nep-law New Economics Papers
on Law and Economics
Issue of 2018‒06‒11
twelve papers chosen by
Eve-Angeline Lambert, Université de Lorraine

  1. Tort Liability and Unawareness By Surajeet Chakravarty; David Kelsey; Joshua C. Teitelbaum
  2. Medical Malpractice Liability and Physicians’ Behavior:Experimental Evidence By Castro, M.F.;; Ferrara, P.;; Guccio, C.;; Lisi, D.;
  3. Douglass C. North: Transaction Costs, Property Rights, and Economic Outcomes By Gary D. Libecap
  4. The Effects of Official and Unofficial Information on Tax Compliance By Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
  5. Evolving practice in land demarcation By Benito Arruñada
  6. Why the initial regulation of financial innovations is decisive: Regulatory arbitrage and off-balance-sheet leasing in Germany By Friedrich, Jan; Thiemann, Matthias
  7. News Media and Crime Perceptions: Evidence from a Natural Experiment By Mastrorocco, Nicola; Minale, Luigi
  8. Does the Relative Income of Peers Cause Financial Distress? Evidence from Lottery Winners and Neighboring Bankruptcies By Agarwal, Sumit; Mikhed, Vyacheslav; Scholnick, Barry
  9. Explaining Escalating Fines and Prices: The Curse of Positive Selection By Buehler, Stefan; Nicolas Eschenbaum
  10. The Unilateral Accident Model under a Constrained Cournot-Nash Duopoly By Gérard Mondello; Evens Salies
  11. An Experimental Analysis of the Complications in Colluding when Firms are Asymmetric By Charles F. Mason
  12. Price or Variety? An Evaluation of Mergers Effects in Grocery Retailing By Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo

  1. By: Surajeet Chakravarty (Department of Economics, University of Exeter); David Kelsey (Department of Economics, University of Exeter); Joshua C. Teitelbaum (Georgetown University)
    Abstract: Unawareness is a form of bounded rationality where a person fails to conceive all feasible acts or consequences or to perceive as feasible all conceivable act-consequence links. We study the implications of unawareness for tort law, where relevant examples include the discovery of a new product or technology (new act), of a new disease or injury (new consequence), or that a product can cause an injury (new link). We argue that negligence has an important advantage over strict liability in a world with unawareness–negligence, through the stipulation of due care standards, spreads awareness about the updated probability of harm.
    Keywords: negligence, strict liability, tort law, unawareness.
    JEL: D83 K13
    Date: 2018
  2. By: Castro, M.F.;; Ferrara, P.;; Guccio, C.;; Lisi, D.;
    Abstract: Medical liability systems have been accused of increasing health expenditure insofar as they induce the practice of defensive medicine. Despite the large evidence on the role of medical malpractice liability, the identification of its causal effect on physicians’ treatment decisions is a difficult task. In this paper we study for the first time in a controlled laboratory setting the effect of introducing the risk of being sued for medical malpractice on the provision of physicians’ medical services. In our experimental sessions both medical and non-medical students choose how many medical services to provide for heterogeneous patients. We implement exogenous variations in the presence of medical malpractice liability and expected probability of being sued, and thus we exploit the within-subject variation in the provision of medical services to infer the causal effect of malpractice liability. Furthermore, we analyze the impact of malpractice liability under different physicians’ payment methods, which allows us to discuss the interplay between medical liability and payment systems. Our behavioral data show that introducing malpractice liability pressure does lead physicians to choose a higher amount of medical services, regardless of the physicians’ payment system. However, we also find that the payment system in which malpractice liability is implemented makes the difference under the societal perspective, with relevant implications for health policy.
    Keywords: medical liability; defensive medicine; payment systems; physicians’behavior; laboratory experiment;
    JEL: I12 K13 C91
    Date: 2018–05
  3. By: Gary D. Libecap
    Abstract: Douglass North asked why some societies historically and contemporarily have rising per-capita incomes and individual welfare, whereas others do not? He argued that successful economies had property rights that encouraged markets, trade, and investment in new production and organizational methods. In other economies, transaction costs, especially those due to the political process, blocked more efficient property rights. Property rights grant decision making over valuable resources and are the basis for investment, and market exchange. They mold the economy and the distribution of wealth and political power. Politicians and coalitions of privileged elites with stakes in the status quo join to preserve it. Inefficiencies create their own constituencies. There is no clear remedy for general citizens in North’s cases. Despite the power of North’s argument, transaction costs are not clear in aggregate studies of economies. They are more apparent in US common-pool resource problems with large, continuing losses in resource rents. This evidence runs counter to the facile arguments in the welfare and environmental economics literatures for addressing externalities that are reminiscent of the simplistic recommendations in the growth and economic history literatures that North challenged. If the observed costly political response to open access losses is characteristic of regulation in general, then welfare losses permeate developed economies as well and are more pervasive than the dramatic examples of development failure examined by North and others. Mitigation requires competitive interest groups that benefit from more secure property rights and greater resource rents to offset powerful elites that align with politicians and capture bureaucratic agencies to achieve particularistic benefits that undermine general welfare.
    JEL: K11 K32 N4 N42 N5 N52 Q15 Q2 Q22 Q25 Q28 Q32 Q38
    Date: 2018–05
  4. By: Filomena Garcia; Luca David Opromolla; Andrea Vezzulli; Rafael Marques
    Abstract: The administration of tax policy has shifted its focus from enforcement to complementary instruments aimed at creating a social norm of tax compliance. In this paper we provide an analysis of the effects of the dissemination of information regarding the past degree of tax evasion at the social level on the current individual tax compliance behavior. We build an experiment where, for given levels of audit probabilities, fines and tax rates, subjects have to declare their income after receiving either a communication of the official average tax evasion rate or a private message from a group of randomly matched peers about their tax behavior. We use the experimental data to estimate a dynamic econometric model of tax evasion. The econometric model extends the Allingham-Sandmo-Yitzhaki tax evasion model to include self-consistency and endogenous social interactions among taxpayers. We find four main results. First, tax compliance is very persistent. Second, the higher the official past tax evasion rate the higher the degree of persistence: evaders are more likely to evade again, and compliant individuals are more likely to comply again. Third, when all peers communicate to have evaded (complied) in the past, both evaders and compliant individuals are more likely to evade (comply). Fourth, while both treatments, and especially the unofficial information treatment, are associated, in the context of our experiment, with a significantly larger growth in evasion intensity, the aggregate effect depends on the characteristics of the population. In countries with inherently low levels of tax evasion, official information can have beneficial effects by consolidating the behavior of compliant individuals. However, in countries with inherently high levels of tax evasion, official information can have detrimental effects by intensifying the behavior of evaders. In both cases, the impact of official information is magnified in the presence of strong peer effects.
    Keywords: tax morale, information, tax evasion, experiment, peer effects
    JEL: H26 D63 C24 C92 Z13
    Date: 2018
  5. By: Benito Arruñada
    Abstract: This paper analyzes social choice with respect to the demarcation of land boundaries, distinguishing between physical and legal demarcation. In contrast with the influential “land administration” literature and the World Bank’s policy guidelines, the analysis supports voluntary—instead of mandatory—demarcation as well as non-integrated services for land administration. Consistent with these theoretical arguments, the paper empirically verifies that demarcation conflicts play a lesser role in title-, land- and property-related litigation, which seems to increase in all these areas after physical demarcation is made mandatory. Relying on World Bank data, it also observes that linking and merging cadastres and land registries does not correlate with lower transaction costs.
    Keywords: land, property, boundaries, surveying, cadastres, land registry, land administration.
    JEL: D73 K11 K34 K41 L85 O17 O18 Q15 Q24
    Date: 2018–05
  6. By: Friedrich, Jan; Thiemann, Matthias
    Abstract: This policy letter provides evidence for the crucial importance of the initial regulatory treatment for the further development of financial innovations by exploring the emergence and initial legal framing of off-balance-sheet leasing in Germany. Due to a missing legal framework, lease contracts occurred as an innovative social practice of off-balance-sheet financing. However, this lacking legal framing impeded the development of this financial innovation as it also created legal uncertainties. This was about to change after the initial legal framing of leasing in the 1970's which eliminated those legal uncertainties and off-balance-sheet leasing entered into a stunning period of growth while laying the foundation of a regulatory resiliency against efforts that seek to abandon the off-balance-sheet treatment of leases. As the initial legal framing is crucial for the further development of a financial innovation, we propose the French approach for the initial vindication of new financial products in which the principles-based rules are aligned with the capabilities of regulators to intervene, even when a financial innovation complies with the letter of the law. In this way, regulators could regulate the frontier of financial innovations and weed out those which are entirely or mainly driven by regulatory arbitrage considerations while maintaining the beneficial elements of those products.
    Keywords: financial innovations,regulation,regulatory arbitrage,leasing
    Date: 2018
  7. By: Mastrorocco, Nicola (Trinity College Dublin); Minale, Luigi (Universidad Carlos III de Madrid)
    Abstract: In democracies voters rely on media outlets to learn about politically salient issues. This raises an important question: how strongly can media affect public perceptions? This paper uses a natural experiment – the staggered introduction of the Digital TV signal in Italy – to measure the effect of media persuasion on the perceptions individuals hold. We focus on crime perceptions and, combining channel-specific viewership and content data, we show that the reduced exposure to channels characterized by high levels of crime reporting decreases individual concerns about crime. The effect is driven by individuals aged 50 and over, who turn out to be more exposed to television while using other sources of information less frequently. Finally, we provide some evidence about the effect of the digital introduction on public policies closely related to crime perceptions and on voting behavior.
    Keywords: information, news media, persuasion, crime perceptions
    JEL: D72 D83 K42 L82
    Date: 2018–04
  8. By: Agarwal, Sumit (Georgetown university); Mikhed, Vyacheslav (Federal Reserve Bank of Philadelphia); Scholnick, Barry (University of Alberta)
    Abstract: We examine whether relative income differences among peers can generate financial distress. Using lottery winnings as plausibly exogenous variations in the relative income of peers, we find that the dollar magnitude of a lottery win of one neighbor increases subsequent borrowing and bankruptcies among other neighbors. We also examine which factors may mitigate lenders’ bankruptcy risk in these neighborhoods. We show that bankruptcy filers can obtain secured but not unsecured debt, and lenders provide secured credit to low-risk but not high-risk debtors. In addition, we find evidence consistent with local lenders reducing bankruptcy risk using soft information.
    Keywords: financial distress; social comparisons among peers
    JEL: D14 D31 G02 K35
    Date: 2018–05–24
  9. By: Buehler, Stefan; Nicolas Eschenbaum
    Abstract: This paper shows that escalating fines emerge in a generalized version of the canonical Becker (1968) model if the authority (i) does not fully credit offender gains to social welfare, and (ii) lacks commitment ability. We demonstrate that the authority has no incentive to increase the fine for repeat offenders because of their positive selection. Instead, escalation is driven by the authority's incentive to reduce the fine for low-value offenders in the future and redistribute additional offender gains to society. Our analysis nests optimal law enforcement with uncertain detection and behavior-based monopoly pricing with imperfect customer recognition.
    Keywords: Escalation, repeat offenders, behavior-based pricing, deterrence
    JEL: D42 L11 L12
    Date: 2018–06
  10. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS); Evens Salies (OFCE)
    Abstract: This paper extends the basic unilateral accident model to allow for Cournot competition. Two firms compete with production input and prevention as strategic variables under asymmetric capacity constraints. We find that liability regimes exert a crucial influence on the equilibrium price and outputs. Strict liability leads to higher output and higher risk compared to negligence. We also study the conditions under which both regimes converge.
    Keywords: Tort Law, Strict Liability, Negligence Rule, Imperfect Competition, Oligopoly, Cournot Competition
    JEL: D43 L13 L52 K13
    Date: 2018–06
  11. By: Charles F. Mason
    Abstract: I study an indefinitely repeated game where firms differ in size. Attempts to form cartels in such an environment, for example by rationing outputs in a manner linked to firm size differences, have generally struggled. Any successful cartel has to set production shares in a manner that ensures no firm will defect. But this can require allocating sellers disproportionate shares, which in turn makes these tacit agreements difficult to create and enforce. I analyze some experimental evidence in support of this last proposition.
    Keywords: asymmetric cartel, repeated game, experiments
    JEL: D80 L15
    Date: 2018
  12. By: Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo
    Abstract: Assortment decisions are key strategic instruments for firms responding to local market conditions. We assess this claim by studying the effect of a national merger between two large Dutch supermarket chains on prices and on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger’s effects, controlling for selection on observables when defining our control group through a matching procedure. We show that the local change in competitive conditions due to the merger did not affect individual products’ prices but it led the merging parties to reposition their assortment and increase average category prices. While the low-variety and low-price target’s stores reduced the depth of their assortment when in direct competition with the acquirer’s stores, the latter increased their product variety. By analyzing the effect of the merger on category prices, we find that the target most likely dropped high priced products, while the acquirer added more of them. Thus, the merging firms reposition their product offerings in order to avoid cannibalization and lessen local competition. Further, we show that other dimensions of heterogeneity, such as market concentration, whether a divestiture was imposed by the Dutch competition authority, and the re-branding strategy of the target stores, are important for explaining the post-merger dynamics. A simple theoretical model of local-market variety competition explains most of our findings.
    Keywords: variety, assortment, mergers, ex-post evaluation, retail sector, supermarkets, grocery
    JEL: L10 L41 L66 L81 D22 K21 C23
    Date: 2018

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