New Economics Papers
on Law and Economics
Issue of 2014‒06‒22
thirteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Cumulative Harm, Products Liability, and Bilateral Care By Daughety, Andrew F.; Reinganum, Jennifer F.
  2. Enforcement vs Deterrence in Merger Control: Can Remedies Lead to Lower Welfare? By Andreea Cosnita-Langlais; Lars Sørgard
  3. Patent Trolls, Litigation, and the Market for Innovation By Haus, Axel; Juranek, Steffen
  4. A Partner in Crime: Assortative Matching and Bias in the Crime Market By Gavrilova, Evelina
  5. From Custom to Law – Hayek revisited By Rossi, Guido; Spagano, Salvatore
  6. Scarcity without Leviathan: The Violent Effects of Cocaine Supply Shortages in the Mexican Drug War - Working Paper 356 By Juan Camilo Castillo, Daniel Mejia, and Pascual Restrepo
  7. Efficient Microlending without Joint Liability By Altınok, Ahmet; Sever, Can
  8. Abusive Transfer Pricing and Economic Activity By Nielsen, Søren Bo; Schindler, Dirk; Schjelderup, Guttorm
  9. Promoting innovation on the seed market and biodiversity: the role of IPRs and commercialisation rules By Marc Baudry; Adrien Hervouet
  10. On the Distributed Costs of Drug-Related Homicides - Working Paper 364 By Nicholas Ajzenman, Sebastian Galiani, and Enrique Seira
  11. Dealing with Technological Risk in a Regulatory Context: The Case of Smart Grids By Paulo Moisés Costa; Nuno Bento; Vítor Marques
  12. Methods for Multicountry Studies of Coporate Governance: Evidence from the BRIKT Countries By Black, Bernard; De Carvalho, Antonio Gledson; Khanna, Vikramaditya; Kim, Woochan; Yurtoglu, Burcin
  13. An Analysis of Omitted Shareholder Proposals By Boylan, Robert; Cebula, Richard; Foley, Maggie; Liu, Xiaowei

  1. By: Daughety, Andrew F.; Reinganum, Jennifer F.
    Abstract: We extend consideration of cumulative harm in products liability to the case of bilateral care. For this specification, the level of care and the level of output chosen by the firm are inextricably interrelated, and different liability regimes yield different combinations of care and output. As in the case of bilateral care with proportional harm, strict liability by itself leads to moral hazard on the part of the consumer, but strict liability with a defense of contributory negligence on the part of the consumer is now a resilient (that is, both robust and convergent) liability rule when harm is cumulative.
    Date: 2013–06
  2. By: Andreea Cosnita-Langlais; Lars Sørgard
    Abstract: This paper deals with the enforcement of merger policy, and aims to identify situations where the introduction of remedies can lead to a lower welfare. For this we study how merger remedies affect the deterrence accomplished by controlling mergers, and determine the optimal frequency of investigations launched by the agency. We find that when conditional approvals are possible, it may be harder to deter the most welfare-detrimental mergers, and the agency might have to investigate mergers more often. The resulting welfare from merger control can indeed be lower than without remedies.
    Keywords: merger control, merger remedies, enforcement, deterrence.
    JEL: K21 L41
    Date: 2014
  3. By: Haus, Axel (Dept. of Management and Microeconomics, Goethe University Frankfurt); Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We examine the role of non-practicing entities (NPEs), often called patent trolls, in patent litigation. We present a theoretical model that predicts that cases with NPE patentees resolve faster. We test this prediction using a hand-collected data set of US patent litigation cases. We find that NPEs challenge larger and more technology intensive firms, and use more valuable patents from technology areas that have a less fragmented ownership base compared to the control group. Controlling for these factors, we find that NPE cases are indeed resolved faster. NPEs help to increase the speed of diffusion of technology into the economy; therefore, increasing the effectiveness of the market for innovation.
    Keywords: Litigation; patents; patent trolls; technology diffusion
    JEL: K00 K41 O34
    Date: 2014–06–11
  4. By: Gavrilova, Evelina (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: I identify a discriminatory bias in partnership formation within the property crime market in the United States. Theoretically, the prisoner's dilemma creates an incentive for a criminal to form a partnership with a counterpart with the same probability of success, resulting in an equilibrium pattern of positive assortative matching. Using individual matched report-arrest data from the National Incident Based Reporting System and a novel empirical strategy, I pinpoint matches where the underlying probability of success of two partners differ. This difference in probability is correlated with observable characteristics, which could be evidence for discrimination and search frictions. I find patterns consistent with discrimination in male-female partnerships and patterns consistent with search frictions in black-white matches. In particular, females in a male-female partnership are more likely to evade law-enforcement than males, even though on average males are more successful as a group. This results is robust to controlling for the criminal earnings, individual criminal offenses and market characteristics. Furthermore, these patterns are found also in criminal groups of a size bigger than 2. The result could be either due to pre-crime marital matching or discrimination.
    Keywords: Organized Crime; Assortative Matching; Discrimination
    JEL: C78 J16 J71 K42
    Date: 2014–06–11
  5. By: Rossi, Guido; Spagano, Salvatore
    Abstract: The present paper combines legal history with economic theory so to explain the passage from custom to law. Economists have usually explained the shift from customary to statutory law (that is, from spontaneous to formal rules) either in terms contractualism or evolutionism. In the first case, law is the only efficient solution for a Hobbesian-like immanent social conflict. In the second case, customs do create an efficient enough equilibrium. Law comes on a later stage just to formalise an already accepted rule, vesting the custom with a formal status. Neither theory, however, is fully able to explain the transition from custom to law. One struggles with the very acceptance of customs in the first place. The other fails to provide a satisfactorily explanation of the passage from custom to law. The present work seeks to reconcile the two theories by looking at the economic advantages of statutory law over custom. Unlike the first theory, it does not deny that customs may produce a relatively efficient status, but it seeks to explain why, at a certain point, customs were considered as inadequate and statutory law became more desirable. Our answer lies in the publication of written rules, for the presumption of knowledge it entails. Presumption of knowledge of the applicable rules is one of the elements that (oral) customs could not provide to contracts. Although somewhat neglected in many studies on customs and legislation, publication is a crucial element for our understanding of the passage from spontaneous custom to positive law. The work shall first introduce the passage from customary to statutory law in both legal and economic theories. Then, it will analyse the deep symmetry between the number of agents involved and the number of transactions on the one hand and the progressive replacement of customs with statutes on the other. The conclusions of such an analysis will be used to prove the crucial role played by the presumption of knowledge, which is perhaps the missing link between different economic theories on customs and law.
    Keywords: Evolutionary Economics, Constitutional Law
    JEL: B25 H10
    Date: 2014
  6. By: Juan Camilo Castillo, Daniel Mejia, and Pascual Restrepo
    Abstract: Using the case of the cocaine trade in Mexico as a relevant and salient example, this paper shows that scarcity leads to violence in markets without third party enforcement. We construct a model in which supply shortages increase total revenue when demand is inelastic. If property rights over revenues are not well defined because of the lack of reliable third party enforcement, the incentives to prey on others and avoid predation by exercising violence increase with scarcity, thus increasing violence. We test our model and the proposed channel using data for the cocaine trade in Mexico. We found that exogenous supply shocks originated in changes in the amount of cocaine seized in Colombia (Mexico's main cocaine supplier) create scarcity and increase drug-related violence in Mexico. In accordance with our model, the effect of cocaine scarcity on violence is larger near US entry points; in locations contested by several cartels; and where, due to high support for the PAN party, crackdowns on the cocaine trade have been more frequent. Our estimates suggest that, for the period 2006-2010, scarcity created by more efficient interdiction policies in Colombia may account for 21.2% and 46% of the increase in homicides and drug-related homicides, respectively, experienced in the north of the country. At least in the short run, scarcity created by Colombian supply reduction efforts has had negative spillovers in the form of more violence in Mexico under the so-called War on Drugs.
    Keywords: Rule of Law, War on Drugs, Violence, Illegal Markets, Mexico
    JEL: D74 K42
    Date: 2014–02
  7. By: Altınok, Ahmet; Sever, Can
    Abstract: Peer-group mechanisms have been widely used by micro-credit institutions to minimize default risk. However, there are costs associated with establishing and maintaining liability groups. In the case when output is fully observable, we propose a dynamic individual lending mechanism. Assuming that risky borrowers discount the future costs and benefits relatively higher, our mechanism performs equally well in repayment rates, distinguishes safe and risky borrowers through differentiated interest rates and payment schedules. In case of unobservable types, it is able to eliminate adverse selection problem, and it reaches the first best outcome of the case that types of borrowers are publicly known. It improves wealth of individuals, and hence achieves a net welfare-superior outcome when compared with joint liability. Individual lending further saves from internal costs of group formation, and broadens the fractions of society into which microfinance institutions penetrate. We also identify unique welfare maximizing contract in our mechanism. Finally, we introduce a history dependent success probabilities, and show existence of efficient individual contract in that environment.
    Keywords: Microfinance, Graamen bank, joint liability, adverse selection, microlending, group lending, individual lending
    JEL: D60 D86 G21 O1 O12
    Date: 2014–05–11
  8. By: Nielsen, Søren Bo (Dept. of Economics, Copenhagen Business School); Schindler, Dirk (Dept. of Accounting, Auditing and Law, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper investigates how concealment costs of transfer pricing and the probability of detection affect transfer pricing and firm behavior. We find that transfer pricing in intermediate production factors does not affect real activity of a multinational firm if the firm’s concealment effort as well as the probability of being audited by tax authorities are conditioned on the amount of shifted profits. If tax authorities rely on the standard OECD arm’s-length principle instead by reacting to a deviation of the transfer price from the market price, the multinational will for tax reasons adjust its production structure. A policy implication of the paper is that it should be preferable to condition audits on the amount of income shifted rather than on the distortion of the transfer price proper. Another policy finding is that improving the quality of tax law might be superior to higher detection effort. The former reduces profit shifting and concealment effort, whereas the latter leads to more wasteful use of resources on concealment and has an ambiguous effect on profits shifted.
    Keywords: Transfer Pricing; Firm Behavior; Tax Law
    JEL: H20
    Date: 2014–05–30
  9. By: Marc Baudry; Adrien Hervouet
    Abstract: This article deals with the impact of legislation in the seed sector on incentives for variety creation. Two categories of rules interact. The first category consists in intellectual property rights and is intended to address a problem of sequential innovation and R&D investments by the private sector. The second category concerns commercial rules that are intended to correct a problem of adverse selection on the seed market. We propose a dynamic model of market equilibrium with vertical product differentiation that enables us to take into account the economic consequences of imposing either Plant Breeders’ Rights (PBRs) or patents as IPRs. We simultaneously examine two kinds of commercial legislation: compulsory registration in a catalogue and minimum standards for commercialisation. Analytical results are completed by numerical simulations. The main result is that the combination between minimum standards and PBRs provides higher incentives for sequential innovation and may be preferred by a public regulator to maximise the expected and discounted total surplus when sunk investment costs are low or when they are medium and the probability of R&D success is sufficiently high. This solution differs from the combination of IPRs and commercialisation rules used in both the US and Europe. Otherwise, PBRs have to be replaced by patents, which yields a configuration close to that observed in the US. The catalogue commercialisation rule is seldom preferred to minimum standards, so that the combination of IPRs and commercialisation rules that prevails in Europe is not supported by our model.
    Keywords: Intellectual Property Rights, Plant Breeders’ Rights, Catalogue, Product differentiation, Asymmetric information, Biodiversity.
    JEL: D43 D82 K11 L13 Q12
    Date: 2014
  10. By: Nicholas Ajzenman, Sebastian Galiani, and Enrique Seira
    Abstract: Reliable estimates of the effects of violence on economic outcomes are scarce. We exploit the manyfold increase in homicides in 2008-2011 in Mexico resulting from its war on organized drug traffickers to estimate the effect of drug-related homicides on house prices. We use an unusually rich dataset that provides national coverage on house prices and homicides and exploit within-municipality variations. We find that the impact of violence on housing prices is borne entirely by the poor sectors of the population. An increase in homicides equivalent to one standard deviation leads to a 3% decrease in the price of low-income housing. In spite of this large burden on the poor, the willingness to pay in order to reverse the increase in drug-related crime is not high. We estimate it to be approximately 0.1% of Mexico’s GDP.
    Keywords: drug-related homicides, costs of crime, poverty
    JEL: K4 I3
    Date: 2014–05
  11. By: Paulo Moisés Costa (ESTG, Instituto Politécnico de Viseu and INESC TEC, Portugal); Nuno Bento (ISCTE, Instituto Universitário de Lisboia and Dinâmia'CET-IUL, Portugal); Vítor Marques (Entidade Reguladora dos Serviços Energéticos, Portugal)
    Abstract: This paper aims to analyze the implementation of innovations, featuring technological risk, in network industries through the development of a suitable regulatory scheme. In particular, Smart grid (SG) technologies which have the potential to save operational costs and reduce the need for further investments in the grid, but are still surrounded by many uncertainties which discourage the investment. Therefore, a suitable regulatory scheme should be developed in order to incentivize network operators to invest in SG technologies, besides of conventional investments that yield the regulatory and warranted revenue. Through a decision model, it is shown that incentive regulation encourages the adoption of innovations that enhance efficiency. Yet the consideration of technological risk into the analysis reduces the set of investment opportunities. In addition, the model assesses the impact on firm’s decision of different types of projects that can displace more or less conventional capital and reduce more or less operational costs. Therefore, this paper provides a new tool that can be used to evaluate the effect of different regulatory designs in a wide range of investments with the characteristics of SG.
    Keywords: Economics of regulation; Price-cap; Cost-plus, Technological change; Smart grids.
    JEL: O33 L51 L94
    Date: 2014–06
  12. By: Black, Bernard; De Carvalho, Antonio Gledson; Khanna, Vikramaditya; Kim, Woochan; Yurtoglu, Burcin
    Abstract: We discuss empirical challenges in multicountry studies of the effect of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity,” and endogeneity issues in these studies, propose methods to respond to those issues, and apply those methods to a study of five major emerging markets -- Brazil, India, Korea, Russia, and Turkey. We develop unique time-series datasets on governance in each country. We address construct validity by building country-specific indices which reflect local norms and institutions. These similar-but-not-identical indices predict firm market value in each country, and when pooled across countries in firm fixed-effects (FE) and random-effects (RE) regressions. In contrast, a “common index” that uses the same elements in each country, has no predictive power in FE regressions. For the country-specific and pooled indices, FE and RE coefficients on governance are generally lower than in pooled OLS regressions; and coefficients with extensive covariates are generally lower than with limited covariates. These results confirm the value of using FE or RE with extensive covariates to reduce omitted variable bias. We develop lower bounds on our estimates which reflect potential omitted variable bias.
    Keywords: Brazil, Korea, India, Russia, Turkey, corporate governance, boards of directors, disclosure, shareholder rights
    JEL: G18 G30 G34 G39 K22 K29
    Date: 2014–03
  13. By: Boylan, Robert; Cebula, Richard; Foley, Maggie; Liu, Xiaowei
    Abstract: We intend to reveal the causes and the determinants of the omitted shareholder proposals. We find that individual investors are mostly likely to submit a proposal being excluded from the proxy ballot. Since individual investors are not so skillful as institutional investors, we summarize that shareholder proposals are excluded mainly due to sponsors’ lack of experience and knowledge, rather than as a self-serving vehicle for shareholder activists to gain bargaining power or to simply annoy management. We also find that most shareholder proposals are omitted because they deal with a matter relating to the company’s ordinary business operations.
    Keywords: corporate governance; SEC Rule 14a; omitted shareholder proposals
    JEL: G30 G34 K22
    Date: 2013–12–30

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