nep-law New Economics Papers
on Law and Economics
Issue of 2016‒08‒07
twelve papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. The Shareholder Wealth Effects of Delaware Litigation By Badawi, Adam B.; Chen, Daniel L.
  2. Incarceration, recidivism and employment By Manudeep, Bhuller; Dahl, Gordon B.; Løken, Katrine V.; Mogstad, Magne
  3. In Europe We Trust? By Ritzen, Jo; Haas, Jasmina
  4. Covering: Mutable Characteristics and Perceptions of (Masculine) Voice in the U.S. Supreme Court By Chen, Daniel L.; Halberstam, Yosh; Yu, Alan
  5. The Impact of Merger Legislation on Bank Mergers By Elena Carletti; Steven Ongena; Jan-Peter Siedlarek; Giancarlo Spagnolo
  6. Priming Ideology: Why Presidential Elections Affect U.S. Judges By Chen, Daniel L.
  7. An Event Study of Patent Verdicts and Judicial Leakage By Bryan Engelhardt; Zachary Fernandes
  8. A careerist judge with two concerns By Ascensión Andina Díaz; José A. García-Martínez
  9. Monopoly Power with a Short Selling Constraint By Robert Baumann; Bryan Engelhardt; David L. Fuller
  10. Does Empathy Beget Guile? Experimental Evidence By Chen, Daniel L.
  11. No Extension without Representation? Evidence from a Natural Experiment in Collective Bargaining By Alexander Hijzen; Pedro S. Martins
  12. The Italian Blitz: a natural experiment on audit publicity and tax compliance By Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro

  1. By: Badawi, Adam B.; Chen, Daniel L.
    Abstract: We collect data on the record of every action in over one thousand cases involving public companies from 2004 to 2011 in the Delaware Court of Chancery, which is the leading court for corporate law disputes in the United States. We use these data to estimate how markets respond to Delaware litigation events and characteristics such as case initiations, procedural motions, case quality, and judge identity. We find that negative abnormal returns are associated with the filing of derivative and contract cases, but we observe little effect associated with the filing of the average merger challenge. When we include measures of case quality, we see that higher quality cases increase the expected impact of derivative and contract litigation on firm value. We also develop evidence that tactics associated with multijurisdictional litigation are associated with a weakened impact of litigation on firm value. This evidence is consistent with the belief that the presence of litigation in another jurisdiction allows defense lawyers to bid down competing groups of plaintiffs’ lawyers during settlement negotiations. Finally, we show that abnormal returns are not associated with information on judicial assignment at the time of case filing, nor are they associated with judge identity at case resolution. These results suggest that the judicial impact on shareholder wealth at the time of judicial assignment and the time of case termination is too small to be statistically detected.
    Date: 2016–07
  2. By: Manudeep, Bhuller (Department of Economics, University of Chicago; Research Department, Statistics Norway); Dahl, Gordon B. (Department of Economics, UC San Diego); Løken, Katrine V. (Department of Economics, University of Bergen); Mogstad, Magne (Department of Economics, University of Chicago; Research Department, Statistics Norway; NBER)
    Abstract: Understanding whether, and in what situations, time spent in prison is criminogenic or preventive has proven challenging due to data availability and correlated unobservables. This paper overcomes these challenges in the context of Norway’s criminal justice system, offering new insights into how incarceration affects subsequent crime and employment. We construct a panel dataset containing the criminal behavior and labor market outcomes of the entire population, and exploit the random assignment of criminal cases to judges who differ systematically in their stringency in sentencing defendants to prison. Using judge stringency as an instrumental variable, we find that imprisonment discourages further criminal behavior, and that the reduction extends beyond incapacitation. Incarceration decreases the probability an individual will reoffend within 5 years by 27 percentage points, and reduces the number of offenses over this same period by 10 criminal charges. In comparison, OLS shows positive associations between incarceration and subsequent criminal behavior. This sharp contrast suggests the high rates of recidivism among ex-convicts is due to selection, and not a consequence of the experience of being in prison. Exploring factors that may explain the preventive effect of incarceration, we find the decline in crime is driven by individuals who were not working prior to incarceration. Among these individuals, imprisonment increases participation in programs directed at improving employability and reducing recidivism, and ultimately, raises employment and earnings while discouraging further criminal behavior. Contrary to the widely embraced ‘nothing works’ doctrine, these findings demonstrate that time spent in prison with a focus on rehabilitation can indeed be preventive.
    Keywords: crime; employment; incarceration; recidivism
    JEL: J24 K42
    Date: 2016–07–25
  3. By: Ritzen, Jo (IZA and Maastricht University); Haas, Jasmina (Maastricht University)
    Abstract: The decrease in the rule of law and in control of corruption in several EU countries is a threat to the cohesion in the EU. Brexit has reinforced the centrifugal forces in the EU. To counter this threat the EU needs to engage in unpopular measures as they infringe on the Member States' sovereignty. We propose to introduce new measures in treaty revisions like the possibility of individuals to appeal to European courts to counter negative developments in governance in EU Member States.
    Keywords: governance, institutions, EU, economic growth
    JEL: D02 D72 D78 E02 I31 K20 K33 O43 O52
    Date: 2016–07
  4. By: Chen, Daniel L.; Halberstam, Yosh; Yu, Alan
    Abstract: The emphasis on “fit” as a hiring criterion has raised the spectrum of a new form of subtle discrimination (Yoshino 1998; Bertrand and Duflo 2016). Under complete markets, correlations between employee characteristics and outcomes persist only if there exists animus for the marginal employer (Becker 1957), but who is the marginal employer for mutable characteristics? Using data on 1,901 U.S. Supreme Court oral arguments between 1998 and 2012, we document that voice-based snap judgments based on lawyers’ identical introductory sentences, “Mr. Chief Justice, (and) may it please the Court?”, predict court outcomes. The connection between vocal characteristics and court outcomes is specific only to perceptions of masculinity and not other characteristics, even when judgment is based on less than three seconds of exposure to a lawyer’s speech sample. Consistent with employers irrationally favoring lawyers with masculine voices, perceived masculinity is negatively correlated with winning and the negative correlation is larger in more masculine-sounding industries. The first lawyer to speak is the main driver. Among these petitioners, males below median in masculinity are 7 percentage points more likely to win in the Supreme Court. Justices appointed by Democrats, but not Republicans, vote for lessmasculine men. Female lawyers are also coached to be more masculine and women’s perceived femininity predict court outcomes. Republicans, more than Democrats, vote for more feminine-sounding females. A de-biasing strategy is tested and shown to reduce evaluators’ tendency to perceive masculine voices as more likely to win. Perceived masculinity explains 3-10% additional variance compared to the current best prediction model of Supreme Court votes.
    Keywords: Identity, Phonology, Judicial Decision-Making
    JEL: J15 J78 K41
    Date: 2016–07
  5. By: Elena Carletti (Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute); Jan-Peter Siedlarek (Federal Reserve Banks - Federal Reserve Bank of Cleveland); Giancarlo Spagnolo (Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF)
    Abstract: We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust
    JEL: G21 G34 K21 L40
  6. By: Chen, Daniel L.
    Abstract: U.S. Presidential elections polarize U.S. Courts of Appeals judges, doubling their dissents, partisan voting, and lawmaking along partisan lines and increasing their reversal of District Court decisions (Berdejo and Chen 2016). Dissents are elevated for ten months before the Presidential elections. I develop a theoretical model showing that the salience of partisan identities drives these behavioral patterns. The polarizing effects are larger in close elections, non-existent in landslide elections, and reversed in wartime elections. I link judges to their states of residence and exploit variation in the timing and importance of a state during the electoral season. Dissents are elevated in swing states and in states that count heavily to winning the election, when these states are competitive. U.S. Senate elections, the timing of which also varies by state, further elevate dissents. I link administrative data on case progression and frequency of campaign advertisements in judges’ states of residence to proxy for a state’s importance during Presidential primaries. Dissents occur shortly before publication, increase with monthly increases in campaign ads, and appear for cases whose legal topic, economic activity, is most heavily covered by campaign ads. Finally, I link the cases to their potential resolution in the Supreme Court. Dissents before elections appear on more marginal cases that cite discretionary miscellaneous issues and procedural (rather than substantive) arguments, which the Supreme Court appears to recognize and only partly remedy. The behavioral changes of unelected Courts of Appeals judges are larger than the behavioral changes of elected judges running for re-election.
    Keywords: Judicial Decision-Making, Group Decision-Making, Moral Decision-Making, Salience
    JEL: D7 K00 Z1
    Date: 2016–07
  7. By: Bryan Engelhardt (College of Business, University of Wisconsin - Oshkosh); Zachary Fernandes (Board of Governors of the Federal Reserve System)
    Abstract: To check for the impartiality of the United States judicial system, we investigate whether judicial decisions are leaked prior to their public release. Utilizing an event study methodology, we test for leaked information by analyzing the effect of patent infringement verdicts on the stock prices of the firms involved before and after the public release of the verdict. We find evidence that at least some of the decisions are leaked prior to their public release.
    Keywords: event study, patent infringement, judicial leakage, insider trading, trial court, appellate court
    JEL: G14 K41
    Date: 2016–07
  8. By: Ascensión Andina Díaz (Departamento de Teoría e Historia Económica, Universidad de Málaga); José A. García-Martínez (Departamento de Estudios Económicos y Financieros, Universidad Miguel Hernández)
    Abstract: This paper analyzes the effect of media coverage on the incentives of a careerist judge to act on her information. The novelty of our approach is to consider a judge who seeks to signal both \textit{expertise} and (absence of) \textit{bias}. To this, we incorporate three types of judges: the high quality or wise judge, the normal judge and the biased/lenient judge. Our results show that whether media coverage of judicial cases leads to better sentencing practices or not, deeply depend on the proportion of lenient judges in the population. In particular, we obtain that when this proportion is either too low or too high, media coverage does not affect a judge's behavior. However, her behavior if very different in one case than in the other. We also obtain that when the perceived proportion of lenient judges is neither too strong nor too weak, media coverage of judicial cases can induce a judge to act less on her information and to pass harsher sentences.
    Keywords: Careerist judges; bias; transparency; media coverage; sentencing practices
    JEL: D82 K40 L82
    Date: 2016–08
  9. By: Robert Baumann (Department of Economics, College of the Holy Cross); Bryan Engelhardt (Department of Economics, College of the Holy Cross); David L. Fuller (College of Business, University of Wisconsin - Oshkosh)
    Abstract: We show if a speculator can benefit from reducing a monopoly’s rents through short selling, then a speculator may take a short position in a monopoly, overcome the barriers to entry, and compete with the monopoly. The competition drives down the monopoly’s rents, and as a result, the short position becomes profitable and covers the cost of entry. If entry is impossible, then the speculator may coordinate and pay the firm’s counter-parties to stop trading with the monopoly rather than entering. Either way, increasing a speculator’s ability to short a firm’s rents results in a constraint on the monopoly and forces it to act more like a price taker. The mechanism is a market based approach to antitrust.
    Keywords: antitrust, monopoly, short selling
    JEL: L12 K21
    Date: 2016–04
  10. By: Chen, Daniel L.
    Abstract: Some theories about the positive impact of markets on morality suggest that competition increases empathy, not between competitors, but between them and third parties. However, empathy may be a necessary evolutionary antecedent to guile, which is when someone knows what the other person wants and intentionally deceives him or her, and deception may have evolved as a means of exploiting empathy. This paper examines how individuals primed for empathy behave towards third parties in a simple economic game of deception. It reports the results of a data entry experiment in an online labor market. Individuals enter data randomized to be a prime for empathy, for guile, or a control. Empathy is then measured using a Reading the Mind in the Eyes Test and guile is measured using a simple economic game. Individuals primed for empathy become less deceptive towards third parties. Individuals primed for guile become less likely to perceive that deceiving an individual is unfair in a vignette. These results are robust to a variety of controls and to restricting to workers who entered the prime accurately. These findings are inconsistent with the hypothesis that empathy causes guile and suggests that empathy may cause those who are making judgements to become less deceptive.
    Keywords: Normative Commitments, Other-Regarding Preferences, Empathy, Deception, Guile
    JEL: D03 D64 K00
    Date: 2016–07
  11. By: Alexander Hijzen; Pedro S. Martins
    Abstract: In many countries, notably across Europe, collective bargaining coverage is enhanced by government-issued extensions that widen the reach of collective agreements beyond their signatory parties to all firms and workers in the same sector. This paper analyses the causal impact of such extensions on employment using a natural experiment in Portugal: the immediate suspension by the government that took office in 21 June 2011 of the (until then) nearly automatic extensions. The combination of this suspension and the time needed for processing the extension applications resulted in a sharp and unanticipated decline in the extension probability of agreements signed several months earlier, around 1 March 2011. Our results, based on a regression discontinuity design and matched employer-employee-agreement panel data, suggest that extensions had a negative impact on employment growth. Moreover, the effects tend to be concentrated amongst non-affiliated firms. The lack of representativeness of employer associations is a potentially important factor behind the adverse effect of extensions. Another is the role of retro-activity in combination with the administrative delay in processing extensions. This is particularly relevant in the context of a recession.
    Keywords: collective bargaining, industrial relations, employer associations, wage setting, employment
    JEL: J52 J58 J21
    Date: 2016–07
  12. By: Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
    Abstract: Tax evasion is a major problem faced by governments across the world, and many strategies have been attempted to minimize its extent. One such strategy is the “fiscal blitz”, consisting in clusters of unexpected tax verification activities targeting businesses. Blitzes have been widely implemented in Italy: the ones taking place in the last years shared many common features, but differed in the level of publicity they received on the media. We use confidential data on Value Added Tax payments at the sector level in two cities to estimate the effect of such publicity on tax compliance of local sellers. By employing a Difference-in-Differences identification strategy, we find that the publicity of the blitz has a positive effect on fiscal declarations made shortly after. The results suggest that increasing awareness on future audits via the media can be an important instrument in the hands of tax authorities.
    Keywords: Tax evasion, Natural experiment, Audit publicity
    JEL: H32 K34 E62
    Date: 2016–07

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