nep-law New Economics Papers
on Law and Economics
Issue of 2017‒06‒04
fifteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Deterrence and the Optimal Use of Prison, Parole, and Probation By A. Mitchell Polinsky; Paul N. Riskind
  2. How should we model property? thinking with my critics By Benito Arruñada
  3. Cost Shifting in Civil Litigation: A General Theory By Ben Chen; José A. Rodrigues-Neto
  4. The Effect of Malpractice Law on Physician Supply: Evidence from Negligence-Standard Reforms By Michael D. Frakes; Matthew B. Frank; Seth A. Seabury
  5. Effective anti-corruption policy-making: What can we learn from experimental economics? By Boly, Amadou; Gillanders, Robert
  6. Capital structure and competitive intensity: Considerations for Start-Up Firms By Pandey, Ashish
  7. Villains or Heroes? Private Banks and Railroads after the Sherman Act By Cantillo, Miguel
  8. The Ephemeral Concept of Parasitic Commercial Practices in the EU By Radka MacGregor Pelikánová
  9. Contingent judicial deference: theory and application to usury laws By Guimarães, Bernardo; Salama, Bruno Meyerhof
  10. Rethinking the Benefits of Youth Employment Programs: The Heterogeneous Effects of Summer Jobs By Jonathan M.V. Davis; Sara B. Heller
  11. Racial Bias in Bail Decisions By David Arnold; Will Dobbie; Crystal S. Yang
  12. The Cross-Border Spillover Effects of Recreational Marijuana Legalization By Zhuang Hao; Benjamin Cowan
  13. Changes in perception of European integration after Brexit By Andzelika Kuznar; Jerzy Menkes
  14. The Apparent Diversification Discount By Michela Altieri; Giovanna Nicodano
  15. Private Equity Fund Structures in Czech Republic within the Framework of the New Institutional Economics By Martina Skalicka,; Marek Zinecker; Tomas Meluzín

  1. By: A. Mitchell Polinsky; Paul N. Riskind
    Abstract: We derive the sentence—choosing among the sanctions of prison, parole, and probation—that achieves a target level of deterrence at least cost. Potential offenders discount the future disutility of sanctions and the state discounts the future costs of sanctions. Prison has higher disutility and higher cost per unit time than parole and probation, but the cost of prison per unit of disutility can be lower or higher than the cost of parole and probation per unit of disutility. The optimal order of sanctions depends on the relative discount rates of offenders and the state, and the optimal duration of sanctions depends on the relative costs per unit of disutility among the sanctions and on the target level of deterrence. In the case we focus on, in which potential offenders discount the disutility of sanctions at a higher rate than the state discounts the costs of sanctions, we demonstrate that (a) it is optimal for prison to precede parole if both sanctions are used; and (b) it may be optimal to employ prison even if prison has a higher cost per unit of disutility than parole and probation and even if prison is not needed to achieve the deterrence target.
    JEL: H23 K14 K42
    Date: 2017–05
  2. By: Benito Arruñada
    Abstract: Inspired by comments made by Allen (2017), Lueck (2017), Ménard (2017) and Smith (2017), this response clarifies and deepens the analysis in Arruñada (2017a). Its main argument is that to deal with the complexity of property we must abstract secondary elements, such as the physical dimensions of some types of assets, and focus on the interaction between transactions. This sequential-exchange framework captures the main problem of property in the current environment of impersonal markets. It also provides criteria to compare private and public ordering, as well as to organize public solutions that enable new forms of private ordering. The analysis applies the lessons in Coase (1960) to property by not only comparing realities but also maintaining his separate treatment of the definition of property rights and transaction costs. However, it replaces his contractual, single-exchange, framework for one in which contracts interact, causing exchange externalities.
    Keywords: property rights, externalities, enforcement, transaction costs, public ordering, private ordering, impersonal exchange.
    JEL: D23 K11 K12 G38 H41 O17 P48
    Date: 2017–05
  3. By: Ben Chen; José A. Rodrigues-Neto
    Abstract: We model civil litigation as a contest between a plaintiff and a defendant. A success function describes the litigants’ respective posterior probabilities of success based on their simultaneously-chosen efforts and an exogenous prior reflecting their relative advantages. The present success function satisfies general assumptions which capture frequently-used functional forms. These assumptions represent natural intuitions regarding the properties of reasonable success functions, and enable the results arising from the present model to reach a great degree of generality. Another generalization is the use of an exogenous proportion to characterize a cost-shifting rule that allows the winner to recover that proportion of her litigation costs from the loser. There exists a unique Nash equilibrium with positive efforts. In equilibrium, more cost shifting makes the outcome of the case more predictable, but may increase the litigants’ collective expenditure and decrease their collective welfare.
    Keywords: cost shifting, legal predictability, litigation costs, legal accuracy, contest theory.
    JEL: C72 K41
    Date: 2017–05
  4. By: Michael D. Frakes; Matthew B. Frank; Seth A. Seabury
    Abstract: We explore whether the composition of the physician work force is impacted by the clinical standards imposed on physicians under medical liability rules. We theorize that physicians of particular backgrounds will be attracted to regions when the malpractice laws of those regions favor the type of medicine characteristic of those backgrounds. To test this prediction, we rely on a quasi-experiment made possible by states shifting from local to national customs as the basis for setting standards at court, a distinction that captures meaningful differences in the clinical expectations of the law in light of the well documented phenomenon of regional variations in medical practices. Using data from the Area Health Resource File from 1977 to 2005, we find that the rate of surgeons among practicing physicians increases by 2-2.4 log points following the adoption of national-standard laws in initially low surgery-rate regions—i.e., following a change in the law that effectively expects physicians to increase practice intensities. We find that this response is nearly three times greater in rural counties. We also find that this supply effect is unidirectional, with no evidence to suggest that surgeons retreat when initially high-surgery-rate regions change their laws so as to expect less intensive practice styles.
    JEL: I18 K13
    Date: 2017–05
  5. By: Boly, Amadou; Gillanders, Robert
    Abstract: Experimental studies have shown that deterrence (monitoring and punishment) can be an effective anti-corruption policy. Even when they themselves stand to lose, policymakers may enact deterrence policies with real teeth ... However, policymakers' legitimacy is crucial: a given deterrence policy is more effective when chosen by an honest policymaker as opposed to a corrupt one.
    Date: 2017
  6. By: Pandey, Ashish
    Abstract: This short perspective article discusses the effect of a start-up firm's capital structure on the nature and degree of competition in the marketplace. Specifically, the article argues that the nature of financing availed by the start-up firms expose them to the risk of predatory price-based competition from a well-capitalized competitor. The staged model of capital infusion works best when tangible progress can be demonstrated at every new round of financing. Indian start-up firms need to acknowledge this fact, pursue innovations that complement the local realities and develop a distinct local model that justifies the need for additional capital.
    Keywords: Venture Financing, Start-Up Firms, Predatory Competition, Capital Dumping
    JEL: D43 G32 G38 K42 M13
    Date: 2017–02
  7. By: Cantillo, Miguel
    Abstract: Abstract This paper analyzes and measures the value that American private banks added as directors of non financial companies. Using data between 1874 and 1913, and an event study from 1906, I find that bank directors added about 20% of a firm's market capitalization. Collusive practices encouraged by private banks accounted for 65% of this value, and were the equivalent of creating a three player market among railroads. About 35% of the value added by banks came from better governance. I argue that although policymakers were partly right in sidelining private banks as activist investors, this helped entrench managers.
    Keywords: Antitrust; Collusion; Corporate Governance; Financial History
    JEL: G21 G24 G34 K21 L41 N21
    Date: 2016–11–30
  8. By: Radka MacGregor Pelikánová (Metropolitan University Prague, Dubeèská 900/10, 100 31 Prague 10 , Czech Republic)
    Abstract: Research background: It has been one decade since the transposition deadline regarding the Unfair Commercial Practices Directive. The EU´s growth strategy, Europe 2020, and all EU member states are committed to smart, sustainable, and inclusive growth, to the single internal market and to R&D leading to innovations. These positive priorities, however, often conflict with one another. The EU crossed the Rubicon and decided to harmonize the protection against parasitic commercial practices hurting intellectual property and consumers. Is this appropriate, effective and efficient? Purpose of the article: The primary purpose of this article is to assess the appropriateness, effectiveness and efficiency of the EU harmonization of the ephemeral concept of parasitic commercial practices. The secondary purpose is to assess approach(es) of the EU and EU member states to this overlap of the competition and intellectual property regimes. The third purpose is to assess the feasibility of the integrative harmonization in this arena. Methodology/methods: The multi-disciplinary nature of this article, and its three purposes, leads to the employment of Meta-Analysis, of the critical comparison of laws and the impact of their application, to the holistic perception of historical and national contexts, and to case studies. The primary sources (field search) and secondary sources (literature) are explored and the yield knowledge and data are confronted with the explored cases. The dominating qualitative research and data are complemented by the quantitative research and data. Findings & Value added: The Unfair Commercial Practices Directive harmonizes the protection of various issues, including the ephemeral concept of parasitic commercial practices. The set trio of purposes leads to a conclusion that this overlap of competition and intellectual property protection is highly sensitive and nationally particular. EU integration in this sphere is needed, but the undertaken harmonization is not fully effective and efficient, and perhaps even not appropriate.
    Keywords: Unfair Commercial Practices Directive; Unfair Competition; Intellectual Property; Innovation; Consumers.
    JEL: D18 K22 M38 O34
    Date: 2017–05
  9. By: Guimarães, Bernardo; Salama, Bruno Meyerhof
    Abstract: Legislation that seems unreasonable to courts is less likely to be followed. Building on this premise, we propose a model and obtain two main results. First, the enactment of legislation prohibiting something raises the probability that courts will allow related things not expressly forbidden. In particular, the imposition of an interest rate ceiling can make it more likely that courts will validate contracts with interest rates below the legislated cap. Second, legal uncertainty is greater with legislation that commands little deference from courts than with legislation that commands none. We discuss examples of e§ects of legislated prohibitions (and, in particular, usury laws) that are consistent with the model.
    Date: 2017–03–02
  10. By: Jonathan M.V. Davis; Sara B. Heller
    Abstract: This paper reports the results of two randomized field experiments, each offering different populations of youth a supported summer job in Chicago. In both experiments, the program dramatically reduces violent-crime arrests, even after the summer. It does so without improving employment, schooling, or other types of crime; if anything, property crime increases over 2-3 post-program years. To explore mechanisms, we implement a machine learning method that predicts treatment heterogeneity using observables. The method identifies a subgroup of youth with positive employment impacts, whose characteristics differ from the disconnected youth served in most employment programs. We find that employment benefiters commit more property crime than their control counterparts, and non-benefiters also show a decline in violent crime. These results do not seem consistent with typical theory about improved human capital and better labor market opportunities creating a higher opportunity cost of crime, or even with the idea that these programs just keep youth busy. We discuss several alternative mechanisms, concluding that brief youth employment programs can generate substantively important behavioral change, but for different outcomes, different youth, and different reasons than those most often considered in the literature.
    JEL: C53 C54 C93 I28 J24 J48 K42
    Date: 2017–05
  11. By: David Arnold; Will Dobbie; Crystal S. Yang
    Abstract: This paper develops a new test for identifying racial bias in the context of bail decisions – a high-stakes setting with large disparities between white and black defendants. We motivate our analysis using Becker's (1957) model of racial bias, which predicts that rates of pre-trial misconduct will be identical for marginal white and marginal black defendants if bail judges are racially unbiased. In contrast, marginal white defendants will have a higher probability of misconduct than marginal black defendants if bail judges are racially biased against blacks. To test the model, we develop a new estimator that uses the release tendencies of quasi-randomly assigned bail judges to identify the relevant race-specific misconduct rates. Estimates from Miami and Philadelphia show that bail judges are racially biased against black defendants, with substantially more racial bias among both inexperienced and part-time judges. We also find that both black and white judges are biased against black defendants. We argue that these results are consistent with bail judges making racially biased prediction errors, rather than being racially prejudiced per se.
    JEL: J15 J71 K14
    Date: 2017–05
  12. By: Zhuang Hao; Benjamin Cowan
    Abstract: We examine the spillover effects of recreational marijuana legalization (RML) in Colorado and Washington on neighboring states. We find that RML causes a sharp increase in marijuana possession arrests in border counties of neighboring states relative to non-border counties in these states. RML has no impact on juvenile marijuana possession arrests but is rather fully concentrated among adults. We do not find evidence that marijuana sale/manufacture arrests, DUI arrests, or opium/cocaine possession arrests in border counties are affected by RML.
    JEL: I12 I18 K14
    Date: 2017–05
  13. By: Andzelika Kuznar (Warsaw School of Economics (SGH), Al. Niepodleglosci 162, 02-554 Warszawa); Jerzy Menkes (Warsaw School of Economics (SGH), Al. Niepodleglosci 162, 02-554 Warszawa)
    Abstract: Research background: UK rejects the paradigm of the role and rank of the security community and the perception of European integration as a road of no return. Economic and legal study allows to assess the reasoning of Brexit and future regime of EU-UK relations. Purpose of the article: To assess changes in perception of European integration due to Brexit and to determine its geopolitical and geo-economic consequences. The reasons of such purpose: the evolving structure of the UK, persistent trends of separatism in the UK, geographical differences in attitudes of UK citizens to Brexit. Methods: The research is an interdisciplinary economic and law study. The authors use: economic and legal methods applicable to the research. Conclusions are formulated on the basis of the synthesis of the results and approximations. Findings: Brexit changes the perception and attractiveness of European integration. Weakening of Britain’s ties with EU Members will have a significant impact on the strength of European identity. Brexit will weaken the European pillar of Atlantic Alliance. Brexit will be a factor of permanent disintegration of UK.
    Keywords: Brexit; European integration; transatlantic relations
    JEL: F14 F15 F53 K33
    Date: 2017–05
  14. By: Michela Altieri; Giovanna Nicodano
    Abstract: Our model highlights the impact of bankruptcy on (true and apparent) firm value. We show that the pricing of diversified firms suffers from a survivorship bias, due to their lower mortality relative to focused ones. This difference in mortality is able to turn a true diversification premium, deriving from saved bankruptcy costs, into an apparent diversification discount. Such apparent discount is larger the larger is the true premium due to coinsurance across diversified units. We show how this insight contributes to explain value paradoxes in diversified companies such as multi-unit groups, multi-segment conglomerates, and parent companies.
    Keywords: bankruptcy costs, coinsurance, contagion, limited liability, diversification discount, survivorship bias, parent company discount, cost of debt
    JEL: G32 D23 K19
    Date: 2016
  15. By: Martina Skalicka, (Brno University of Technology, Czech Republic); Marek Zinecker (Brno University of Technology, Czech Republic); Tomas Meluzín (Brno University of Technology, Czech Republic)
    Abstract: Institutional aspects of a well-functioning private equity and venture capital market are emphasized in the recent academic literature. In particular, a favourable tax and legal environment is essential, since formal institutions enable the industry to attract a larger volume of investors and thus to contribute more efficiently to the growth of GDP. In the Czech Republic, however, legal barriers represent an essential obstacle affecting a rather poor scope of resources available to domestic private equity and venture capital funds.This paper examines the current tax and legal environment for private equity and venture capital investments in the Czech/ Republic. Proposals for prospective improvements of legal and tax framework are made in the empirical part of the study.As the phenomenon under study is complex and explanatory in nature, qualitative data with content analysis proved to be the best way how to assess institutional framework for PE/VC in the Czech Republic. Data collection methods cover a comparative analysis of scientific literature documents and reports, as well as primary data from interviews with experts in the industry. The results of both secondary and primary data analysis were categorized and core lacks in the institutional framework were identified and discussed. Finally, proposals for prospective improvements of the institutional framework are made. The conducted analysis implies that the issue of the legal and organisational structure suitable for PE/VC funds may be deemed resolved in the Czech Republic. A Czech equivalent to a Limited Partnership (SICAR), i.e. a limited partnership with investment certificates, has already with provided with sufficient support in the legislation in terms of the legal form. The legal form is a necessary, yet not sufficient condition. A tax handicap was identified implying that it is necessary to amend the tax law so that the legal regulation extends the tax exemption. Another amendment to the applicable legislation should then be directed towards eliminating or mitigating the barriers imposed on pension funds when investing in PE/VC funds.
    Keywords: new institutional economics; private equity; venture capital; tax and legal environment; private equity fund structures
    JEL: B25 G24 K23
    Date: 2017–05

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