nep-law New Economics Papers
on Law and Economics
Issue of 2017‒09‒10
eight papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Whistleblower Rewards, False Reports, and Corporate Fraud By Buccirossi, Paolo; Immordino, Giovanni; Spagnolo, Giancarlo
  2. Partial Cartels and Mergers with Heterogeneous Firms: Experimental Evidence By Gomez-Martinez, Francisco
  3. How Extensive is Inter-State Diversion of Recreational Marijuana? By Benjamin Hansen; Keaton Miller; Caroline Weber
  4. Too complex to work: A critical assessment of the bail-in tool under the European bank recovery and resolution regime By Tröger, Tobias H.
  5. Ganga Action Plan(GAP): The Challenge of ‘Regulatory Quality’ By Basu Roy, Sharanya
  6. On Basu’s Proposal: Fines Affect Bribes By Popov, Sergey V. Popov
  7. The effects of a tax allowance for growth and investment: Empirical evidence from a firm-level analysis By Petutschnig, Matthias; Rünger, Silke
  8. Is law normalizing Hybrid Organizations? Putting profit-with-purpose corporations into historical perspective By Kevin Levillain; Blanche Segrestin; Armand Hatchuel

  1. By: Buccirossi, Paolo; Immordino, Giovanni; Spagnolo, Giancarlo
    Abstract: It is often claimed that rewards for whistleblowers lead to fraudulent reports, but for several US programs this has not been a major problem. We model the interaction between rewards for whistleblowers, sanctions against fraudulent reporting, judicial errors and standards of proof in the court case on a whistleblower's allegations and the possible follow-up for fraudulent allegations. Balancing whistleblower rewards, sanctions against fraudulent reports, and courts' standards of proof is essential for these policies to succeed. When the risk of retaliation is severe, larger rewards are needed and so are tougher sanctions against fraudulent reports. The precision of the legal system must be sufficiently high, hence these programs are not viable in weak institution environments, where protection is imperfect and court precision low, or where sanctions against false reporting are mild. Internal reporting channels may interfere with external ones in unexpected ways.
    Keywords: Corporate Fraud; False allegations; Judicial errors; Standard of proof; Whistleblowers rewards
    JEL: G38 H83 K20 K42 L41 M41
    Date: 2017–08
  2. By: Gomez-Martinez, Francisco
    Abstract: A usual assumption in the theory of collusion is that cartels are all-inclusive. In contrast, most real-world collusive agreements do not include all firms that are active in the relevant industry. This paper studies both theoretically and experimentally the formation and behavior of partial cartels. The theoretical model is a variation of Bos and Harrington’s (2010) model where firms are heterogeneous in terms of production capacities and where individual cartel participation is endogenized. The experimental study has two main objectives. The first goal is examine whether partial cartels emerge in the lab at all, and if so, which firms are part of it. The second aim of the experiment is to study the coordinated effects of a merger when partial cartels are likely to operate. The experimental results can be summarized as follows. We find that cartels are typically not all-inclusive and that various types of partial cartels emerge. We observe that market prices decrease by 20% on average after a merger. Our findings suggest that merger analysis that is based on the assumption that only full cartels forms produces misleading results. Our analysis also illustrates how merger simulations in the lab can be seen as a useful tool for competition authorities to back up merger decisions.
    Keywords: Bertrand oligopoly; Cartels; Mergers; Experiments
    JEL: C92 G34 L13 L41 L44
    Date: 2016–11–23
  3. By: Benjamin Hansen; Keaton Miller; Caroline Weber
    Abstract: Despite federal prohibition, recreational marijuana is available to 21% of the United States population. A chief concern among policy makers across multiple levels of government and political parties is inter-state diversion of marijuana from states with legal markets to others. We measure this diversion with a natural experiment. Oregon opened a recreational market on October 1, 2015 next to an existing market in Washington, which opened on July 8, 2014. Using comprehensive administrative data on the universe of Washington sales, we find Washington retailers along the Oregon border experienced a 41% decline in sales immediately following Oregon's market opening. Retailers along Washington's borders with Idaho and Canada experienced no such decline. The decline occurred equally across weekdays and weekends, and was largest among the largest transaction sizes, suggesting diversion, not drug tourism, was to blame. Our estimates suggest that 11.9% of the marijuana sold in Washington was diverted out of the state before Oregon legalized and 7.5% remains diverted today.
    JEL: I12 I28 K14 K42
    Date: 2017–08
  4. By: Tröger, Tobias H.
    Abstract: This paper analyses the bail-in tool under the BRRD and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution framework is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD's bail-in tool in the much broader resolution process which entails ample discretion of the authorities also in forcing private sector involvement. Finally, this paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible from the resolution process as such.
    Keywords: bail-in,private sector involvement,precautionary recapitalization,cross-border insolvency,market discipline
    JEL: G01 G18 G21 G28 K22 K23
    Date: 2017
  5. By: Basu Roy, Sharanya
    Abstract: The largest river basin of India, the Ganges (locally referred as Ganga) is one of the most important river systems in the world. It is home to almost one tenth of the world’s population. Billions of litres of sewage, industrial waste, thousands of animal and human corpses are also released into the river every day. Consequently, the Ganga Action Plan (GAP) was launched in 1985 for pollution abatement as a Federal and state sponsored scheme and till date, three phases have been implemented. Even after establishing numerous institutional arrangements under the GAP and investing billions of dollars there has been no major improvement in the Ganges river water quality, in fact it has further deteriorated. Clearly governmental intervention through pollution control policies, specifically regulation has failed miserably. Therefore, an attempt has been made to analyse empirically, the legal and institutional framework of the GAP using the transdisciplinary method ‘economic analysis of law’. The results reveal that the chief underlying reason for ineffective GAP regulations is lack of a well-defined legal basis.
    Keywords: water pollution, River Ganges, regulatory quality, Economic analysis of Law, public policy
    JEL: K0 K00 K3 K32 Q2 Q5 Q53 Q58
    Date: 2017–04–25
  6. By: Popov, Sergey V. Popov (Cardiff Business School)
    Abstract: I model the connection between the equilibrium bribe amount and the fines imposed on both bribe-taker and bribe-payer. I show that Basu’s (2011) proposal to lower the fines imposed on bribe-payers in order to induce more whistleblowing and increase the probability of penalizing corrupt government officials might instead increase bribe amounts. Higher expected fines on bribe-takers will make them charge larger bribes; at the same time, lowering fines for bribe-paying might increase bribe-payers’ willingness to pay bribes.
    Keywords: Bootstrap, indirect inference, gravity model, classical trade model, UK trade
    Date: 2017–09
  7. By: Petutschnig, Matthias; Rünger, Silke
    Abstract: We contribute to the empirical literature on the debt bias of corporate income taxation through a firm-level evaluation of the European Commission's recent proposal of an Allowance for Growth and Investment (AGI). We use the introduction, the application and the repeal of a similar allowance in Austria during the early 2000s to evaluate the effects of the AGI on corporate equity and profit distribution. Our analysis provides evidence that such an allowance could increase corporate equity ratios by 5.5 percentage points and reduce profit distributions by 7.6 percentage points. These effects are stronger than those the previous literature for traditional Allowance for Corporate Equity (ACE) tax systems has identified. Additionally, we contribute to the recently expanding literature on the influence of ownership on tax planning as we find significant differences in the utilization of the AGI depending on individual specifics of the majority shareholder as well as depending on the number of shareholders of the respective firms
    Keywords: taxes,retained earnings,tax allowance,notional interest deduction,AGI,ACE
    JEL: G32 H24 H25 K34
    Date: 2017
  8. By: Kevin Levillain (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Blanche Segrestin (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique); Armand Hatchuel (CGS i3 - Centre de Gestion Scientifique i3 - MINES ParisTech - École nationale supérieure des mines de Paris - PSL - PSL Research University - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Among other challenges, hybrid organizations face a legal one as the law divides organizations into nonprofit and for-profit structures. For a few years however, new legal forms of corporations have emerged, whose claim is to overcome this challenge: profit-with-purpose corporations (PPCs), such as the Benefit Corporation. In this paper, we investigate how these innovative legal provisions have been designed to help solving this legal challenge, in a two-step process. First, we reexamine the origins of the legal divide through an historical analysis of the separation of UK and US corporations into two legal categories. We show that although early corporations were, in essence, profit-with-purpose organizations, business corporations have difficulties today to defend a public interest orientation because of a major shift in corporate governance that occurred in the 19 th century: the disappearance of corporate charters demanding public interest purposes, which led to hand the control of corporations over to shareholders through the generalization of fiduciary duties imported from unincorporated businesses' governance. Second, we exhibit the design process of PPCs to help solving this divide. We show that PPCs propose a way to " shift back ", yet not by restoring control by the State, but by reintroducing the corporate purpose into legal documents, and designing accountability mechanisms to control multiple purposes. We argue that studying the emergence of legal structures for profit-with-purpose organizations may open new avenues for research on hybrid organizations.
    Keywords: Profit-with-purpose Corporations,Hybrid organizations,Corporate law
    Date: 2017–06

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