nep-law New Economics Papers
on Law and Economics
Issue of 2015‒04‒25
sixteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Settlement and Trial: Selected Analyses of the Bargaining Environment By Andrew F. Daughety; Jennifer F. Reinganum
  2. A Note on Trial Delay and Social Welfare: The Impact of Multiple Equilibria By Tim Friehe; Thomas J. Miceli
  3. The Effect of Third-Party Funding of Plaintiffs on Settlement By Andrew Daughety; Jennifer Reinganum
  4. The influence of product liability on vertical product differentiation By Baumann, Florian; Friehe, Tim; Rasch, Alexander
  5. Legal Principles in Antitrust Enforcement By Harold Houba; Evgenia Motchenkova; Quan Wen
  6. What Clients want: Choices between Lawyers' Offerings By Flora Felso; Sander Onderstal; Jo Seldeslachts
  7. Crime, Employment and Social Welfare: an Individual-level Study on Disadvantaged Males By Geert Mesters; Victor van der Geest; Catrien Bijleveld
  8. Piracy As A Threat To International Peace And Security By Anton A. Varfolomeev
  9. On the use of price-cost tests in loyalty discounts: Which implications from economic theory? By Fumagalli, Chiara; Motta, Massimo
  10. The Effects of Leniency on Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  11. Innovation and Legal Enforcement for Competition Policy: Theory and international evidence from overseas subsidiaries of the Japanese auto-parts suppliers By TAKEDA Yosuke; UCHIDA Ichihiro
  12. Penalizing Cartels: The Case for Basing Penalties on Price Overcharge By Yannis Katsoulacos; Evgenia Motchenkova; David Ulph
  13. The Economics of First-Contract Mediation By Sabien Dobbelaere; Roland Iwan Luttens
  14. The Power of a Bad Example - A Field Experiment in Household Garbage Disposal By Robert Dur; Ben Vollaard
  15. Does Experience Rating Improve Obstetric Practices? Evidence From Geographical Discontinuities in Italy By Sofia Amaral-Garcia; Paola Bertoli; Veronica Grembi
  16. Incentives for Process Innovations Under Discrete Structural Alternatives of Competition Policy By Andrey E Shastitko; Alexander Kurdin

  1. By: Andrew F. Daughety (Vanderbilt University); Jennifer F. Reinganum (Vanderbilt University)
    Abstract: This Handbook chapter provides a brief review of selected settlement bargaining models in some areas where new work is developing and where additional work is likely to yield yet further important results. This work has focused on what might be thought of as the environment of the settlement negotiation process, where bargaining failure generally results in trial, and our survey will use that perspective to organize the work discussed
    Keywords: Settlement, bargaining
    JEL: K4 C7
    Date: 2014–07–09
  2. By: Tim Friehe (University of Marburg); Thomas J. Miceli (University of Connecticut)
    Abstract: Greater trial delay is commonly associated with decreasing demand for trials, thereby bringing about an equilibrium for a given trial capacity. This note highlights that – in contrast to this premise – trial delay may in fact increase trial demand. Such an outcome is established for a scenario in which the number of cases is endogenous based on the deterrence effect of lawsuits. That trial demand may increase with longer delay makes multiple stable equilibria possible. This reality has important policy implications, which are discussed.
    Keywords: trial, delay, care, multiple equilibria
    JEL: K41 K13
    Date: 2015–04
  3. 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
  4. By: Baumann, Florian; Friehe, Tim; Rasch, Alexander
    Abstract: This paper explores the impact of product liability on vertical product differentiation when product safety is perfectly observable. In a two-stage competition, duopolistic firms are subject to strict liability and segment the market such that a low-safety product is marketed at a low price to consumers with relatively small harm levels whereas the safer product is sold at a high price to consumers with high levels of harm. Firms' expected liability payments are critically influenced by how the market is segmented, creating a complex relationship between product liability and product differentiation. We vary the liability system's allocation of losses between firms and consumers. Shifting more losses to firms increases the safety levels of both products, but decreases the degree of product differentiation. Some shifting of losses is always socially beneficial, but the optimum may require that some compensable losses stay with the consumers.
    Keywords: product liability,accident,harm,imperfect competition,product safety,vertical product differentiation
    JEL: D43 K13 L13
    Date: 2015
  5. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (University of Washington, United States)
    Abstract: We study antitrust enforcement that channels price-fixing incentives through setting fines and allocating resources to detection activities. Antitrust fines obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. Bankruptcy considerations limit maximum fines, ensure abnormal cartel profits and impose a challenge for optimal antitrust enforcement. We integrate the mentioned legal principles into an infinitely-repeated oligopoly model. We derive the optimal level of detection activities and the optimal fine schedule that achieves maximal social welfare under these legal principles. The optimal fine schedule remains below the maximum fine and induces collusion on a lower price by making it more attractive than collusion on higher prices. For a range of low cartel prices, the fine is set to the legal minimum. Raising minimum fines will enable the cartel to raise its price and is better avoided. Our analysis and results relate to the marginal deterrence literature.
    Keywords: Antitrust enforcement, Antitrust Law, Cartel, Oligopoly, Repeated game
    JEL: L4 K21 D43 C73
    Date: 2013–10–25
  6. By: Flora Felso (Netherlands Bureau for Economic Policy Analysis (CPB), the Netherlands); Sander Onderstal (University of Amsterdam); Jo Seldeslachts (University of Amsterdam)
    Abstract: We analyze a client's choice of contract in auctions where Dutch law firms compete for routine cases. The distinguishing feature here is that lawyers may submit bids with any fee arrangement they prefer: an hourly rate, a fixed fee or a mixed fee, which is a time-capped fixed fee plus an hourly rate for any additional hours should the case take longer than expected. Furthermore, this format of selling legal services is unusual in that it both forces lawyers to compete directly against each other and allows clients to easily compare these different offers. We empirically estimate a choice model for clients and find robust evidence that hourly rate bids are a client's least-preferred choice. Our findings tentatively contradict lawyers' often made argument that hourly rates are in a client's best interest.
    Keywords: Lawyers' fee arrangements, clients' choices, discrete choice models
    JEL: C25 D43 K10 K40
    Date: 2014–02–10
  7. By: Geert Mesters; Victor van der Geest; Catrien Bijleveld (VU University Amsterdam)
    Abstract: We test economic and sociological theories for the relationship between employment and crime, where social welfare is used as an identifying mechanism. We consider a sample of disadvantaged males from The Netherlands who are observed between ages 18 and 32 on a monthly time scale. We simultaneously model the offending, employment and social welfare variables using a dynamic discrete choice model, where we allow for state dependence, reciprocal effects and time-varying unobserved heterogeneity. We find significant negative bi-directional structural effects between employment and property crime. Robustness checks show that only regular employment is able to significantly reduce the offending probability. Further, a significant uni-directional effect is found for the public assistance category of social welfare on property offending. The results highlight the importance of economic incentives for explaining the relationship between employment and crime for disadvantaged individuals. For these individuals the crime reducing effects from the public assistance category of social welfare equivalent to those from employment, which suggests the importance of financial gains. Further, the results suggest that stigmatizing effects from offending reduce the future employment probability.
    Keywords: dynamic discrete choice, strain, social control, state dependence, reciprocal, unobserved heterogeneity
    JEL: K42 C32 C33
    Date: 2014–07–22
  8. By: Anton A. Varfolomeev (National Research University Higher School of Economics)
    Abstract: The study focuses on specific issues in the system of international security related to modern-day piracy. The first part examines the adequacy of the classical approach treating piracy as a common crime with an international element, comparing contemporary piracy to other illegal activities committed by non-state actors. The second part deals with the status of the threat to international peace and security potentially applicable to piracy. The essay concludes with a brief case study on the role of the UN Security Council in suppressing piracy off the coast of Somalia under norms of international security law.
    Keywords: piracy, international security, Somalia, Security Council, Russia
    JEL: F51
    Date: 2015
  9. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: Recent cases in the US (Meritor, Eisai) and in the EU (Intel) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.
    Keywords: exclusive dealing; inefficient foreclosure; market-share discounts
    JEL: K21 L41
    Date: 2015–04
  10. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (University of Chicago, United States)
    Abstract: We analyze how leniency affects cartel pricing in an infinitely-repeated oligopoly model where the fine rates are linked to illegal gains and detection probabilities depend on the degree of collusion. A novel aspect of this study is that we focus on the worst possible outcome. We investigate the maximal cartel price, the largest price for which the conditions for sustainability hold. We analyze how the maximal cartel price supported by different cartel strategies adjusts in response to the introduction of (ex-ante and ex-post) leniency programs. We disentangle the effects of traditional antitrust enforcement, leniency, and cartel strategies on the maximal cartel price. Ex-ante leniency cannot reduce the maximal cartel price below the price under antitrust without leniency. On the other hand, for ex-post leniency, improvement is possible and granting full immunity to single-reporting firms achieves the largest reduction in the maximal cartel price. To reduce adverse effects under both leniency programs, fine reductions to multiple-reporting firms should be moderate or absent. Finally, ex-post leniency should provide less generous fine reductions to multiple-reporting firms, which is supported by the current practice in the US and the EU.
    Keywords: Cartel, Antitrust, Competition Policy, Leniency Program, Self-reporting, Repeated Game
    JEL: L41 K21 C72
    Date: 2014–11–10
  11. By: TAKEDA Yosuke; UCHIDA Ichihiro
    Abstract: Do legal enforcements for competition policy have differential effects on innovative research and development (R&D) activities? Taking into account both strategic R&D competition between incumbent and entrant, and government's optimal choice of legal schemes, we first present a game-theoretic model of innovation and legal enforcement (Glaeser and Shleifer, 2003; Schwartzstein and Shleifer, 2013; Segal and Whinston, 2007). The model suggests that there are in subgame-perfect equilibria some relations concerning average treatment effects of legal enforcement on entrant's R&D or incumbent's deterrence activities, conditional on law and order degree in host countries (World Bank Worldwide Governance Indicators). Second, focusing on overseas subsidiaries of the Japanese auto-parts suppliers that have international deployments with different legal origins in locations, we use a pooled data set of the Basic Survey of Overseas Business Activities and the Basic Survey of Japanese Business Structure and Activities. The average multi-valued treatment effect estimation shows positive results for the model. It suggests that under regulation as a legal enforcement scheme instead of strict liability or negligence, even in countries with low degree of law and order, R&D activities would be more enhanced and R&D-deterrent ones be further suppressed on average. Legal enforcement for competition policy does matter for innovation.
    Date: 2015–04
  12. 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
  13. By: Sabien Dobbelaere (VU University Amsterdam, the Netherlands, and IZA, Germany); Roland Iwan Luttens (VU University Amsterdam, and Amsterdam University College, the Netherlands)
    Abstract: This paper provides an economic foundation for non-binding mediation to stimulate first collective bargaining agreements, as implemented in British Columbia since 1993. We show that the outcome of first-contract mediation is Pareto efficient and proves immune to the insider-outsider problem of underhiring. We also demonstrate that equilibrium wages and profits under mediation coincide with the Owen values of the corresponding cooperative game with the coalitional structure that follows from unionization.
    Keywords: BC first-contract model, mediation, collective bargaining, union, non-binding contract
    JEL: C71 J51 L20 K12
    Date: 2013–07–19
  14. By: Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Ben Vollaard (Tilburg University, CentER, and TILEC)
    Abstract: Field-experimental studies have shown that people litter more in more littered environments. Inspired by these findings, many cities around the world have adopted policies to quickly remove litter. While such policies may prevent people from following the bad example of litterers, they may also invite free-riding on public cleaning services. We are the first to show that both forces are at play. We conduct a natural field experiment where, in a randomly assigned part of a residential area, the frequency of cleaning was drastically reduced during a three-month period. We find evidence that some people start to clean up after themselves when public cleaning services are diminished. However, the tendency to litter more dominates. We also find that these responses continue to exist for some time after the treatment has ended. <P> Forthcoming in <I>Environment & Behavior</I>.
    Keywords: littering, public services, free-riding, field experiment
    JEL: C93 H40 K42
    Date: 2012–07–03
  15. By: Sofia Amaral-Garcia (ETH Zurich); Paola Bertoli (University of Economics, Prague); Veronica Grembi (Copenhagen Business School & CEIS, University of Rome "Tor Vergata")
    Abstract: Using data from 2002 to 2009 inpatient discharge records on deliveries in the Italian region of Piedmont, we assess the impact of an increase in malpractice pressure on obstetric practices, as identified by the introduction of experience-rated malpractice liability insurance. Our identification strategy exploits the exogenous location of public hospitals in court districts with and without schedules for noneconomic damages. We perform difference-in-differences and difference-in-discontinuities analyses. We find that the increase in medical malpractice pressure is associated with a decrease in the probability of performing a C-section from 2.3 to 3.7 percentage points (7% to 11.6% at the mean value of C-section) with no consequences for a broadly defined measure of complications or neonatal outcomes. We show that these results are robust to the different methodologies and can be explained by a reduction in the discretion of obstetric decision making rather than by patient cream skimming.
    Keywords: Experience rating, Medical liability insurance, Difference-in-discontinuities, C-sections, Scheduled damages
    JEL: K13 K32 I13
    Date: 2015–04–17
  16. By: Andrey E Shastitko; Alexander Kurdin (National Research University Higher School of Economics)
    Abstract: This study analyses the incentives for process innovations under different conditions determined by the competition policy for intellectual property rights (IPR) and particular features of markets and technologies. Competition policy is defined by the presence or absence of compulsory licensing, markets are characterized by technological leadership or technological competition. The results of modelling show that the uncertainty engendered by technological competition may lower the intensity of innovative activities, if there are no mechanisms of coordination between participants. Voluntary licensing generally improves social welfare but does not guarantee an increase in innovative efforts. Compulsory licensing can impede innovations due to the opportunistic behaviour of market participants but certain measures of state policy can prevent this negative effect
    Keywords: competition policy, compulsory licensing, process innovations
    JEL: L24 O31 K21
    Date: 2015

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