nep-law New Economics Papers
on Law and Economics
Issue of 2016‒04‒16
ten papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Illegal markets boundaries and interfaces between legality and illegality By Mayntz, Renate
  2. Magna Carta, the Rule of Law and the Limits on Government By Fernandez-Villaverde, Jesus
  3. The scope of qualified law: comparative analysis By Boldizsár Szentgáli-Tóth
  4. Court Enforcement, Bank Loans and Firm Investment: evidence from a bankruptcy reform in Brazil By Jacopo Ponticelli; Leonardo S. Alencar
  5. Speeding, Punishment, and Recidivism - Evidence from a Regression Discontinuity Design By Markus Gehrsitz
  6. The EU's Rule of Law Promotion in Central and Eastern Europe: Where and Why Does It Fail, and What Can Be Done About It? By Martin Mendelski
  7. Screening for bid-rigging - does it work? By Imhof, David; Karagök, Yavuz; Rutz, Samuel
  8. Forms of Government Decentralization and Institutional Quality: Evidence from a Large Sample of Nation By Goel, Rajeev K.; Saunoris, James W.
  9. A risk governance approach to managing antitrust risks in the banking industry By Denise Scheld; Johannes Paha; Nicolas Fandrey
  10. On the optimal use of correlated information in contractual design under limited liability By Daniel Danau; Analisa Vinella

  1. By: Mayntz, Renate
    Abstract: In sociology generally, the infringement of legal norms is not treated as a special kind of norm violation, the sociology of law being an obvious exception. The study of illegal markets therefore faces the challenge of distinguishing illegality from legality, and relating both to legitimacy. There is no conceptual ambiguity about the distinction between legal and illegal if legality is formally defined. In practice, (formal) legality and (social) legitimacy can diverge: there is both legitimate illegal action and illegitimate legal action. Illegal markets are a special kind of illegal social system, constituted by market transactions. Illegal markets are empirically related to organized crime, mafia and even terrorist organizations, and they interact both with legal markets and the forces of state order. Where legal and illegal action systems are not separated by clear social boundaries, they are connected by what has come to be called 'interfaces': actors moving between a legal and an illegal world, actions that are illegal but perceived as legitimate or the other way around, and a gray zone of actions that are neither clearly legal nor illegal, and neither clearly legitimate nor illegitimate. Interfaces facilitate interaction between legal and illegal action systems, but they are also sources of tension and can lead to institutional change.
    Abstract: Die Verletzung von Rechtsnormen wird in der Soziologie - abgesehen von der Rechtssoziologie - nicht systematisch als eine besondere Art von Devianz behandelt. Daher verlangt die Untersuchung illegaler Märkte, zwischen Legalität und Illegalität zu unterscheiden und ihre Beziehung zu Legitimität zu bestimmen. Die Unterscheidung von Legalität und Illegalität ist unproblematisch, wenn man diese Begriffe formal definiert. Legalität und soziale Legitimität können auseinanderfallen; es gibt sowohl als legitim erachtetes illegales wie als illegitim erachtetes legales Handeln. Illegale Märkte sind eine durch Markttransaktionen gebildete, besondere Art illegaler Handlungssysteme. Empirisch sind illegale Märkte verbunden mit organisiertem Verbrechen, Mafiaorganisationen und selbst Terrororganisationen, und sie interagieren sowohl mit legalen Märkten wie mit staatlichen Ordnungskräften. Wo legale und illegale Handlungssysteme nicht durch klar definierte soziale Grenzen getrennt sind, werden sie durch Grauzonen unklar einzuordnenden Handelns, durch als legitim wahrgenommene illegale Praktiken (bzw. umgekehrt) und durch Akteure verbunden, die fallweise in legalen und illegalen Systemen agieren. Diese sogenannten Interfaces verbinden legale und illegale Sozialsysteme, stellen aber zugleich eine Quelle von Spannungen dar, die zur Veränderung der formal definierten Grenze zwischen Legalität und Illegalität führen können.
    Date: 2016
  2. By: Fernandez-Villaverde, Jesus
    Abstract: This paper surveys the legal tradition that links Magna Carta with the modern concepts of the rule of law and the limits on government. It documents that the original understanding of the rule of law included substantive commitments to individual freedom and limited government. Then, it attempts at explaining how and why such commitments were lost to a formalist interpretation of the rule of law from 1848 to 1939. The paper concludes by arguing how a revival of the substantive commitments of the rule of law is central in a project of reshaping modern states.
    Keywords: Rule of Law, Magna Carta, Legal Theory, Limited Government.
    JEL: D78 K10 N43 N73
    Date: 2015–10
  3. By: Boldizsár Szentgáli-Tóth (Eötvös Loránd University)
    Abstract: During the last decades, several countries have entrenched a special subcategory of law, which is adopted by stricter procedural rules, than the requirements of the ordinary legislative process. These laws are enacted by qualified majority, by the consent of the two chambers of the legislation, they are subject to mandatory constitutional review before their promulgation, or additional safeguards are implemented in the ordinary legislative process. In my article, I would compare the experiences of three legal systems, France, Spain, and Hungary, which provide three different frameworks of qualified law. Nevertheless, I would provide further examples from Europe , Africa and Latin America to demonstrate better the diversity of legal concepts. My aim is to identify the most contested issues from the legal nature of qualified laws, and to seek the proper solutions of these issues, as well as an ideal model of qualified law.-Firstly, on the ground of different national experiences, I would seek for a broadly acceptable definition of qualified law. -Secondly, I would briefly compare the historical background of the three emerges. An important common point would be the role of qualified laws during any process of democratic transition.-Thirdly, the scope of qualified law differs significantly from country to country, consequently, I would continue with this issue by arguing for a narrower scope of qualified law. -Fourthly, qualified law may have a special position in the hierarchy of norms, somewhere between statutory and the constitutional level, so I would cover this aspect. I would focus on the level of precision of constitutional articles in this regard.-Furthermore, the separation of powers perspective of qualified laws would be taken into consideration: the neglect of two-third majority, and the mandatory a priory review.-As the main outcome, certain points would be highlighted for a potential constitution-drafting process.
    Keywords: Qualified majority, separation of powers, fundamental rights, scope of qualified law, democratic transition, rule of law, hierarchy of norms
    JEL: K00 K11 K40
  4. By: Jacopo Ponticelli; Leonardo S. Alencar
    Abstract: We exploit variation in the congestion of civil courts across Brazilian municipalities, together with a bankruptcy reform increasing secured creditors’ protection, to estimate the effect of enforcement on firm access to finance, investment and size. We find that firms operating in municipalities with less congested courts experienced larger increase in the use of secured loans, as well as a larger increase in investment and value of output in the years after the reform. To establish the direction of causality, we use an instrumental variable strategy that exploits Brazilian state laws on judicial organization, and focus on differences in court congestion across otherwise similar neighboring municipalities located across judicial district borders within the same state. Together, the evidence indicates that differences in court enforcement affect the impact of financial reform on firm access to finance, investment and size
    Date: 2016–04
  5. By: Markus Gehrsitz (Ph.D. Program in Economics, Graduate Center, CUNY)
    Abstract: This paper estimates the effects of temporary driver's license suspensions on driving behavior. A little known rule in the German traffic penalty catalogue maintains that drivers who commit a series of speeding transgressions within 365 days should have their license suspended for one month. My fuzzy regression discontinuity design exploits the quasi-random assignment of license suspensions caused by the 365-day cutoff and shows that 1-month license suspensions lower the probability of recidivating within a year by 20 percent. This effect is not driven by incapacitation and indicates that temporary license suspensions are an effective tool in preventing traffic transgressions.
    Keywords: Speeding, Recidivism, Punishment, Economics of Crime, Risky Behavior, Regression Discontinuity
    JEL: K42 I12 I18
    Date: 2016–03–22
  6. By: Martin Mendelski
    Abstract: This policy paper identifies two key dilemmas of the EU's rule of law promotion: 1. The problem of supporting unaccountable reformers in a partisan way (ownership dilemma); 2. The problem of valuing quantity over quality (change vs. stability dilemma). It is argued that these dilemmas reinforce legal pathologies which undermine the rule of law in Central and Eastern Europe. The paper offers two unconventional policy recommendations to enhance the quality of rule of law reform and assessment.
    Keywords: Central and Eastern Europe,European Union,Europeanization,rule of law
    Date: 2016–02
  7. By: Imhof, David; Karagök, Yavuz; Rutz, Samuel
    Abstract: This paper proposes a method to detect bid-rigging by applying mutually reinforcing screens to a road construction procurement data set from Switzerland in which no prior information about collusion was available. The screening method is particularly suited to deal with the problem of partial collusion, i.e. collusion which does not involve all firms and/or all contracts in a specific data set, implying that many of the classical markers discussed in the corresponding literature will fail to identify bid-rigging. In addition to presenting a new screen for collusion, it is shown how benchmarks and the combination of different screens may be used to identify subsets of suspicious contracts and firms in a data set. The discussed screening method succeeds in isolating a group of “suspicious” firms exhibiting the characteristics of a local bid-rigging cartel operating with cover bids and a – more or less pronounced – bid rotation scheme. Based on these findings the Swiss Competition Commission (ComCo) decided to open an investigation.
    Keywords: bid-rigging; screening method; variance screen; cover bidding screen; bid rotation test; partial collusion
    JEL: C00 C40 D22 D40 K40 L40
    Date: 2016–04–07
  8. By: Goel, Rajeev K. (Asian Development Bank Institute); Saunoris, James W. (Asian Development Bank Institute)
    Abstract: This paper studies the effects of various forms of government decentralization on institutional quality across countries. Using corruption and the shadow economy to proxy for institutional quality, as well as three forms of government decentralization (i.e., virtual, physical, and fiscal), the econometric results show virtual decentralization to be the most effective in improving institutional quality. The effects on transition and countries in Asia are also considered.
    Keywords: government decentralization; shadow economy; institutional quality; virtual decentralization
    JEL: H11 H73 K42
    Date: 2016–03–31
  9. By: Denise Scheld (University of Giessen); Johannes Paha (University of Giessen); Nicolas Fandrey (Protiviti GmbH)
    Abstract: Competition law compliance has become increasingly important in the banking industry as the number of infringements and the associated fines imposed by the European Commission are rising. This article shows that not only governments and regulators, but also shareholders and managers, should be interested in managing antitrust risks in banks in order to avoid competition law infringements. Therefore, this article sets out an approach to assessing the residual risk of antitrust non-compliance as well as the costs associated with such conduct, in order to be able to identify the required intensity of risk management activities. It also shows how antitrust risk management can be implemented in banks’ governance structures using the Three Lines of Defence model and the COSO ERM framework. As a result, it demonstrates how to integrate antitrust risk management activities into existing structures and processes, thus improving the efficiency and effectiveness of overall risk management, in particular antitrust risk management.
    Keywords: risk management, antitrust, compliance, banks, competition
    JEL: G20 G30 G32 L21 K21
    Date: 2015
  10. By: Daniel Danau (Normandie Université, UNICAEN, CREM CNRS, France); Analisa Vinella (Università degli Studi di Bari "Aldo Moro", Italy)
    Abstract: Riordan and Sappington (JET, 1988) show that in an agency relationship in which the type of the agent is correlated with a signal that is observed publicly ex post, the principal may attain first best (full surplus extraction and efficient output levels) if she offers the agent a lottery such that each type is rewarded for one signal realization and punished equally for all the others. Gary-Bobo and Spiegel (RAND, 2006) show that this kind of lottery is most likely to be locally incentive-compatible when the agent is protected by limited liability. In this paper we investigate how the principal should construct the lottery to attain not only local but also global incentive-compatibility. We first assess that the main issue with global incentive-compatibility rests with intermediate types being potentially attractive reports to both lower- and higher-order types. We then show that a lottery including three (rather than two) levels of profit is most likely to be globally incentive-compatible under limited liability, if local incentive constraints are strictly satisfied. We identify conditions under which first best is implemented and pin down the optimal distortions when those conditions are violated. In particular, when the first-best allocation is locally but not globally incentive-compatible, output distortions are induced but no information rent is conceded to the agent.
    Keywords: Incentive compatibility; Limited liability; Correlated signals; Conditional probability; Full-rank condition
    JEL: D82
    Date: 2016–03

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