nep-law New Economics Papers
on Law and Economics
Issue of 2014‒11‒17
twelve papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. The EU Leniency Programme and Recidivism By Marvao, Catarina
  2. Heterogeneous Penalties and Private Information By Marvão, Catarina
  3. Critical Analysis of Acquitted Conduct Sentencing in the U.S.: "Kafka-esque," "Repugnant," "Uniquely Malevolent" and "Pernicious"? By Yalincak, Orhun hakan
  4. The Appeals Process and Incentives to Settle By Wohlschlegel, Ansgar
  5. Ease of Doing Business: Emphasis on Corruption and Rule of Law By Karama, Dalal
  6. Corruption in PPPs, Incentives and Contract Incompleteness By Elisabetta Iossa; David Martimort
  7. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  8. The Impact of Fine Size and Uncertainty on Punishment and Deterrence: Evidence from the Laboratory By Feess, Eberhard; Schramm, Markus; Wohlschlegel, Ansgar
  9. The collusion incentive constraint By Huric Larsen, Jesper Fredborg
  10. Corporate Governance Reforms, Interlocking Directorship and Company Performance in Italy By Drago, Carlo; Millo, Francesco; Ricciuti, Roberto; Santella, Paolo
  11. Signaling with Audits: Mimicry, Wasteful Expenditures, and Non-compliance in a Model of Tax Enforcement By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  12. Temporal, Spatial, Economic and Crime Factors in Illicit Drug Usage across European Cities By Jacques J.F. Commandeur; Suncica Vujic; Siem Jan Koopman; Barbara Kasprzyk-Hordern

  1. By: Marvao, Catarina (Trinity College Dublin)
    Abstract: The EU Leniency Programme (LP) aims to encourage the dissolution of existing cartels and the deterrence of future cartels, through spontaneous reporting and/or significant cooperation by cartel members during an investigation. However, the European Commission guidelines are rather vague in terms of the factors that influence the granting and scale of fine reductions. As expected, the results shown that the first reporting or cooperating firm receives generous fine reductions. More importantly, there is some evidence that firms can “learn how to play the leniency game”, either learning how to cheat or how to report, as the reductions given to multiple offenders (and their cartel partners) are substantially higher. These results have an ambiguous impact on firms’ incentives and major implications for policy making.
    Keywords: Cartels; competition policy; Leniency Programme; self-reporting
    JEL: K21 K42 L40 L51
    Date: 2014–09–07
  2. By: Marvão, Catarina (Trinity College Dublin)
    Abstract: The theoretical framework of the adequacy or otherwise of fine reductions under the EU and US Leniency Programmes has been explored widely. However, the characteristics of the reporting cartel members remain unexplained. This is the first paper to develop a model where cartel members are heterogeneous in terms of the cartel fine and have private information on the probability of conviction. It is shown that firms which receive higher fines, have a lower equilibrium threshold for reporting. To validate this result and analyze the sources of fine heterogeneity, data for EU and US cartels are used. Being the first reporter is shown to be correlated with recidivism, leadership and reductions received outside the Leniency Programme. Some characteristics of the cartels where reporting occurred are also unveiled. Identifying the characteristics of the reporting firms is vital to dissolve and dissuade cartels and the wider policy implications of these findings are discussed in the paper.
    Keywords: Cartels; competition policy; Leniency Programme; private information
    JEL: D43 K21 K42 L13 L51
    Date: 2014–09–18
  3. By: Yalincak, Orhun hakan
    Abstract: In federal court and many state courts across the United States, once a defendant is convicted, judges are routinely permitted, and in fact, sometimes required to increase a defendant’s sentence based on relevant conduct, of which he was acquitted at trial, or conduct for which he was never charged. This article highlights the issues that arise from the use of acquitted conduct sentencing under the now advisory U.S. Sentencing Guidelines. The use of acquitted conduct under the relevant conduct provisions of the Guidelines has resulted in substantially longer prison sentences with a disparate impact on racial and ethnic minorities. Acquitted conduct sentencing treats the offense admitted by a defendant, or proven to a judge or jury’s satisfaction beyond a reasonable doubt as only the starting point in calculating a defendant’s sentence; the modified real offense approach, which incorporates relevant conduct and mandates consideration of acquitted conduct, determines the end sentence. This article concludes that use of acquitted conduct should be prohibited both on constitutional and normative grounds. While it is outside the scope of this article to offer a comprehensive solution or alternative to the use of acquitted conduct at sentencing, the key observation is that since the common thread linking the constitutional and normative issues arise from the fragmented nature of U.S. sentencing policy, the solution must start with re-conceptualizing the theories underlying sentencing in the United States.
    Keywords: criminal justice, white collar, retributive justice, utilitarian theory of punishment, economics, crime and punishment, sentencing, acquitted conduct, relevant conduct, sentencing guidelines, hakan yalincak
    JEL: K2 K4 K42
    Date: 2014–08–21
  4. By: Wohlschlegel, Ansgar
    Abstract: This paper analyzes asymmetrically informed litigants' incentives to settle when they anticipate the possibility of appeals. It identifies a strategic effect, which induces a litigant to negotiate pretrial so as to optimize her posttrial bargaining position, and an information effect, which means that litigants will take into account pretrial how the information revealed by the trial court's verdict will translate into posttrial equilibrium payoffs. The paper's main contribution is twofold: First, it establishes a workhorse model of settlement and litigation in the shadow of appeals which may be used in future research to analyze specific issues of litigation and legal reform. Second, the importance of including the possibility of appeals in the litigation model is highlighted by an example in which some results contradict the immediate intuition: It is shown that (i) more accurate trial courts may actually attract less cases and (ii) cases may go to trial court with a larger ex-ante probability for higher legal costs in the appeals stage.
    Keywords: Litigation; settlement; appeals; sequential bargaining; asymmetric information
    JEL: D82 K41
    Date: 2014–02–14
  5. By: Karama, Dalal
    Abstract: The rule of law is often treated as a major contributor to growth in the most developed countries and corruption as a contributor to growth in the least developed countries. What is most important is to analyze the facts to determine the degree to which rule of law and corruption influence; 1.) Growth and 2.) Ease of doing business. Three issues are addressed: 1.) Types of externalities, 2.) Effect of corruption and rule of law on ease of doing business, and 3.) How corruption and rule of law influence gdp growth and gdp per capita. Should policy makers focus their efforts on providing incentives to reduce and/or eliminate corruption or on providing incentives to legislate and implement rules and regulations that enforce rule of law? Due to the limitation of data, the observed outcomes in this study leaves the results open to diverse interpretation and further examination and research.
    Keywords: Ease of doing business, corruption, rule of law, gdp growth, gdp per capita
    JEL: A1 K4
    Date: 2014–09–16
  6. By: Elisabetta Iossa; David Martimort
    Abstract: In a public procurement setting, we discuss the desirability of completing contracts with state-contingent clauses providing for monetary compensations to the contractor when revenue shocks occur. Realized shocks are private information of the contractor and this creates agency costs of delegated service provision. Verifying the contractor’s messages on the shocks entails contracting costs that make incomplete contracts attractive, despite their higher agency costs. A public official (supervisor) has private information on contracting costs and chooses the degree of contractual incompleteness on behalf of an upper-tier public authority. As the public official may be biased towards the contractor, delegating the contractual choice to that lower-tier may result in incomplete contracts being chosen too often. Empirical predictions on the use of incomplete contracts and policy implications on the benefits of standardized contract terms are discussed.
    Keywords: Corruption, Incomplete Contracts, Moral Hazard, Principal-Agent-Supervisor Model, Public-Private Partnerships, Risk Allocation
    JEL: D23 D82 K42 L33
    Date: 2014
  7. By: Yannis Katsoulacos (Athens University of Economics and Business, Greece); Evgenia Motchenkova (VU University Amsterdam); David Ulph (University of St Andrews, United Kingdom)
    Abstract: In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than tho se based on profit)while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.
    Keywords: Antitrust Enforcement, Antitrust Law, Cartel, Oligopoly, Repeated Games
    JEL: D43 C73
    Date: 2014–09–26
  8. By: Feess, Eberhard; Schramm, Markus; Wohlschlegel, Ansgar
    Abstract: We use a laboratory experiment to test the impacts of uncertainty, the magnitude of fines and aversion against making type-I and type-II errors on legal decision making. Measuring uncertainty as the noise of a signal on the defendant's guilt observed by legal decision makers, we observe that a supposed wrongdoer is less likely to be punished if fines and uncertainty are high. Furthermore, judges care far more about type-I errors and violators steal far less often than expected payoff maximizers would. While our results support the theoretical predictions on average, a cluster analysis provides evidence for heterogeneous behavior of participants, many of whom don't respond to changes in the parameters or are far more driven by uncertainty than the magnitude of fines.
    Keywords: Deterrence; fine size; type-I and type-II error; experiment
    JEL: C91 D03 K14
    Date: 2014–09–28
  9. By: Huric Larsen, Jesper Fredborg
    Abstract: The collusion incentive constraint is an important economic measure of cartel stability. It weighs the profits of being in a cartel with those of cheating and punishment of the remaining cartel members. The constraint places no restrictions on firm cartel, cheating and punishment pricing, but is usually considered in a restricted competitive set up characterized by either Cournot or Bertrand competition. This paper examines the constraint under Bertrand competition and homogenous goods when assuming that cartel members have the same market power and then continues to examine if this is not so.
    Keywords: Collusion, firm incentives, market power
    JEL: C71 L2 L4
    Date: 2014–03
  10. By: Drago, Carlo; Millo, Francesco; Ricciuti, Roberto; Santella, Paolo
    Abstract: We analyze the effects of corporate governance reforms on interlocking directorship (ID), and we assess the relationship between interlocking directorships and company performance for the main Italian firms listed on the Italian stock exchange over 1998-2007. We use a unique dataset that includes corporate governance variables related to the board size, interlocking directorships and variables related to companies’ performances. The network analysis showed only some effectiveness of these reforms in slightly dispersing the web of companies. Using a diff-in-diff approach, we then find in the period considered a slight reduction in the returns of those companies where interlocking directorships were used the most, which confirms our assumption on the perverse effect of ID on company performance in a context prone to shareholder expropriation such as the Italian one
    Keywords: Corporate Governance, Interlocking Directorships, Social Network Analysis, Empirical Corporate Finance
    JEL: C33 G34 G38 L14
    Date: 2014–10–10
  11. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: The audit policy of a tax authority can signal its audit effectiveness. We model this process and show that in limited circumstances an ineffective authority can masquerade as being effective. We show that high maximal penalties imply underreporting of income.
    JEL: C71 D82 D86
    Date: 2014–01
  12. By: Jacques J.F. Commandeur (VU University Amsterdam, the Netherlands); Suncica Vujic (University of Antwerp, Belgium); Siem Jan Koopman (VU University Amsterdam, the Netherlands); Barbara Kasprzyk-Hordern (University of Bath, United Kingdom)
    Abstract: We analyze the illicit drug usage by inhabitants and visitors of European cities. Our statistical analyses are by means of linear mixed models. The data on illicit drug usage of cocaine, ecstasy, amphetamines, methamphetamines, and cannabis are collected through wastewater samples from the inlet of 21 sewage treatment plants spread over 11 European countries. The data set represents nineteen cities, services a population of approximately 15 million inhabitants and covers a one-week period in 2011. The patterns of illicit drug usage are examined with respect to temporal (daily) and spatial variations, as well as in relation to economic wealth (gross domestic product) and criminological (drug offenses recorded by police) factors. In a joint statistical analysis, we find that cocaine and ecstasy are typically recreational drugs that are consumed during the weekend. Inhabitants of Western European countries consume more cocaine than inhabitants of Eastern European countries. This finding cannot be explained by political divisions between West and East. We also find evidence that higher usage of ecstasy is associated with medium-sized cities, economic prosperity, and a lower number of drug offenses.On the other hand, higher usage of methamphetamine is associated with medium-sized cities and low economic wealth.
    Keywords: Sewage biomarker analysis, ANOVA, Linear mixed models, Wastewater-based epidemiology
    JEL: C33 I15
    Date: 2014–10–16

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