legal principles of managing agricultural lands in Poland and their impact on changes in the agrarian structure By Suchon, Aneta Anna
  8. Jointly optimal taxes and enforcement policies in response to tax evasion By PESTIEAU, Pierre; POSSEN, Uri M.; LUTSKY, Steven M.
  9. Private Property Rights and Pollution in Emerging Market Economies By Yang, Zhenzeng
  10. Do Social Rights Affect Social Outcomes? By Christian Bjørnskov; Jacob Mchangama
  11. Do fixed patent terms distort innovation? Evidence from cancer clinical trials By Eric Budish; Benjamin N. Roin; Heidi Williams
  12. Carbon Taxes, Agricultural Competitiveness and Trade By Nicholas Rivers; Brandon Schaufele
  13. Dynamics of the Corruption Eradication in Indonesia By Situngkir, Hokky; Maulana, Ardian
  14. External factors affecting investment decisions of companies By Bialowolski, Piotr; Weziak-Bialowolska, Dorota
  15. Enlisting Employees in Improving Payroll-Tax Compliance: Evidence from Mexico By Kumler, Todd J.; Verhoogen, Eric; Frias, Judith A.
  16. Do the Laws of Tax Incidence Hold? Point of Collection and the Pass-through of State Diesel Taxes By Wojciech Kopczuk; Justin Marion; Erich Muehlegger; Joel Slemrod
  17. Migration and Tax Competition Within a Union By Razin, Assaf; Sadka, Efraim
  18. Modeling of Emission Allowance Markets: A Literature Review By Vincent Bertrand

  1. By: Andrew Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: In this paper we use a signaling model to analyze the effect of (endogenously-determined) third-party non-recourse loans to plaintiffs on settlement bargaining when a plaintiff has private information about the value of her suit. We show that an optimal loan (i.e., one that maximizes the joint expected payoff to the litigation funder and the plaintiff) induces full settlement. Furthermore, in contrast with the more standard (no-loan) settlement bargaining models, there is no revelation of information created by the bargaining process: all plaintiff types (where the plaintiff's type is her level of harm) make the same demand and, since no types go to trial, private information is not revealed. Implementation of the loan may entail a very high interest rate; we show that a high (enough) rate is necessary if one wants to obtain full settlement for all types of plaintiffs even when there is asymmetric information. We also find that plaintiffs' lawyers benefit from such financing, as it reduces their costs by eliminating the need to take the case to trial due to bargaining breakdown. We further show that regulation of such loans, in the form of caps on the interest charged, may result in settlement failure or elimination of the litigation-funding industry itself.
    Keywords: settlement bargaining, litigation funding, non-recourse loan, signaling
    JEL: K4 D8
    Date: 2013–02–13
  2. By: Michael P. Stone (Quinnipiac University); Thomas J. Miceli (University of Connecticut)
    Abstract: The literature on frivolous lawsuits has focused on litigation costs and the optimal settlement-trial decision of defendants, but has not examined how they affect the decisions of potential injurers. This paper asks whether there are circumstances under which frivolous suits might actually increase social welfare by inducing parties engaged in risk activities to limit the scale, and improve the safety, of those activities. The reason this is possible is that in a costly legal system, injurers will generally underinvest in safety and overengage in the activity. The fact that some uninjured plaintiffs succeed in obtaining settlements may therefore affect the care and activity choices of injurers in a socially valuable way. In light of these conclusions, the paper goes on to examine the desirability of various policies aimed at curbing frivolous litigation.
    Keywords: Frivolous lawsuits, care, activity level, deterrence
    JEL: K13 K41
    Date: 2013–09
  3. By: Gregorio Caetano (University of Rochester); Vikram Maheshri (University of Houston)
    Abstract: The “Broken Windows†theory of crime prescribes “zero-tolerance†law enforcement policies that disproportionately target light crimes with the understanding that this will lead to future reductions of more severe crimes. We provide evidence against the effectiveness of such policies using a novel database from Dallas. Our identification strategy explores detailed geographic and temporal variation to isolate the causal behavioral effect of prior crimes on future crimes and is robust to a variety of sources of potential endogeneity. We also estimate the effectiveness of alternative targeting policies to discuss the efficiency of “Broken Windows†inspired policies.
    Keywords: Crime, Social Interactions, Broken Windows
    JEL: K R
    Date: 2013–05–09
  4. By: Baumann, Florian; Friehe, Tim
    Abstract: This paper examines the consequences of an increase in the expected fine for non-compliance with an environmental design standard for an industry with Cournot competition and free entry. Our analysis is quite timely, given recent policy proposals to raise environmental fines. We describe the range in which changes in the environmental fine have no consequences, and detail the various other effects that emerge. It is established that an increase in the expected fine for non-compliance may have adverse welfare consequences, while it always serves the purpose of inducing a greater share of firms to adopt the prescribed technology. --
    Keywords: pollution,regulation,design standard,endogenous number of firms,environmental fines,SEC
    JEL: D62 Q55 Q58
    Date: 2013
  5. By: Hijzen, Alexander (OECD); Mondauto, Leopoldo (IMT Lucca); Scarpetta, Stefano (OECD)
    Abstract: This paper analyses the impact of employment protection (EP) on the composition of the workforce and worker turnover using a unique firm-level dataset for Italy. The impact of employment protection is analyzed by means of a regression discontinuity design (RDD) that exploits the variation in EP provisions across firms below and above a size threshold. Using our RDD approach, we show that EP increases worker reallocation, suggesting that EP tends to reduce rather to increase worker security on average. We further show that this can be entirely explained by the fact that firms facing more stringent EP make a greater use of workers on temporary contracts. Our preferred estimates suggest that the discontinuity in EP increases the incidence of temporary work by 2-2.5 percentage points around the threshold. Moreover, further analysis suggests that the effect of employment protection persists among larger firms well beyond the threshold and may account for about 20% of the overall incidence of temporary work. There is also evidence that EP reduces labour productivity and this effect is to an important extent due to the impact of EP on worker reallocation and the incidence of temporary work.
    Keywords: employment protection legislation, worker reallocation, temporary contracts, labour market duality
    JEL: J42 J63 J65
    Date: 2013–08
  6. By: Fernando Martin (Federal Reserve Bank of St. Louis)
    Abstract: Recent events in the U.S. and Europe have renewed interest in the desirability of imposing constraints on fiscal policy. In the U.S., the implementation of large and persistent deficits as a response to the financial crisis and subsequent recession motivated debates about debt ceilings and brought back proposals for balanced-budget-rules. In the Eurozone, the fiscal crisis driven by excessive debt has forced some governments to enact austerity programs, consisting both of tax increases and expenditure cuts. The objective of this paper is to evaluate the effects of putting constraints on the ability of politicians to run fiscal policy, with an emphasis on how monetary policy interacts with such restrictions. The institutional experiments conducted include balanced budget rules and cooperation between government agencies in setting policy.
    Date: 2013
  7. By: Suchon, Aneta Anna
    Abstract: The article assesses legal regulations regarding managing agricultural lands in Poland. The paper presents, first of all, the scope of activity of the Agricultural Property Agency, which is a significant institution on the property market. This institution started its activity on 1 January 1992 and its main task was to take over all state agricultural property and to manage the property in compliance with the regulations. Secondly, the article analyzes basic regulations concerning the sale and lease. They both give legal title to organize family as well as large farms. It also presents information about perpetual usufruct. Additionally, the article shows the EU instruments which have an essential impact on changing the agricultural structure, namely structural pensions and bonuses for young farmers.
    Keywords: agricultural lands, agrarian structure, sale, lease, EU funds, Agribusiness, Agricultural Finance, Land Economics/Use,
    Date: 2013
  8. By: PESTIEAU, Pierre; POSSEN, Uri M.; LUTSKY, Steven M.
  9. By: Yang, Zhenzeng
    Abstract: I use cross-country panel data to show that strengthening of private property rights protection lowers pollution emission intensity. The finding is robust to the inclusion of many controls and use of different independent variables. This paper provides preliminary empirical evidence for property rights theory of environmental goods, and suggests that completely specifying property rights is an important approach to response to environmental degradation.
    Keywords: Private Property Rights, Pollution, Emerging Market, CO2 Emission
    JEL: Q28 Q56
    Date: 2013–07–30
  10. By: Christian Bjørnskov (Department of Economics and Business, Aarhus University); Jacob Mchangama (Center for Political Studies, Copenhagen, Denmark)
    Abstract: While the United Nations and NGOs are pushing for global judicialization of economic, social and cultural rights (ESCRs), little is known of their consequences. We provide evidence of the effects of introducing three types of ESCRs into the constitution: the rights to education, health and social security. Employing a large panel covering annual data from 160 countries in the period 1960-2010, we find no robust evidence of positive effects of ESCRs. We do, however, document adverse medium-term effects on education and inflation.
    Keywords: Human rights, human development, constitutional political economy
    JEL: K19 H11 O11
    Date: 2013–09–10
  11. By: Eric Budish; Benjamin N. Roin; Heidi Williams
    Abstract: Patents award innovators a fixed period of market exclusivity, e.g., 20 years in the United States. Yet, since in many industries firms file patents at the time of discovery (“invention”) rather than first sale (“commercialization”), effective patent terms vary: inventions that commercialize at the time of invention receive a full patent term, whereas inventions that have a long time lag between invention and commercialization receive substantially reduced - or in extreme cases, zero - effective patent terms. We present a simple model formalizing how this variation may distort research and development (R&D). We then explore this distortion empirically in the context of cancer R&D, where clinical trials are shorter - and hence, effective patent terms longer - for drugs targeting late-stage cancer patients, relative to drugs targeting early-stage cancer patients or cancer prevention. Using a newly constructed data set on cancer clinical trial investments, we provide several sources of evidence consistent with fixed patent terms distorting cancer R&D. Back-of-the-envelope calculations suggest that the number of life-years at stake is large. We discuss three specific policy levers that could eliminate this distortion - patent design, targeted R&D subsidies, and surrogate (non-mortality) clinical trial endpoints - and provide empirical evidence that surrogate endpoints can be effective in practice.
    JEL: I10 O30 O34
    Date: 2013–09
  12. By: Nicholas Rivers (Graduate School for Public and International Affairs, University of Ottawa, Ottawa, ON); Brandon Schaufele (Department of Economics and Institute of the Environment, University of Ottawa, Ottawa ON)
    Abstract: This study evaluates the implications of an actual carbon tax on the international competitiveness of the agricultural sector. Applying uniformly to all fossil fuels combusted within its borders, the province of British Columbia unilaterally introduced a carbon tax on July 1, 2008. Using commodity-specific trade flows and exploiting cross-provincial and inter-temporal variation, we find little evidence that the implementation of the carbon tax is associated with any meaningful effects on agricultural exports despite the sector being singled out as “at risk” by the provincial government. Allowing for heterogeneous responses by commodity, some statistically insignificant negative effects are shown for specific exports. Discussion of potential policy remedies to address the potential impacts of the tax on firm profitability and international competitiveness is also included.
    Keywords: Agricultural trade; British Columbia; carbon tax; competitiveness; unilateral climate policy.
    JEL: H23 Q17 Q5
    Date: 2013
  13. By: Situngkir, Hokky; Maulana, Ardian
    Abstract: The paper discusses an important aspect of the complexity of corruption eradication in Indonesia. Corruption eradication is practically not merely about law enforcement, but also related to social, economic, and political aspects of the nation. By extracting the data from national news media and implement models describing the sentiment relations among political actors, the connection between balance of the sentiment among political elites and the critical levels of the investigation and law enforcement is apparently demonstrated. The focus group discussions among experts, practitioners, and social activists confirm the model.
    Keywords: corruption eradication, Indonesia, KPK RI, political actor, sentiment relations
    JEL: C54 C60 C83 H0 K42 O10 Y1 Z13
    Date: 2013–09–12
  14. By: Bialowolski, Piotr; Weziak-Bialowolska, Dorota
    Abstract: In this paper we attempt to investigate the importance of certain external factors on the investment decision among Polish companies. With the use of data from the tailored made Survey on Receivables we examine factors influencing investment decisions of companies in Poland, assess the relation between the branch and company size and importance of the factors and finally we determine the relative influence of these factors on the actual investment reductions. The results showed that first, although the problem of payment delays is the most important single reason determining the investment decisions of Polish companies, its importance decreases when analyzed simultaneously with other reasons. Second, there are two driving forces determining the investment decisions of Polish companies, namely macroeconomic factors and law-related factors with the relative importance of the former lower than the latter. Third, there is a positive association between the importance attached to factors influencing investment decisions associated with either macroeconomic or legal environment and the investment reductions, meaning that companies facing higher investment reductions are also more prone to notice and value the factors influencing these decisions. --
    Keywords: investment decisions,company,survey,structural equation modelling
    JEL: D92 G11 G31
    Date: 2013
  15. By: Kumler, Todd J. (Columbia University); Verhoogen, Eric (Columbia University); Frias, Judith A. (Mexican Institute of Social Security (IMSS))
    Abstract: Non-compliance of firms with tax regulations is a major constraint on state capacity in developing countries. We focus on an arguably under-appreciated dimension of non-compliance: under-reporting of wages by formal firms to evade payroll taxes. We develop a simple partial-equilibrium model of endogenous compliance by heterogeneous firms to guide the empirical investigation. We then compare two independent sources of individual-level wage information from Mexico – firms' wage reports to the Mexican social security agency and workers' responses to a household labor-force survey – to investigate the extent of wage under-reporting and how it responded to an important change in the social security system. We document that under-reporting by formal firms is extensive, and that compliance is better in larger firms. Using a difference-in-differences strategy based on the 1997 Mexican pension reform, which effectively tied pension benefits more closely to reported wages for younger workers than for older workers, we show that the reform led to a relative decline in under-reporting for younger workers. Within metro area/sector/firm size cells, the decline in under-reporting was greater in cells initially employing a younger workforce on average. The empirical patterns are consistent with our theoretical model and suggest that giving employees incentives and information to improve the accuracy of employer reports can be an effective way to improve payroll-tax compliance.
    Keywords: tax compliance, state capacity, Mexico, heterogeneous firms, pension reform
    JEL: O17 H26 H55
    Date: 2013–08
  16. By: Wojciech Kopczuk; Justin Marion; Erich Muehlegger; Joel Slemrod
    Abstract: The canonical theory of taxation holds that the incidence of a tax is independent of the side of the market which is responsible for remitting the tax to the government. However, this prediction does not survive in certain circumstances, for example when the ability to evade taxes differs across economic agents. In this paper, we estimate in the context of state diesel fuel taxes how the incidence of a quantity tax depends on the point of tax collection, where the level of the supply chain responsible for remitting the tax varies across states and over time. Our results indicate that moving the point of tax collection from the retail station to higher in the supply chain substantially raises the pass-through of diesel taxes to the retail price. Furthermore, tax revenues respond positively to collecting taxes from the distributor or prime supplier rather than from the retailer, suggesting that evasion is the likely explanation for the incidence result.
    JEL: H22 H26 H71 Q48
    Date: 2013–09
  17. By: Razin, Assaf; Sadka, Efraim
    Abstract: We develop a stylized EU-type model of a union consisting of rich, capital-abundant and productive, countries, and poor,capital-scarce and low productivity, countries, in order to explain key features of tax policies and inter- and intra-migration flows. Our purpose is to explain the differences in the tax rates and the generosity of the welfare state, on the one hand, and migration flows, on the other hand, between rich and poor countries, within the union, and migration flows from the rest of the world. We identify a fiscal externality which makes the tax competition and the tax coordination regime to be different one from the other.
    Keywords: capital mobility; fiscal leakage; labor mobility
    JEL: F2 H2
    Date: 2013–08
  18. By: Vincent Bertrand
    Abstract: This paper reviews the development of emission trading models from the earliest to recent contributions. First, we introduce the economics of pollution control and the origins of emission trading. We give a brief description of policy instruments for the control of pollution, and explain why economic instruments (Pigouvian tax and emission trading) produce better results than “command-and-control” approaches. Second, we review several papers on modeling of emission trading systems, with a focus on dynamic models in case of perfect competition. We begin with the earliest static models, investigating a number of factor that can affect the effectiveness of emission trading (e.g. market power, transaction-costs, political pressures, etc). Next, we present dynamic models of permit markets, analysing questions such as banking/borrowing, relationship between spot and future markets, exogenous factors influencing the marginal abatement cost, etc. Finally, we end the paper with recent studies that model the main features of the European Emission Trading Scheme (EU ETS) in a dynamic framework with stochastic emissions.
    Keywords: Emission Trading, EU ETS, Partial Equilibrium Modeling
    Date: 2013

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