New Economics Papers
on Law and Economics
Issue of 2014‒03‒08
nine papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Endogenous Enforcement Institutions By Gani Aldashev; Giorgio Zanarone
  2. Law after Lehmans By Jo Braithwaite
  3. Mergers and the Incentives to Undertake Product Innovation Oriented R&D: First Steps Towards an Assessment Approach By Benjamin Rene Kern; Juan Manuel Mantilla Contreras
  4. The costs of separation: friction between company and insolvency law in the single market By Carsten Gerner-Beuerle; Edmund-Philipp Schuster
  5. Intermediated securities and legal certainty By Eva Micheler
  6. From the Substance to the Shadow: The Court Embedded into Japanese Labor Markets By NAKABAYASHI, Masaki
  7. Determinants of corporate governance codes By Carsten Gerner-Beuerle
  8. The Effect of Stolen Goods Markets on Crime: Evidence from a Quasi - Natural Experiment By D'Este, Rocco
  9. Bankruptcy Remoteness and Incentive-compatible Securitization By G. Chiesa

  1. By: Gani Aldashev (Center for Research in the Economics of Development, University of Namur and ECARES, ULB); Giorgio Zanarone (Colegio Universitario de Estudios Financieros (CUNEF))
    Abstract: We model the State as a self-enforcing agreement over the use of force. A principal contracts with an agent, and a powerful ruler enforces their contracts through a mix of monetary fines and coercion. If the ruler fails to enforce, or if he uses his power to expropriate, all parties revert to low production forever after. Our model has two important implications. First, a better coercion technology moves the optimal system from private ordering, where contracts are enforced by the threat of termination, to the State, where they are enforced by the threat of coercion. This is consistent with the historical correlation between improvements in coercion and the transition from the Law Merchant enforcement system to the State. Second, contract enforcement and non-expropriation are complementary inputs in the State, in the sense that improvements in the enforcement technology increase the agents effort only if the ruler has limited expropriation power, so that the rulers incentive constraint on contractual enforcement is binding. This result relates to the Acemoglu and Johnson (2005) finding that constraints on rulers have affected the development of nations more than improvements in contractual enforcement. Using their data we find that, consistent with our model, contractual enforcement does affect development, but only when the rulers expropriation power is sufficiently constrained.
    Keywords: Enforcement, Punishment, Coercive power, Relational contracts, State
    JEL: D23 K42 P37
    Date: 2014–01
  2. By: Jo Braithwaite
    Abstract: The September 2008 collapse of the Lehman Brothers group marked the nadir of the global financial crisis. While the regulatory aftermath has been extensively debated, the effects of the case law that arose from the insolvency have not. This paper explains the need to redress the balance. It starts by considering the quantity and qualities of the Lehmans case law, examining why the 30 plus decisions handed down by the English courts enjoy an unusually high precedent-setting potential. The paper proceeds by analysing the precedential effects of these decisions, and it reports on a recent workshop held at the London School of Economics that met to consider this question. Subject to the event’s terms of engagement, the paper draws out several themes from the discussion, including the impact of the Lehmans cases on the principles of contractual interpretation, the law of trusts and insolvency law. By way of conclusion, it is submitted that the impact of Lehmans case law reaches far beyond that particular insolvency, to worldwide users of standard form documents, the global financial markets and the common law itself. Seen in this light, the Lehmans case law is a significant, but under-appreciated, side-effect of the global financial crisis.
    JEL: N0 L81
    Date: 2014–02
  3. By: Benjamin Rene Kern (University of Marburg); Juan Manuel Mantilla Contreras
    Abstract: The firms that compete with one another in terms of innovation do not necessarily coincide with the relevant competitors on pre-innovation product markets. As a consequence, the findings about the ambiguous interrelation between (product) market concentration and innovation cannot be transferred one-to-one to the interrelationship between innovation competition and innovation. By identifying and classifying the most relevant effects, which are decisive for the impact of mergers on the incentives to invest in product innovation oriented R&D, we will demonstrate that the interrelation between innovation competition and innovation is not always as unclear as it seems. Hence, by analyzing the model-theoretic industrial organization literature, this article aims to contribute to the discussion about the development of a decision theoretic assessment framework for analyzing the impact of mergers on innovation and is therefore also in line with the idea of a rule-based competition policy which is, from a law and economics perspective, ought to reduce error costs, give legal guidance and reduce legal uncertainty.
    JEL: K21 L12 L41 O31
    Date: 2014
  4. By: Carsten Gerner-Beuerle; Edmund-Philipp Schuster
    Abstract: Corporate mobility and choice of law within the EU has dominated much of the academic writing in European company law over the last decades. What has not yet received much attention is the way in which national company law interacts with and depends on features of the national legal system outside of company law. In this article we explore this interaction and its relevance for coherent national regulatory systems. Using the regulatory framework for companies in the ‘vicinity of insolvency’ as an example, we show how choice of company law can create both regulatory gaps and multiplication of legal requirements, as private international law rules are applied inconsistently across Europe. More importantly, however, we show that even consistent application of conflicts rules would fail to resolve these problems due to cross-doctrinal interdependence within any national legal system. We conclude that this is a design flaw in the way EU law deals with the increasingly international reach of corporations, and discuss possible paths for resolving or mitigating this issue.
    JEL: L81 F3 G3
    Date: 2014–02
  5. By: Eva Micheler
    Abstract: This contribution shows that holding securities through chains of intermediaries compromises the ability of investors to exercise their rights. This problem is not remedied by Geneva Securities Convention (‘the Convention’ or ‘GSC’). It will be argued in the paper that research should be carried out to determine if a mechanism can be created that enables ultimate investors to hold securities directly. Further work on creating a harmonized set of rules at a functional level will not improve legal certainty, reduce systemic risk or enhance market efficiency. The problems associated with the current framework are a function of the process of intermediation itself. Legal and systemic risk and market efficiency are adversely affected by the number of intermediaries operating in this context. Law cannot help here. Structural reform can. It is worth investigating if a framework can be created that allows for securities to be held directly by ultimate investors.
    JEL: L81 F3 G3
    Date: 2014–02
  6. By: NAKABAYASHI, Masaki (Institute of Social Science, The University of Tokyo)
    Abstract: If a perfected claim cannot be placed on workers, investment in workers by employers could become less-than optimal. Thus, the protection of an employer's investment, balanced against mobility of the labor market for better employer-employee matches, is desired. We explore how Japanese state courts in their early period first directly protected the interests of employers, curbing mobility, and then indirectly governed trades between employers as a shadow off-the-equilibrium path, enabling labor market mobility with protection of an original employer's claim, in the labor market of the silk-reeling industry that led Japan's industrialization.
    Keywords: Employment contract; poaching; bystander's infringement on claim; shadow of the law; Japan
    JEL: K12 L14 J42
    Date: 2014–02–24
  7. By: Carsten Gerner-Beuerle
    Abstract: Corporate governance codes are an increasingly prominent feature of the regulatory landscape in many countries, yet remarkably little is known about the determinants of corporate governance reform. Potential determinants include: (1) the diffusion of an international benchmark model of good governance; (2) a country’s legal system; (3) the desire to attract foreign investors; and (4) the influence of interest groups. I construct a proxy for the investor-friendliness of 52 corporate governance codes of different jurisdictions and collect data on the code issuers. I find strong evidence that the drafters of codes emulate international benchmark models and that jurisdictions belonging to different legal traditions use different regulatory strategies, some evidence that portfolio equity inflows are associated with the investor-friendliness of codes, and no evidence that interest groups succeed in affecting rules. The article suggests a method for the modeling of legal evolution, convergence, and the political economy of corporate governance codes.
    Keywords: Corporate governance codes; board structure; empirical legal research; interest group politics; convergence.
    JEL: L81
    Date: 2014–02
  8. By: D'Este, Rocco (Department of Economics, University of Warwick)
    Abstract: This paper analyses the causal effect of the availability of stolen goods markets on theft crimes. Motivated by the richness of anecdotal evidence, we study this overlooked determinant of crime’s production function through the lens of pawnshops, a widespread business that offers secured loans to people, with items of personal property used as collateral. The endogeneity of pawnshops to crime is addressed in multiple ways. First, we strengthen the hypothesis that pawnshops deal with stolen goods by exploiting the properties of a panel of 2176 US counties from 1997 to 2010. Then, we detect causality exploiting the exogenous rise in the price of gold in a quasi - natural experiment fashion. Specifically, the identification strategy relies on the exogeneity of the interaction between the price of gold, constantly demanded by pawnbrokers in the form of jewels that are melted down to be transformed in a bar of precious metal, and the initial concentration of pawnshops to the county. Conservative estimates show that a one standard deviation increase in gold price generates a 0.05 standard deviation increase in the e.ect of pawnshops on burglaries and robberies. The mechanism behind the causal effect is corroborated by numerous falsification tests on other crimes that disprove the possibility that pawnshops might cause crime through channels other than the demand for stolen goods. Key words: JEL classification:
    Date: 2014
  9. By: G. Chiesa
    Abstract: Securitization performs two functions. One refers to the risk allocation between the bank and outside investors; the other consists of creating transferable/liquid securities. A key ingredient of liquid/claimtransferability is bankruptcy remoteness - the insolvency of the sponsor (the loan originator) has no impact on the securities. We explore the implications of bankruptcy remoteness on risk allocation and regulatory/policy issues. Under traditional banking, when debt/deposits coexist with securitization, bankruptcy remoteness amounts to: i) a seniority structure when debt/deposits (the claim that insist on the bank as a whole) have the lowest priority; ii) the bank finds it optimal to grant securities maximum protection - securitization without risk transfer. This constrains incentive-compatible lending below the social optimum, whenever at an optimal allocation not all risk bears on the bank. Policies that implement the social optimum are derived.
    JEL: G21 G28 K22 D86
    Date: 2014–02

This issue is ©2014 by Eve-Angeline Lambert. 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.
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