nep-law New Economics Papers
on Law and Economics
Issue of 2018‒03‒12
eighteen papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Financially-Constrained Lawyers: An Economic Theory of Legal Disputes By Landeo, Claudia; Nikitin, Maxim
  2. The Greek Justice System: Collapse and Reform By Karatza, Stavroula; Papaioannou, Elias
  3. Policing America's Children: Police Contact and Consequences Among Teens in Fragile Families By Amanda Geller
  4. Balancing Free Movement and Public Health: The Case of Minimum Unit Pricing of Alcohol in Scotch Whisky By Alemanno, Alberto
  5. Patent Protection and Threat of Litigation in Oligopoly By Capuano, Carlo; Grassi, Iacopo
  6. Hanging Down Under: Capital Punishment and Deterrence in Australia By Vincent Aidan O'Sullivan
  7. Voters' Response to Public Policies: Evidence from a Natural Experiment By Francesco Drago; Roberto Galbiati; Francesco Sobbrio
  8. Horizontal Mergers and Innovation By Jullien, Bruno; Lefouili, Yassine
  9. Germany's reluctance to regulate related party transactions: An industrial organization perspective By Tröger, Tobias
  10. Accuracy and Costs of Dispute Resolution with Heterogeneous Consumers. A Conjectural Approach to Mass Litigation By Giorgio Rampa; Margherita Saraceno
  11. Myths and Numbers on Whistleblower Rewards By Nyreröd, Theo; Spagnolo, Giancarlo
  12. The price of violence: Consequences of violent crime in Sweden By Ornstein, Petra
  13. Libel Bullies, Defamation Victims and Litigation Incentives By David J. Acheson; Ansgar Wohlschlegel; ;
  14. Links between Childhood Exposure to Violent Contexts and Risky Adolescent Health Behaviors By Sarah James; Louis Donnelly; Jeanne Brooks-Gunn; Sara McLanahan
  15. A School-to-Prison Pipeline? Locating the Link Between Exclusionary School Discipline and Juvenile Justice Contact By Joel Mittleman
  16. Parental Incarceration and Child Overweight By Amelia Branigan; Christopher Wildeman
  17. Bank Corporate Governance and Future Earnings Predictability By Sabur Mollah; Omar Al Farooque; Asma Mobarek; Philip Molyneux
  18. The ghost of institutions past: History as an obstacle to fighting tax evasion By Aaron Kamm; Christian Koch; Nikos Nikiforakis

  1. By: Landeo, Claudia (University of Alberta, Department of Economics); Nikitin, Maxim (National Research University Higher School of Economics)
    Abstract: Financial constraints reduce the lawyer's ability to file lawsuits and bring cases to trial. As a result, access to justice for victims, pretrial bargaining, and potential injurers' precaution might be affected. We study civil litigation using a model that allows for asymmetric information, financially-constrained lawyers, third-party lawyer lending, and a continuum of plaintiff's types. We contribute to the economic analysis of law by generalizing seminal models of litigation (Bebchuk, 1984, 1988; Katz, 1990), offering the first formal definition of access to justice, and presenting comprehensive social welfare analysis of relevant public policy. We provide complete equilibrium characterization and identify necessary conditions for the existence of the mixed- and pure-strategy PBE. The mixed-strategy equilibrium arises in a state of the world characterized by lawyers facing strong financial constraints. Access to justice is denied to some victims under the mixed-strategy equilibrium. We then study the social welfare effects of policies aimed at relaxing lawyers' financial constraints, and identify a necessary and sufficient condition for a welfare-enhancing effect.
    Keywords: Civil Litigation; Access to Justice; Social Welfare; Financially-Constrained Lawyers; Asymmetric Information; Perfect Bayesian Equilibrium; Deterrence; Lawsuits; Settlement; Litigation; Third-Party Lawyer Lending Industry; Third-Party Litigation Funding
    JEL: C70 D82 K41
    Date: 2018–02–28
  2. By: Karatza, Stavroula; Papaioannou, Elias
    Abstract: This paper discusses the key structural deficiencies of the Greek justice system and proposes some concrete policy reforms. In the first part, we provide an anatomy of the Greek legal system using cross-country indicators reflecting the formalism, quality, and speed of the resolution mechanisms. The analysis shows that the Greek justice system is failing to protect citizens, as delays in all types of courts exceed five years and in some instances reach a decade. At the same the quality of laws protecting investors, even property, is low. Using comparative data from other EU jurisdictions, we show that the key reasons behind these failures are the absence of information technology, the lack of supporting to judges staff, the absence of specialized courts and tribunals, and a hugely dysfunctional administration. At the same time, there are minimal checks and balances. In the second part, we detail a set of policy proposals. Our proposals consist of immediate measures for clearing the large backlog and a set of more ambitious medium-term reforms (many of which require a constitutional amendment). Our proposals aim to make the Greek justice system professionally administered, less formalistic, suitably flexible, more responsive and more accountable to society at large. Given the strong link between legal institutions and development, justice reform is an absolute priority of the reform agenda and a sine qua non-condition for the much-needed sustainable recovery of the Greek economy.
    Keywords: bankruptcy; contractual institutions; investor protection; law and economics
    JEL: K00 K40 O1 O43 O52 O57 P16
    Date: 2018–02
  3. By: Amanda Geller (New York University)
    Abstract: Recent high-profile incidents of police violence and misconduct have brought widespread attention to long-standing tensions between police departments and the communities they serve. Policy shifts over the past 20 years have led to the broad adoption of "proactive" policing, which emphasizes active engagement of citizens at low levels of suspicion. Police use investigative stops, citations, and arrests to detect and disrupt low-level disorder or other circumstances interpreted as indicia that crime is afoot. However, these encounters rarely uncover illegal activity, and in many cities are characterized by stark racial disparities. Such encounters threaten the health and wellbeing of individuals and communities targeted. Due largely to data constraints, little is known about the experiences of youth stopped by the police, and the current national picture of policing and its implications for youth is unclear. I use new data from the Fragile Families and Child Wellbeing Survey (FFCWS) to measure the extent, nature, and health implications of police contact among a cohort of contemporary urban teenagers. I find that FFCWS teens have extensive police exposure: more than 75% report a police officer stationed at their school, and more than 25% report personal experience with the police. This contact is racially disparate, and often severe. Observed racial disparities in both a binary indicator of stop experience and a measure of police intrusion are robust to controls for adolescent behavior and their peer context. Further, I find that adolescents' experiences with the police are significantly associated with multiple indicators of adverse mental health, suggesting that police contact has the potential to drive or exacerbate health disparities among urban teens.
    JEL: D63 K14 K42
    Date: 2017–05
  4. By: Alemanno, Alberto (HEC Paris - Tax & Law)
    Abstract: Scotland is the first jurisdiction in the world to introduce a minimum price per unit of alcohol to reduce consumption. The relevant industry did not hesitate to challenge this new alcohol control policy before courts. The ensuing judgment contains a wealth of insights stemming from regulatory autonomy to proportionality review. What is the role of a national court in the review of national measures restricting free movement? In particular, how should it review the proportionality of those measures when adopted on public health grounds, and on the basis of what evidence? What is the burden of proof that the relevant Member State must discharge? Those are essentially the questions referred by a Scottish court to the Court of Justice when called upon to determine the compatibility with EU law of Minimum Unit Prices for alcohol introduced by the Scottish Government. Although rather recurrent in the Court’s free movement case law, the question of the standard of review, and corresponding burden of proof epitomises the struggle currently faced by national courts in striking the right balance between the proper functioning of the market and due recognition and protection of national regulatory autonomy. As such, this preliminary reference offered an opportunity to address “the information gap on what the Court of Justice expects defendant States to establish” in order to justify their measures under the proportionality stages of free movement analysis. But there is more. This case also raises deeper epistemic and methodological questions faced by any court of law when asked to review the proportionality, and in particular the necessity, of an individual policy intervention that belongs to a wider ‘political strategy’. Indeed, those strategies – as exemplified in the present case by the Scottish policy designed to combat the devastating effects of alcohol – generally entail the enactment of a full ‘regulatory mix’ of policy interventions. In those circumstances, how can we pinpoint the effect of a given policy option when it is part of a set of measures? How can we distinguish the effect, in terms of health gains deriving from a drop in alcohol consumption, to be ascribed to the introduction of MUP when such a measure coexists with other measures (more than 40 in Scotland) that have been introduced? And what when the contested measure has never been tested before? While this judgment confirms the gradual empirical turn made by the Court in its own review of the proportionality of national restrictive measures, it also provides some pragmatic guidance on how national courts may realistically engage in that review. Given the growing number of Member States ready to experiment with new policies aimed at tackling inter alia lifestyle risk factors, such as tobacco use, harmful consumption of alcohol and unhealthy diets, this appears as welcome development. Ultimately, the ensuing number of national restrictive measures of trade enacted on public health grounds, such as the UK standardised packaging for cigarettes, its sugar tax or the Hungarian ‘fat tax’, is set to put to test the Court’s approach towards both the qualification of those measures as restrictions and their justification under EU law.
    Keywords: EU law; proportionality; tax; minimum unit pricing; alcohol; lifestyle; NCD; precautionary principle; risk regulation; judicial review
    JEL: K23 K32 K33
    Date: 2016–07–01
  5. By: Capuano, Carlo; Grassi, Iacopo
    Abstract: In recent years, the increasing awarding of patents has captured the attention of scholars operating in different fields. The economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant's expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the issues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.
    Keywords: patents,litigation,collusion,entry game
    JEL: D43 K21 L13
    Date: 2018
  6. By: Vincent Aidan O'Sullivan
    Abstract: Variation in executions and abolition of the death penalty by year and state in Australia was used to examine the deterrent effect of the death penalty on homicides. A dataset covering 1910-2010 was collected comprising homicide rates and controls for demographic and criminal justice features. Using OLS, there was no evidence that executions have a deterrent effect. There is some evidence of a deterrent effect of capital punishment laws, but the effect is no longer significant once demographic and criminal justice variables were added to the model. However, when using exogenous variation in party-political representation to address endogeneity issues, no evidence of a deterrent effect of capital punishment was found.
    Keywords: Illegal Behavior, Enforcement of Law
    JEL: K42
    Date: 2018
  7. By: Francesco Drago; Roberto Galbiati; Francesco Sobbrio
    Abstract: We study voters’ response to public policies. We exploit a natural experiment arising from the Italian 2006 collective pardon that created idiosyncratic incentives to recidivate across released individuals and municipalities. We show that municipalities where resident pardoned individuals had a higher incentive to recidivate experienced a higher recidivism rate. Moreover, in these municipalities: i) newspapers were more likely to report crime news involving pardoned individuals; ii) voters held worse beliefs on the incumbent national government’s ability to control crime and iii) with respect to the previous elections, the incumbent national government experienced a worse electoral performance in the April 2008 elections relative to the opposition coalition. Our findings indicate that voters keep politicians accountable by conditioning their vote on the observed effects of their policies.
    Keywords: accountability, retrospective voting, natural experiment, crime, recidivism, media
    JEL: D72 K42
    Date: 2017
  8. By: Jullien, Bruno; Lefouili, Yassine
    Abstract: This paper discusses the effects of horizontal mergers on innovation. We rely on the existing academic literature and our own research work to present the various positive and negative effects of mergers on innovation. Our analysis shows that, even in the absence of technological spillovers and R&D complementarities, the overall impact of a merger on innovation may be positive. We derive a number of policy implications regarding the way innovation effects should be handled by competition authorities in merger control and highlight the differences with the analysis of price effects.
    Keywords: Merger Policy; Innovation; R&D Investments
    JEL: K21 L13 L40
    Date: 2018–02
  9. By: Tröger, Tobias
    Abstract: Germany Inc. was an idiosyncratic form of industrial organization that put financial institutions at the center. This paper argues that the consumption of private benefits in related party transactions by these key agents can be understood as a compensation for their coordinating and monitoring function in Germany Inc. As a consequence, legal tools apt to curb tunneling remained weak in Germany from the perspective of outside shareholders. While banks were in a position to use their firm-level knowledge and influence to limit rent-seeking by other related parties, their own behavior was not subject to meaningful controls. With the dismantling of Germany Inc. banks seized their monitoring function and left an unprecedented void with regard to related party transactions. Hence, a "traditionalist" stance which opposes law reform for related party transactions in Germany negatively affects capital market development, growth opportunities and ultimately social welfare.
    Keywords: related party transactions,Germany Inc.,industrial organization,tunneling,private benefits of control,capital maintenance,group law
    JEL: D23 D62 K22
    Date: 2018
  10. By: Giorgio Rampa (Department of Economics and Management, University of Pavia); Margherita Saraceno (DEMS, University of Milano Bicocca)
    Abstract: This study focuses on the tradeoff between accuracy and costs in consumer mass dispute resolution. The model investigates how a defendant-firm formulates its settlement offer given the fact that faces a large population of heterogeneously risk-averse claimants. Although firms can learn something about consumers’ reaction to a given settlement offer thanks to repeated litigation, equilibrium settlement can be far –i.e. lower– from the correct claim value. From the societal perspective, this brings up the issue related to the desirability of out-ofthe-court cheaper resolution and the risk of underpricing the value at stake. The paper also deals with the effects of aggregate litigation as an additional means to resolve consumer mass litigation. Results show that the overall cost of dispute resolution (aggregated costs of in-court-litigation plus costs of inaccuracy) is generally decreasing in the unit litigation cost. This suggests that litigation costs may be used as a leverage to favour not only more, but also more accurate, settlements. Finally, aggregate litigation might push the business defendant to negotiate a more generous settlement
    Keywords: Bayesian learning, Conjectural Equilibria, Consumer litigation, Risk Aversion, Settlement.
    JEL: D81 D83 K13 K41
    Date: 2018–03
  11. By: Nyreröd, Theo (Independent); Spagnolo, Giancarlo (Stockholm Institute of Transition Economics)
    Abstract: Whistleblower rewards have been used extensively in the US to limit procurement fraud and tax evasion, and their use has been extended to fight financial fraud after the recent financial crisis. In Europe there is currently a debate on their possible introduction, but authorities appear considerably less enthusiastic than their US counterparts. While it is important that these tools are scrutinized by a lively democratic debate, many things have been written, even by important institutional players, that have no empirical backing or that are in open contrast with the available evidence from independent research. In this paper we review some of the most debated issues regarding the potential benefits and costs of financial incentives whistleblowers trying to separate existing empirical evidence from conjectures with no empirical support, and myths in obvious contrast with available evidence.
    Keywords: whistleblowers; rewards; economic crime; tax evasion; corruption
    JEL: C92 D04 G28 K42
    Date: 2017–12–18
  12. By: Ornstein, Petra (Department of statistics, Uppsala University)
    Abstract: The connection between violence victimization and long term ill-health is well documented, but evidence is lacking on the causal effects of victimization beyond the time of the immediate injury. The aim of this study is to identify and estimate the longer term consequences of interpersonal violence on victims. Using rich administrative population data for Sweden, I compare individuals who visited a hospital in the years 1998 to 2002 due to assault with individuals who did not experience assault, but who were statistically indistinguishable from the cases of interest in the four years prior to the incident. The results suggest that violent crime has large and persistent effects on mortality, suicide, earnings, work status, disposable income, as well as on the number of days on sick leave. Specifically, an assault leading to a hospital visit is estimated to convey losses amounting to 1.4 million SEK per victimized woman and 1.5 million SEK per victimized man, whereof more than 80 percent result from excess mortality. Estimates on socio-economic outcomes show robustness against selection on unobserved characteristics. Estimates on mortality and suicides are very robust.
    Keywords: suicide; mortality; domestic abuse; value of statistical Life; violent crime
    JEL: I12 I14 J12 J17 K42
    Date: 2017–12–08
  13. By: David J. Acheson (University of Kent); Ansgar Wohlschlegel (Portsmouth Business School); ;
    Abstract: We analyse the relationship between a public figure's incentives to sue for defamation, and her incentives to do wrong in the first place and the media's incentives to expose this wrongdoing. If evidence on wrongdoing is noisy, a journalist's decision of whether to publish a story based on this evidence is largely driven by his anticipation of the public figure's litigation decision, rather than by the question of whether the evidence is actually correct. In a repeated setting, this induces a public figure to bring negative-value defamation suits in order to appear litigious to journalists in the future. As a consequence, the public figure's incentives to sue for defamation will not only depend on her own direct costs and benefits of doing so, but also on journalists' costs and benefits from litigation and publications. This result makes the case for also taking these latter factors into account in the debate on potential legal reform aiming at litigation incentives.
    Keywords: Defamation Law, Litigation Costs, Signalling
    JEL: K19
    Date: 2018–03–02
  14. By: Sarah James (Princeton University); Louis Donnelly (Princeton University); Jeanne Brooks-Gunn (Teachers College and the College of Physicians and Surgeons at Columbia University); Sara McLanahan (Princeton University)
    Abstract: We assess whether childhood exposure to violent contexts is prospectively associated with risky adolescent health behavior and whether these associations are specific to different contexts of violence and different types of risky behavior. Data come from 2,693 adolescents in the Fragile Families and Child Wellbeing Study, a population-based, birth cohort study of children born between 1998-2000 in 20 large American cities. Using logistic regression models, we evaluate whether exposure to 6 indicators of community violence and 7 indicators of family violence at ages 5 and 9 is associated with risky sexual behavior, substance use, and obesity risk behavior at age 15. Controlling for a range of adolescent, parent, and neighborhood covariates, each additional point on the community violence scale is associated with 8% higher odds of risky sexual behavior but not substance use or obesity risk behavior. Alternatively, each additional point on the family violence scale is associated with 20% higher odds of substance use but not risky sexual behavior or obesity risk behavior. We conclude that childhood exposure to violent contexts is associated with risky adolescent health behaviors, but the associations are context and behavior specific.
    JEL: I12 K42
    Date: 2017
  15. By: Joel Mittleman (Princeton University)
    Abstract: There is growing concern that exclusionary school discipline promotes a "school-to-prison pipeline," disrupting children’s lives in ways that increase their risk of coming into contact with the justice system. Empirical validations of this argument, however, face a fundamental challenge: both school sanctions and legal sanctions respond to the same behavioral risk factors and concentrate in the same disadvantaged contexts. To address this challenge, the current study combines survey data from the Fragile Families and Childhood Wellbeing Study with administrative data on children’s schools and neighborhoods. Following children from birth through adolescence, I demonstrate that children removed from school at a young age face substantially higher risks of later legal entanglement than their peers. Moreover, the consequences of discipline vary by children’s preexisting propensity for sanction. For every outcome considered, exclusionary discipline is most consequential for those children who were otherwise least likely to come into contact with the justice system.
    Keywords: incarceration; incarcerated
    JEL: I21 I28 K42
    Date: 2017
  16. By: Amelia Branigan (University of Illinois at Chicago); Christopher Wildeman (Cornell University)
    Abstract: While the past four decades have seen unprecedented increases in rates of both childhood obesity and parental incarceration, it remains unknown whether parental incarceration is associated with an increased risk of unhealthy weight among young children. We address this question using a sample of nine-year-olds from the Fragile Families and Child Wellbeing Study, testing for effects separately by whether the mother, father, or both parents have a history of incarceration. Diverging from findings linking paternal incarceration to negative child behavioral outcomes, here we find no effect of incarcerated fathers on child body mass, while maternal incarceration is associated with significantly lower odds of overweight. Findings are consistent with an emerging body of research suggesting that the effects of maternal incarceration may differ from those of paternal incarceration, and caution against generalizing the direction of behavioral and mental health effects of parental incarceration to child physical health conditions.
    JEL: D63 K42 I12 J13
    Date: 2017
  17. By: Sabur Mollah (School of Management, Swansea University); Omar Al Farooque (UNE Business School, University of New England); Asma Mobarek (Cardiff Business School, Cardiff University); Philip Molyneux (Bangor Business School, Bangor University)
    Abstract: This study examines the impact of corporate governance on earnings predictability of future cash flow, a forward-looking earnings quality indicator, in large banks from 35 countries over the period 2004–2010. We find that board structure and CEO power have a significant positive influence on future cash flows although these findings vary for emerging markets and between common and civil law countries. Board structure and CEO power are more effective in predicting future cash flows in civil law countries whereas in common law countries risk governance is a more accurate predictor of future earnings. Similarly, we find differences between developed and emerging countries. While in both domains there is no qualitative difference in CEO power to predict future cash flows, board structure and risk governance appear less effective in emerging economies. The study has important implications for policy makers and regulators for different legal regimes (civil vs. common law) and for countries at different stages of economic development (developed vs. emerging) due to the varying impact of governance on bank earnings quality in these countries.
    Keywords: Earnings Predictability, Corporate Governance, Bank, GAAP/IFRS.
    JEL: G21 G32 G38
    Date: 2018–02–24
  18. By: Aaron Kamm; Christian Koch; Nikos Nikiforakis (Division of Social Science)
    Abstract: If taxpayers believe past rates of compliance are indicative of the future, traditional measures for combating tax evasion can be compromised. We present evidence from a novel laboratory experiment with strategic complementarities showing that a history of low compliance can render a major institutional reform ineffective at reducing tax evasion. The experimental treatments manipulate the history of tax compliance by varying the percentage of tax revenue embezzled by a ‘politician’ – our measure of ‘institutional quality’. We show that tax compliance is substantially higher in good-quality than bad-quality institutions when there is no history of tax evasion. When a bad-quality institution is replaced with a good-quality one, however, tax compliance remains low, as if the institutional change had not occurred. The reason is that the institutional change leaves expectations about future compliance largely unaffected. A history of high-quality institutions, on the other hand, shields tax compliance only partly from institutional deterioration. We discuss reasons for this, policy implications of our findings and evidence that a society-wide poll can assist in overcoming the ‘ghost of institutions past’.
    Date: 2017–10

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