New Economics Papers
on Law and Economics
Issue of 2014‒01‒24
sixteen 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. Modern Maritime Piracy By Paul Hallwood; Thomas J. Miceli
  3. Standardized Enforcement: Access to Justice vs. Contractual Innovation By Nicola Gennaioli; Enrico Perotti; Giacomo Ponzetto
  4. A primer on damages of cartel suppliers: Determinants, standing US vs. EU and econometric estimation By Bueren, Eckart; Smuda, Florian
  5. The Effect of Inspector Group Size and Familiarity on Enforcement and Deterrence By Muehlenbachs, Lucija; Staubli, Stefan; Cohen, Mark A.
  6. International Human Trafficking: Measuring Clandestinity by the Structural Equation Approach By Rudolph, Alexandra; Schneider, Friedrich
  7. Do leniency policies facilitate collusion? Experimental evidence By Clemens, Georg; Rau, Holger A.
  8. Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for Innovation Competition in Merger Reviews? By Benjamin Kern
  9. Intellectual property box regimes: Effective tax rates and tax policy considerations By Evers, Lisa; Miller, Helen; Spengel, Christoph
  10. Tax and the city: A theory of local tax competition and evidence for Germany By Janeba, Eckhard; Osterloh, Steffen
  11. The Legal Framework of Vietnam’s Water Sector: Update 2013 By Nguyen, Thi Phuong Loan
  12. More Is Better! What Can Firm-Specific Estimates of the Impact of Institutional Quality on Performance Tell Us? By Bhaumik, Sumon K.; Dimova, Ralitza; Kumbhakar, Subal C.; Sun, Kai
  13. Challenges to Regulatory Decentralization: Lessons from State Health Technology Regulation By Jill R. Horwitz; Daniel Polsky
  14. Upstream Merger in a Successive Oligopoly: Who Pays the Price? By Nilsen, Øivind Anti; Sørgard, Lars; Ulsaker, Simen A.
  15. A tale of two commitments: equilibrium default and temptation By Nakajima, Makoto
  16. Powerful Independent Directors By Kathy Fogel; Liping Ma; Randall Morck

  1. By: Andrew Daughety (Department of Economics and Law School, Vanderbilt University); Jennifer Reinganum (Department of Economics and Law School, Vanderbilt University)
    Abstract: A significant policy concern about the emerging plaintiff legal funding industry is that loans will undermine settlement. When the plaintiff has private information about damages, we find that the optimal (plaintiff-funder) loan induces all plaintiff types to make the same demand, resulting in full settlement; implementation may entail a very high repayment amount. Plaintiffs' attorneys with contingent-fee compensation benefit from such financing, as it eliminates trial costs. When the defendant has private information about his likelihood of being found liable, we find that the likelihood of settlement is unaffected. In both settings the defendant's incentive for care-taking is unaffected.
    Keywords: Settlement bargaining, litigation funding, non-recourse loan, signaling
    JEL: K4 C7
    Date: 2014–01–14
  2. By: Paul Hallwood (University of Connecticut); Thomas J. Miceli
    Abstract: This essay provides and economic analysis of the problem of modern-day maritime piracy. The essay first reviews the current scope of the problem, and then develops an economic of model of piracy that emphasizes the strategic interaction between the efforts of pirates to locate potential targets, and shippers to avoid contact. The model provides the basis for deriving an optimal enforcement policy, which is then compared to actual enforcement efforts, which, for a variety of reasons, have largely been ineffectual. The essay concludes by reviewing the law of maritime piracy and by offering some proposals for improving enforcement.
    Keywords: International law, law enforcement, piracy
    JEL: K14 K33
    Date: 2014–01
  3. By: Nicola Gennaioli; Enrico Perotti; Giacomo Ponzetto
    Abstract: We model the effect of contract standardization on the development of markets and the law. In a setting in which biased judges can distort contract enforcement, we find that the introduction of a standard contract reduces enforcement distortions relative to reliance on precedents, exerting two effects: i) it statically expands the volume of trade, but ii) it crowds out the use of open-ended contracts, hindering legal evolution. We shed light on the large-scale commercial codification undertaken in the nineteenth century in many countries (even common-law ones) during a period of booming commerce and long-distance trade.
    Keywords: contracting, standardization, inequality, legal evolution
    JEL: K12 K41 G3
    Date: 2013–12
  4. By: Bueren, Eckart; Smuda, Florian
    Abstract: While private actions for damages by customers against price-cartels receive much attention, the treatment of other groups affected by such conspiracies is largely unresolved. This article narrows the research gap with respect to suppliers to a downstream price cartel. First, we show that such suppliers incur losses driven by a direct quantity, a price and a cost effect. We then analyze whether suppliers are entitled to claim these losses as damages in the two leading competition law regimes. We find that, while the majority view in the US denies standing, the emerging position in the EU and important member states is to grant supplier standing. We argue that this can indeed be justified in view of the different institutional context and the goals assigned to the right to damages in the EU. We finally present an econometric approach based on residual demand estimation that allows to quantify all determinants of cartel suppliers' damages, thereby showing that supplier damage claims are a viable option in practice that can contribute to full compensation and greater cartel deterrence. --
    Keywords: competition policy,cartels,suppliers,damage quantification,standing,private enforcement,comparative law
    JEL: L41 K21
    Date: 2013
  5. By: Muehlenbachs, Lucija (Resources for the Future, Washington DC); Staubli, Stefan (University of Calgary); Cohen, Mark A. (Vanderbilt University)
    Abstract: The paper provides new insights into the productivity of teams and the relationship between the inspector and the inspected party. Exploiting exogenous variation in the number of inspectors that are sent to offshore oil and gas platforms in the Gulf of Mexico, we find that adding an inspector does not simply result in more observed violations – it increases the severity of sanctions imposed on those violations that are detected. We also find that inspectors who are more familiar with the offender impose less severe sanctions. We only find weak evidence that increasing sanction severity deters incidents such as oil spills.
    Keywords: inspections, enforcement, deterrence, offshore oil
    JEL: Q58 K42
    Date: 2013–12
  6. By: Rudolph, Alexandra (Heidelberg University); Schneider, Friedrich (University of Linz)
    Abstract: Worldwide human trafficking (HT) is the third most often registered international criminal activity, ranked only after drug and weapon trafficking. The aim of the paper is to measure the extent of HT inflows to destination countries. It proposes the application of the Multiple Indicators Multiple Causes (MIMIC) structural equation model in order to include potential causes and indicators in one model and generate an index of the intensity of HT in destination countries. Thus, we account for the unobservable nature of the crime as well as for visible aspects that both shape the extent of it. By including both dimensions of the trafficking process the model is applied over a period of ten years. The resulting measure orders 142 countries between 2000 and 2010 according to their potential of being a destination country based on characteristics of the trafficking process. The results are that OECD countries are the most likely destination countries while developing countries are less likely.
    Keywords: human trafficking, MIMIC models, latent variable, structural equation models
    JEL: C39 F22 K42 K49
    Date: 2013–12
  7. By: Clemens, Georg; Rau, Holger A.
    Abstract: This paper experimentally analyzes the cartel coordination challenge induced by the discrimination of cartel ringleaders in leniency policies. Ringleaders often take a leading role in the coordination and formation of a cartel. A leniency policy which grants amnesty to all whistleblowers except for ringleaders may therefore reduce the incentive to become a ringleader and may disrupt cartel formation. We analyze discriminatory and non-discriminatory leniency policies in a multi-stage cartel formation experiment where multiple ringleaders may emerge. Although theory predicts that cartels will always be reported, whistleblowing rarely occurs. Paradoxically the discriminatory leniency policy induces more firms to become ringleaders, which ultimately facilitates coordination in the cartel. --
    Keywords: Cartels,Leniency Programs,Ringleader Discrimination,Experiment
    JEL: C92 K21 L41
    Date: 2014
  8. By: Benjamin Kern (University of Marburg)
    Abstract: The relevant competitors in regard to innovation might, but not necessarily do, correspond to the identified competitors on actual product markets. Hence, the conventional analysis of product markets, in order to assess the potential anticompetitive effects of mergers, is insufficient to capture innovation competition in its full extent. As a consequence, the aim of this article is to introduce and compare the existing alternative approaches which can, in principle, be used for the assessment of anticompetitive innovation effects in merger review. By focusing on the applied U.S. Antitrust, it turns out that none of the existing approaches seems to be appropriate to fully account for innovation competition. However, the ‘Innovation Market Analysis’, the first framework especially designed for the assessment of innovation aspects, might still serve as a good starting point for the development of a revised assessment framework.
    JEL: B52 K21 L12 L41 O31
    Date: 2014
  9. By: Evers, Lisa; Miller, Helen; Spengel, Christoph
    Abstract: 11 European countries now operate IP Box regimes that provide substantially reduced rates of corporate tax for income derived from important forms of intellectual property. We incorporate these policies into forward-looking measures of the cost of capital, effective marginal tax rates and effective average tax rates. We show that the treatment of expenses relating to IP income is particularly important in determining the effective tax burden. A key finding is that regimes that allow expenses to be deducted at the ordinary corporate income tax rate, as opposed to the IP Box tax rate, may result in negative effective average tax rates and can thereby provide a subsidy to unprofitable projects. We assess the specific design features of different regimes against the possible policy aim of improving the incentives to undertake R&D investment in a country. While some countries have tried to tie the policy to real activities, others have designed a policy targeted at the income streams associated with intellectual property. A key concern is the role that IP Boxes may play in increased, and possibly harmful, tax competition between European countries. --
    Keywords: corporate taxation,effective tax rate,tax incentive,patent box,innovation box,preferential tax rate
    JEL: H25 H32 H87 K34 O38
    Date: 2013
  10. By: Janeba, Eckhard; Osterloh, Steffen
    Abstract: Despite the well-developed empirical literature on local tax competition, little is known about the actual spatial structure of inter-municipal competition. Assuming that competition takes place only among neighbours (as in the empirical literature) is at odds with the theoretical approaches where all jurisdictions compete simultaneously. In this paper we use a survey conducted among mayors in the German state of Baden-Württemberg to show that the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction. Based on these findings, we develop a sequential tax competition model in which urban centres compete with other urban centres and rural jurisdictions in their own neighbourhood. This model predicts that larger jurisdictions do not necessarily rely more on capital taxes; in case they face strong competition with more distant competitors, larger cities even have lower capital taxes. In addition, we discuss how the model compares to a standard simultaneous approach and show that results from our sequential model are in line with trends in local taxation in Baden-Württemberg. --
    Keywords: local tax competition,survey,intensity of competition,asymmetric tax competition
    JEL: H71 H73 H77
    Date: 2013
  11. By: Nguyen, Thi Phuong Loan
    Abstract: In order to deal with problems related to both water quality and quantity as well as to strengthen the sustainable and integrative management of the nation’s water resources, the Vietnamese Government has adopted a wide spectrum of laws and regulations. In recent years, more than 300 water related regulations on the guidance and implementation of the Law on Water Resources have been issued and often amended to meet the requirements of the country’s development and its increasing international integration. In spite of this, the current legal framework for water resources management in Vietnam remains ineffective and does not correspond with the reality on the ground. Furthermore, law enforcement is deficient and often national regulations are ignored by local authorities, who priorities rapid growth of their communities over sustainability. Under these circumstances, the legal framework cannot properly guide sustainable use of water resources in order to achieve a degree of environmentally sustainable and, in particular, to protect the livelihoods of marginalized groups in society, such as landless fishermen, small-holders or poor people in periurban areas. Despite the gaps in this legal framework, water-related policies and programs in Vietnam consistently refer back to it while, at the same time, policy advisors typically call for reform. Understanding the legal framework is therefore important for both researchers and practitioners. In this view, a previous study was carried out by the author, entitled ‘Legal Framework of the Water Sector in Vietnam’ (Nguyen 2010), which aimed at presenting the key dimensions and the structure of that framework. Both the Vietnamese and the English version of the book were widely disseminated. This update became necessary because the government of Vietnam recently issued a new law on water resources as well as supplementary legislation. So far, no official English version of any of these new documents exists. Therefore, a detailed presentation of the contents of the laws is particularly timely. In addition to presenting the laws, this paper aims at shedding light on some of the critical aspects of the current legislation and illustrates how the law making process proceeded.
    Keywords: Environmental impact assessment (EIA), regulatory impact assessment (RIA), integrated water resource management(IWRM), law on water resources, law making process, Mekong Delta,Vietnam, water quality management, water resources management
    JEL: K23 K4 L5 L52 Q53 Q54 Q56 Q58
    Date: 2013–08
  12. By: Bhaumik, Sumon K. (Aston University); Dimova, Ralitza (University of Manchester); Kumbhakar, Subal C. (Binghamton University, New York); Sun, Kai (Aston University)
    Abstract: We introduce a novel approach to modeling the impact of institutional quality on firm performance. Our methodology enables us to estimate the marginal effect of institutional quality on TFP, factor inputs and output of each firm, which gives us within-country distributions of these effects and hence a better picture of the winners and losers associated with a particular level of institutional quality. We are also able to model marginal impact of institutional quality on both TFP and the efficiency of use of factor inputs, and hence on output. This is a departure from stylized approaches that focus on the impact on TFP alone, and our approach therefore informs policy discussions about the impact of institutional quality (and their change) on shares of factor inputs in the output. We use cross-country firm-level data for the textiles and garments sector to demonstrate the advantages of this modeling approach in analyzing the impact of institutional quality.
    Keywords: institutional quality, firm performance, marginal effect, textiles industry
    JEL: C14 D24 K31 O43
    Date: 2014–01
  13. By: Jill R. Horwitz; Daniel Polsky
    Abstract: Policymakers often prefer decentralized regulation to central planning because decentralization allows them to better reflect the views of local residents, encourage experimentation, and evaluate various regulatory approaches. These advantages can be undermined, however, when the regulations of one government are affected by those of another. To examine the implications of such externalities, we consider the case of state certificate of need laws (CON), which require providers within the state to obtain licenses before adopting various types of health care technology. In particular, we analyze the cross-border effects of these laws on the number and location of magnetic resonance imaging providers. We find a large effect on the location of providers near borders between unregulated and regulated states. These results provide examples of some of the limitations of using states as policy laboratories as well as the ability of states to use state laws to reflect their local preferences. The results may also help explain conflicting studies on whether and why CON regulation may have failed to control costs and quantity.
    JEL: H70 I11 I18 K32 L1 L52
    Date: 2014–01
  14. By: Nilsen, Øivind Anti (Dept. of Economics, Norwegian School of Economics and Business Administration); Sørgard, Lars (Dept. of Economics, Norwegian School of Economics and Business Administration); Ulsaker, Simen A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This study develops and uses a successive oligopoly model, with an unobservable non-linear tariff between upstream and downstream firms, to analyze the possible anti-competitive effects of an upstream merger. We nd that an upstream merger may lead to higher average prices paid by downstream firms, but that there is no change in the prices paid by consumers. The model is tested empirically on data for an upstream merger in the Norwegian food sector (specifically, the market for eggs). Consistent with the theoretical predictions of the model, we find that the merger had no effect on consumer prices, but led to higher average prices from the downstream to the upstream firm.
    Keywords: Upstream merger; non-linear prices; Vertical con- tracts.
    JEL: K21 L41
    Date: 2013–12–13
  15. By: Nakajima, Makoto (Federal Reserve Bank of Philadelphia)
    Abstract: I construct the life-cycle model with equilibrium default and preferences featuring temptation and self-control. The model provides quantitatively similar answers to positive questions such as the causes of the observed rise in debt and bankruptcies and macroeconomic implications of the 2005 bankruptcy reform, as the standard model without temptation. However, the temptation model provides contrasting welfare implications, because of overborrowing when the borrowing constraint is relaxed. Specifically, the 2005 bankruptcy reform has an overall negative welfare effect, according to the temptation model, while the effect is positive in the no-temptation model. As for the optimal default punishment, welfare of the agents without temptation is maximized when defaulting results in severe punishment, which provides a strong commitment to repaying and thus a lower default premium. On the other hand, welfare of agents with temptation is maximized when weak punishment leads to a tight borrowing constraint, which provides a commitment against overborrowing.
    Keywords: Consumer bankruptcy; Debt; Default; borrowing constraint; Temptation and self-control; Hyperbolic-discounting; Heterogeneous agents; Incomplete markets
    JEL: D91 E21 E44 G18 K35
    Date: 2013–12–11
  16. By: Kathy Fogel; Liping Ma; Randall Morck
    Abstract: Shareholder valuations are economically and statistically positively correlated with more powerful independent directors, their power gauged by social network power centrality measures. Sudden deaths of powerful independent directors significantly reduce shareholder value, consistent with independent director power “causing” higher shareholder value. Further empirical tests associate more powerful independent directors with fewer value-destroying M&A bids, more high-powered CEO compensation and accountability for poor performance, and less earnings management. We posit that more powerful independent directors can better detect and counter managerial missteps because of their better access to information, their greater credibility in challenging errant top managers, or both.
    JEL: D85 G02 G3 G34 G38 K22 L2 Z13
    Date: 2014–01

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