New Economics Papers
on Law and Economics
Issue of 2014‒03‒15
eleven papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Trial and Settlement: A Study of High-Low Agreements By J.J. Prescott; Kathryn E. Spier; Albert Yoon
  2. Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers By Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
  3. Using Bankruptcy to Reduce Foreclosures: Does Strip-down of Mortgages Affect the Supply of Mortgage Credit? By Wenli Li; Ishani Tewari; Michelle J. White
  4. Tax Amnesties By Marchese, Carla
  5. Economic growth and crime against small and medium sized enterprises in developing economies By Islam, Asif
  6. Home Country Bias in the Legal System: Empirical Evidence from the Intellectual Property Rights Protection in Canada By Joseph Mai; Andrey Stoyanov
  7. Is crime in Turkey economically rational? By Lauridsen, Jørgen T.; Zeren, Fatma; Ari, Ayse
  9. Are Justices of the US Supreme Court Islands Unto Themselves? Examining external influences on US Supreme Court rulings in securities cases By J.W. Fedderke and M. Mentoruzzo
  10. Corporate Bankruptcies in Czech Republic, Slovakia, Croatia and Serbia By Janda, Karel; Rakicova, Anna
  11. Uncertain Efficiency Gains and Merger Policy By Mariana Cunha; Paula Sarmento; Hélder Vasconcelos

  1. By: J.J. Prescott; Kathryn E. Spier; Albert Yoon
    Abstract: This paper presents the first systematic theoretical and empirical study of high-low agreements in civil litigation. A high-low agreement is a private contract that, if signed by litigants before the conclusion of a trial, constrains any plaintiff recovery to a specified range. Whereas existing work describes litigation as a choice between trial and settlement, our examination of high-low agreements—an increasingly popular phenomenon in civil litigation—introduces partial or incomplete settlements. In our theoretical model, trial is both costly and risky. When litigants have divergent subjective beliefs and are mutually optimistic about their trial prospects, cases may fail to settle. In these cases, high-low agreements can be in litigants’ mutual interest because they limit the risk of outlier awards while still allowing an optimal degree of speculation. Using claims data from a national insurance company, we describe the features of these agreements and empirically investigate the factors that may influence whether litigants discuss or enter into them. Our empirical findings are consistent with the predictions of the theoretical model. We also explore extensions and alternative explanations for high-low agreements, including their use to mitigate excessive, offsetting trial expenditures and the role that negotiation costs might play. Other applications include the use of collars in mergers and acquisitions.
    JEL: D86 K41
    Date: 2014–03
  2. By: Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
    Abstract: In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork’s views on merger policy from The Antitrust Paradox. Many of Bork’s recommendations have been implemented over time and have improved merger analysis. Bork’s proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.
    JEL: K21 L1 L4 L41
    Date: 2014–02
  3. By: Wenli Li; Ishani Tewari; Michelle J. White
    Abstract: We assess the credit market impact of allowing mortgage “strip-down”—that is, reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. Circuit Court of Appeals decisions in the early 1990’s that introduced mortgage strip-down in parts of the U.S., followed by a 1993 Supreme Court ruling that abolished it all over the U.S. We find that the Supreme Court decision led to a short-term reduction of 3% in mortgage interest rates and a short-term increase of 1% in mortgage approval rates, but only the approval rate effect persists in longer sample periods. In contrast, the circuit court decisions to allow strip-down did not have consistent effects on mortgage terms. We also show that strip-down had little effect on default rates by homeowners with existing mortgages. Taken together, these results suggest that mortgage lenders responded weakly to both the adoption and abolition of strip-down because strip-down had little effect on their profits from mortgage lending. According to these findings, re-introducing strip-down of mortgages in bankruptcy as a foreclosure-prevention program would have only small and transient effects on the supply of mortgage loans.
    JEL: G21 K2 K35
    Date: 2014–03
  4. By: Marchese, Carla
    Abstract: A tax amnesty can be a useful tax policy tool when exploited in exceptional circumstances. Amnesties can also be used systematically as a discriminatory mechanism to improve the efficiency or even the equity of the tax system, but only if government commitment to enforcing tax law is credible. If such credibility is lacking, amnesties may actually undermine future tax revenue by breaching the implicit, psychological contract between taxpayers and the state, thus reducing taxpayers’ internal motivation for compliance. Amnesties also have important political implications, because they can signal intertemporal inconsistency in government decision-making and may be linked to the political business cycle. Amnesties respond to externalities among states or layers of government deriving from tax and enforcement policies, and network effects in these fields can trigger waves of amnesties.
    Keywords: tax amnesty, tax evasion, tax policy
    JEL: H20 H26 K34
    Date: 2014–03
  5. By: Islam, Asif
    Abstract: Several studies have explored the relationship between economy-level crime rates or individual-level crime and economic growth. However, few studies have examined the relationship between economic growth and crime against firms. This study uses data for about 12,000 firms in 27 developing countries and finds that economic growth is negatively associated with crime. This relationship is stronger for small and medium firms than large firms. The study also explores several economy-wide factors and their influence on the growth-crime relationship for small and medium enterprises. The results are robust to various sensitivity checks.
    Keywords: Governance Indicators,Public Sector Corruption&Anticorruption Measures,Achieving Shared Growth,Population Policies,Gender and Law
    Date: 2014–02–01
  6. By: Joseph Mai (Department of Economics, York University, Toronto, Canada); Andrey Stoyanov (York University)
    Abstract: Are judges concerned with the effect of their decisions on national welfare in the same way as policy-makers do? In this paper we analyze this question by examining the outcomes of intellectual property rights (IPR) litigations between domestic and foreign .rms. We develop a simple model of oligopoly where foreign .rms have access to more efficient production technology and show that weak protection of foreign-owned IPR always leads to welfare gains at home. We also show that the positive welfare e¤ect increases with the size of the foreign innovator, as well as in the size of the domestic imitator. We test predictions of the model using the data on all Canadian IPR cases over a four-year period. We find that domestic firms are substantially more likely, by 17 percentage points, to succeed in litigations with foreign firms than with other Canadian firms. We also find evidence supporting the hypothesis of the home bias in the legal system. Specifically, we establish that courts' decisions are aligned with welfare maximization principles so that foreign firms are less likely to win in those cases when the implied welfare gains from not protecting foreign IPR are greater.
    Date: 2014–02–03
  7. By: Lauridsen, Jørgen T. (Department of Business and Economics); Zeren, Fatma (Inonu University); Ari, Ayse (Istanbul University)
    Abstract: The study investigates whether crime in Turkey is governed by economic rationality. An economic model of rational behaviour claims that the propensity to commit criminal activities is negatively related to risk of deterrence. Potential presence of higher risk profiles for certain population segments is investigated. Panel data aggregated to sub-regional levels and observed annually for the years 2008 to 2010 are applied. Controls for endogeneity among criminal activity level and risk of deterrence, intra-regional correlation, inter-temporal heterogeneity and spatial spillover are exerted. A positive effect of risk of deterrence on criminal activity is found which conflicts with the hypothesised economic rationality. Certain population segments are identified as obvious target groups for regional policy initiatives aiming to reduce criminal activities. These are in particular unemployed and males. On the other hand, educational attainment, poverty and youngsters are less obvious target groups, while the relationship between population density and crime is ambiguous. Finally, spatial spillover patters related to criminal activities seem to be highly relevant, thus implying that while initiatives toward criminal activities may well be formed at the regional level, coordination across regions might obviously be called for.
    Keywords: Crime; risk of deterrence; Turkey; panel data; spatial spillover
    JEL: C21 C23 K42
    Date: 2014–03–03
    Date: 2014
  9. By: J.W. Fedderke and M. Mentoruzzo
    Abstract: This paper examines whether the voting behavior of Supreme Court justices in 49 cases related to securities legislation since 1936, shows systematic variation in a range of measures of the personal ideological stance of the justices, a range of measures of prevailing economic conditions, and a range of measures of prevailing political conditions. We find that the voting behavior does vary significantly with respect to all three. Conservative justices are more likely to vote against shareholder rights, and in favour of business rights, than are more liberal justices. Under increasing inflation, increased real growth, a rising public debt/GDP ratio, and a weak stock market Supreme Court justices are more likely to favour business rights than shareholder rights. Finally, across a range of measures of contestation of the political space in Congress, we find a systematic statistically significant association with the voting behavior of Supreme Court justices.
    Keywords: Supreme Court, Justice, United States
    Date: 2014
  10. By: Janda, Karel; Rakicova, Anna
    Abstract: The corporate bankruptcies legal frameworks and their economic implications are compared for two pairs of post-communist countries (Czech Republic and Slovakia and Croatia and Serbia) originating from common federative republics. Their process of gradual divergence from the common legal and economic framework is shown. All four countries are identified as creditor friendly (Czech Republic, Croatia, Serbia) or neutral countries (Slovakia). The possibilities of further development of bankruptcy proceeding in these countries are outlined.
    Keywords: Czech Republic; Slovakia; Croatia; Serbia; Bankruptcy; Insolvency
    JEL: G33 K22 P37
    Date: 2014–03–04
  11. By: Mariana Cunha (FEP-UP, School of Economics and Management, University of Porto); Paula Sarmento (FEP-UP, CEF-UP); Hélder Vasconcelos (FEP-UP, CEF-UP, CEPR)
    Abstract: This paper studies the role of uncertainty in merger control and in merger decisions. In a Cournot setting, we consider that mergers may give rise to uncertain endogenous efficiency gains and that every merger has to be submitted for approval to the Antitrust Authority (AA). We assume that both the AA and the firms in the industry face the same uncertainty about the future efficiency gains induced by the merger. It is shown that an increase in the degree of uncertainty benefits both insider and outsider firms but also the consumers. Further, when uncertainty is high, there is a greater likelihood that firms propose a merger to the AA and that the AA accepts it. Interestingly, however, although uncertainty enhances merger approval chances, it also decreases merger's stability, by increasing outsiders' incentives to free-ride on it.
    Keywords: Efficiency gains; Merger control; Uncertainty
    JEL: L13 D41 D81
    Date: 2014–03

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