nep-law New Economics Papers
on Law and Economics
Issue of 2016‒07‒23
eleven papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Costly Pretrial Agreements By Luca Anderlini; Leonardo Felli; Giovanni Immordino
  2. Do courts matter for firm value? Evidence from the U.S. court system. Second draft By Colonnello, Stefano; Herpfer, Christoph
  3. Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law* By Nuri Ersahin; Rustom M. Irani; Katherine Waldock
  4. The Strange Career of Independent Voting Trusts in U.S. Rail Mergers By Pittman, Russell
  5. Strip Clubs, “Secondary Effects,†and Residential Property Prices By Taggert J. Brooks; Brad R. Humphreys; Adam Nowak
  6. Do Government Audits Reduce Corruption? Estimating the Impacts of Exposing Corrupt Politicians By Eric Avis; Claudio Ferraz; Frederico Finan
  7. Why local context matters: de jure and de facto property rights in colonial South Africa By Christie Swanepoel and Johan Fourie; Johan Fourie
  8. International Trade and Good Regulatory Practices: Assessing The Trade Impacts of Regulation By Robert Basedow; Celine Kauffmann
  10. Immigration Enforcement and Childhood Poverty in the United States By Amuedo-Dorantes, Catalina; Arenas-Arroyo, Esther; Sevilla, Almudena
  11. An Italian job: the need for collective wage bargaining reform By Alessio Terzi

  1. By: Luca Anderlini (Georgetown University); Leonardo Felli (London School of Economics); Giovanni Immordino (Università di Napoli Federico II and CSEF)
    Abstract: Legal disputes are either settled or end up in Court. Settling a dispute involves some costs (time and money invested in preparations) that the parties have to incur ex-ante, in order for the pretrial negotiation and possible agreement to become feasible. Even in a full information world, if the distribution of these costs is sufficiently mismatched with the distribution of the parties' bargaining powers, a pretrial agreement may never be reached even though actual Court litigation is overall wasteful. As parameters vary, the equilibrium of our full information model with costly pretrial agreements sheds light on two key features of how disputes are initiated and subsequently handled. First, in some cases a Plaintiff may initiate a law suit even though the parties fully anticipate that it will be settled out of Court. Second, the “likelihood” that a given law suit ends up in Court is unaffected by the way trial costs are distributed among the litigants (e.g. English Rule or American Rule). The choice of fee-shifting rule can only affect whether the Plaintiff files a law suit in the first place. It does not affect whether a given suit is settled before trial or litigated in Court.
    Keywords: Pretrial Agreements, Costly Negotiations, Court Litigation
    JEL: D23 D86 C79 K12 K13
    Date: 2016–07–13
  2. By: Colonnello, Stefano; Herpfer, Christoph
    Abstract: We estimate the link between the court system and firm value by exploiting a U.S. Supreme Court ruling which changed firms' exposure to different courts. We find that exposure to courts which are highly ranked by the U.S. Chamber of Commerce increases firm value. The effect is driven by courts' attitude towards businesses more than by their efficiency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts, so-called forum shopping. We provide evidence that a reduction in firms' ability to forum shop decreases firm value, whereas a reduction in plaintiffs' ability to forum shop increases firm value.
    Keywords: courts,forum shopping,circuit splits,governance
    JEL: G32 G34 G38 K40
    Date: 2016
  3. By: Nuri Ersahin; Rustom M. Irani; Katherine Waldock
    Abstract: We examine entrepreneurial activity following the adoption of fraudulent transfer laws in the U.S. These laws strengthen creditor rights by removing the burden of proof from creditors attempting to claw back funds that were transferred out of failing businesses. These laws are particularly important for entrepreneurs whose personal assets are often commingled with those of the venture. Using establishment-level data from the U.S. Census Bureau, we find significant declines in start-up entry, churning among new entrants, and closures of existing ventures after the passage of these laws. Our findings suggest that strengthening creditor rights can, in some circumstances, impede entrepreneurial activity and slow down the process of creative destruction.
    Keywords: Creditor Rights; Bankruptcy; Entrepreneurship; Creative Destruction; Law and Finance Ersahin
    JEL: G21 G33 K22 L26 M13
    Date: 2016–07
  4. By: Pittman, Russell
    Abstract: Voting trust arrangements have a long history at both the Interstate Commerce Commission and the Surface Transportation Board as devices to protect the incentives of acquiring firms and maintain the independence of acquiring and target firms during the pendency of regulatory investigation of the merger proposal. However, they are not without problems. The STB argued in 2001 that as Class I railroads have become fewer and larger, it may be difficult to find alternative purchasers for the target firm if the STB turns down the proposal. The Antitrust Division argued in 2016 that joint stock ownership creates anticompetitive and/or otherwise undesirable incentives, even if the independence of the voting trustee is complete. On the other hand, the functions served by voting trusts in railroad mergers are served by merger termination fees and other contractual “lockup” mechanisms in other parts of the economy, without the same incentive problems as voting trusts. Thus voting trusts may no longer serve a useful function in railroad merger deliberations.
    Keywords: railroads, mergers, voting trusts, merger termination fees, merger lockup provisions
    JEL: D82 G34 K23 L92 N71 N72
    Date: 2016–07–19
  5. By: Taggert J. Brooks (University of Wisconsin-La Crosse); Brad R. Humphreys (West Virginia University, Department of Economics); Adam Nowak (West Virginia University, Department of Economics)
    Abstract: The "secondary effects" legal doctrine allows municipalities to zone, or otherwise regulate, sexually oriented businesses. Negative "secondary effects" (economic externalities) justify limiting First Amendment protection of speech conducted inside strip clubs. One example of a secondary effect, cited in no fewer than four United States Supreme Court rulings, is the negative effect of strip clubs on the quality of the surrounding neighborhood. Little empirical evidence that strip clubs do, in fact, have a negative effect on the surrounding neighborhood exists. To the extent that changes in neighborhood quality are reflected by changes in property prices, property prices should decrease when a strip club opens up nearby. We estimate an augmented repeat sales regression model of housing prices to estimate the effect of strip clubs on nearby residential property prices. Using real estate transactions from King County, Washington, we test the hypothesis that strip clubs have a negative effect on surrounding residential property prices. We exploit the unique and unexpected termination of a 17 year moratorium on new strip club openings in order to generate exogenous variation in the operation of strip clubs. We find no statistical evidence that strip clubs have "secondary effects" on nearby residential property prices.
    Keywords: Sexually oriented business, secondary effects doctrine, repeat sales regression model
    JEL: K10 K23 R30 R38 R52
    Date: 2016–07
  6. By: Eric Avis (UC Berkeley); Claudio Ferraz (Department of Economics, PUC-Rio); Frederico Finan (UC Berkeley)
    Abstract: Political corruption is considered a major impediment to economic development, and yet it remains pervasive throughout the world. This paper examines the extent to which government audits of public resources can reduce corruption by enhancing political and judiciary accountability. We do so in the context of Brazil’s anti-corruption program, which randomly audits municipalities for their use of federal funds. We find that being audited in the past reduces future corruption by 8 percent, while also increasing the likelihood of experiencing a subsequent legal action by 20 percent. We interpret these reduced-form findings through a political agency model, which we structurally estimate. Based on our estimated model, the reduction in corruption comes mostly from the audits increasing the perceived threat of the non-electoral costs of engaging in corruption. Creation-Date: 2016-07
  7. By: Christie Swanepoel and Johan Fourie; Johan Fourie
    Abstract: For economic transactions, including debt transactions, to occur in a market system, property rights are essential. The literature has focussed on finding empirical proof of the effect of property right regimes, noting differences between de jure and de facto property rights. Yet most of these studies focus on macroeconomic outcomes, like economic growth and public expenditure. We propose, instead, to use individual debt transactions and property ownership available in probate inventories from early colonial South Africa to investigate the effects of property right regimes on economic outcomes at the individual level. At the Cape, de jure property rights between freehold and loan farms differed. Historians, however, suggest that de facto property rights between these two property types were the same. We exploit the random variation of birth order, specifically being the oldest son, to estimate whether the type of farm, and therefore the type of property rights, matter for economic activity, in our case, debt transactions. Our results suggest that historians were correct: loan farms were as secure in their de facto property rights, despite differences in de jure property rights. Our results confirm that the local context in which property right regimes are embedded are at least as important as the property right regime itself.
    Keywords: Property rights, informal credit markets, institutions, Africa
    JEL: G21 D23 P14 N27 N37
    Date: 2016
  8. By: Robert Basedow; Celine Kauffmann
    Abstract: Good Regulatory Practices encompassing the use of regulatory impact assessments, stakeholder engagement and ex post evaluation are a critical tool in the hands of governments to ensure that regulation achieves its objectives. Over the past several years, attention has grown for the trade costs of regulatory divergence. Diverging regulation may increase the costs to trade goods and services across borders. While regulatory divergence is often the result of diverging national public policy objectives, it may be the undesired result of rule-making ignoring the international regulatory environment and interconnectedness of our societies and economies. Good Regulatory Practices provide governments with tools, processes and strategic approaches that can help them identify and evaluate the trade impacts of their regulatory action. The paper reviews the theoretical and practical contribution of GRP to mainstreaming international trade considerations in regulatory decision-making and to addressing regulatory divergence. It does so by reviewing the relevant academic literature, GRP guidelines of a number of OECD members and examples of how GRP and in particular regulatory impact assessments are used to consider the trade impacts of regulation. Building on the available evidence, the paper discusses how decision-makers may enhance the use of GRP to address international trade considerations in regulatory policy-making.
    Keywords: regulatory impact assessment, good regulatory practices, stakeholder engagement, ex post evaluation, regulatory policy
    JEL: F10 H11 K2 K4
    Date: 2016–07–20
  9. By: Dorothy McClellan (Texas A&M University-Corpus Christi)
    Abstract: As the 25th anniversary of the Balkan War approaches, people around the globe recall a terrible war of aggression that shocked the conscience of the modern world by its deliberate carnage, primitivism, and countless atrocities targeting civilian populations. This project addresses the experiences and concerns of tens of thousands of women who were raped in that war and are still awaiting prosecution of their victimizers, many still seeking official status as victims of war crimes entitled to moral, spiritual, and financial assistance. The widespread, systematic use of rape as an instrument of war by the Serbian military has been documented by the U.N., and the International Tribunal for the Former Yugoslavia (ICTY). The U.N. estimates that between 20,000 and 60,000 women were raped by the Serbian military. Yet, to date, there have been few successful prosecutions of the war crimes of genocide, rape, and sexual enslavement. The Security Council, in forming the Tribunal sought a political mechanism for fulfilling two distinct purposes: 1) To meet the Security Council’s obligations “to stop crimes against the peace and reestablish peace and security,†and 2) To meet the Tribunal’s single obligation to try individuals responsible for serious violations of international humanitarian law which delineates the legitimacy of the level of violence in an armed conflict. It failed to make the essential distinction between the aggressor, a war criminal committing a jus cogens crime (a crime that violates a fundamental principle of international law from which no derogation is permitted) and the defendant-victim of the crime lawfully engaged in self-defense. This presentation examines how the Tribunal’s controversial stance of moral equivalency, a formulation that replaces the concept of aggression with that of joint criminal enterprise, has contributed to victims being left alone in their suffering. The criminals live freely among them.
    Keywords: women victims, war violence, rape, war crimes, genocide, former Yugoslavia
    JEL: K14
  10. By: Amuedo-Dorantes, Catalina (San Diego State University); Arenas-Arroyo, Esther (Queen Mary, University of London); Sevilla, Almudena (Queen Mary, University of London)
    Abstract: Over the past two decades immigration enforcement has grown exponentially in the United States. We exploit the geographical and temporal variation in a novel index of the intensity of immigration enforcement between 2005 and 2011 to show how the average yearly increase in interior immigration enforcement over that time period raised the likelihood of living in poverty of households with U.S. citizen children by 4 percent. The effect is robust to a number of identification tests accounting for the potential endogeneity of enforcement policies, and is primarily driven by police-based immigration enforcement measures adopted at the local level such as 287(g) agreements.
    Keywords: immigration enforcement, poverty, U.S. citizen children, unauthorized parents
    JEL: I38 J15 K37
    Date: 2016–06
  11. By: Alessio Terzi
    Abstract: Highlights For references and footnotes, please see the PDF version of this publication. Since the mid-1990s, Italy has been characterised by a lack of labour productivity growth, combined with a 60 percent growth in labour costs, 20 percentage points above euro-area average consumer price growth. As a consequence, Italy has become less competitive compared to its euro-area partners, the profitability of its firms has dropped and real GDP-per-capita has flatlined. At the root of the substantial discrepancy between wages and productivity is Italy’s current system of centralised wage bargaining which, in many ways, is designed without regard for the underlying industrial structure and geographical heterogeneity of the Italian economy. This has fostered perverse incentives and imbalances within Italy. Collective wage bargaining, and in particular the determination of base salaries, should be moved from the national to the regional level for all contracts, in the public and private sectors. The Mezzogiorno, which might superficially be seen as losing out from this policy, would actually gain the most in competitiveness terms. Furthermore, measures should be taken so that, in the long run, the Italian industrial structure evolves into a less fragmented small-company-based economy. This firm consolidation would likely expand the use of firm-level agreements and performance payments, and would improve Italy’s productivity and competitiveness overall. Background Competitiveness is often presented as a nebulous concept, lacking a clear workable definition, and too vague to guide policymaking (Odendahl, 2016). Krugman (1994) goes as far as accusing it of being a “dangerous obsession”, insofar as it makes people believe that it is countries that compete on the world market, rather than firms. However, even Krugman espouses Laura D’Andrea Tyson’s definition of competitiveness as “the ability to produce goods and services that meet the test of international competition while […] citizens enjoy a standard of living that is both rising and sustainable” (Tyson, 1993). It is unquestionable that the euro-area crisis was preceded by significant competitiveness losses in several Mediterranean economies (Bénassy-Quéré, 2015). Several indicators illustrate the evolution of competitiveness at country and sector level, including current account balances, R&D expenditure, market share and productivity (Castellani and Koch, 2015). Thimann (2015) looks at a particular indicator of price competitiveness, namely nominal unit labour costs (ULC), and by decomposing it, shows how in some countries wages and productivity have diverged at a stunning rate. Italy is among them (Figure 1, right panel). Since the mid-1990s, Italy has been characterised by substantially flat labour productivity growth, combined with a 60 percent growth in labour costs over an 18-year period. Obviously this divergence partly reflects inflation developments, although over that period prices in Italy increased by 10 percentage points less (51.3 percent). However, within a monetary union real wages deflated with domestic prices are not a relevant competitiveness benchmark (Thimann, 2015). What matters for purchasing and investment considerations are nominal prices in euros. And over a comparable period of time, consumer prices in the euro area increased by roughly 40 percent. The result of this widening gap is that over the past two decades Italy’s ULCs have risen more than those of its euro-area peers (Figure 1, left panel) and firm profitability has been eroded. Figure 2 shows how the ratio of gross operating surplus (revenues net of the cost of intermediate goods and labour costs) to value-added shrank by a fifth since 1999, compared to -10 percent in France, and +8 percent in Germany. Figure 1 - Nominal unit labour costs (left panel) and labour costs and productivity developments in Italy (right panel), 1995=100 Source - Bruegel, Eurostat, OECD. Note - Productivity is computed as real GDP per hour worked; wages are computed as nominal compensation per hour worked. These two metrics are used to calculate nominal unit labour costs. Figure 2 - Ratio of gross operating surplus to value added, 1995=100 Source - Bruegel, Eurostat. Note - Gross operating surplus is defined as revenues of non-financial corporations minus the cost of intermediate goods (hence value added) minus compensation of employees. In line with Tyson’s predictions, Italy’s real GDP-per-capita has flatlined (Terzi, 2015). Clearly, this is a great concern not only for Rome, but also for other European capitals, because a country with feeble growth and very high public debt (132.7 percent of GDP in 2015) is highly exposed to exogenous macroeconomic shocks and can be a source of instability for the whole euro area. Italy stands out as a country that did not manage to embrace the ICT revolution and live up to the challenges posed by globalisation, as argued by Pellegrino and Zingales (2014).
    Date: 2016–07

This nep-law issue is ©2016 by Eve-Angeline Lambert. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.