nep-reg New Economics Papers
on Regulation
Issue of 2006‒10‒28
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais, Canada

  1. Anti-evasion auditing policy in thepresence of common income shocks By Miguel Sanchez
  2. Corruption, Extortion, and the Boundaries of the Law By Svetlana Andrianova; Nicolas Melissas
  3. Litigation and Settlement: New Evidence from Labor Courts in Mexico By Davis S. Kaplan; Joyce Sadka; Jorge Luis Silva-Mendez
  4. Can Post-Grant Reviews Improve Patent System Design? A Twin Study of US and European Patents By Graham, Stuart J.H.; Harhoff, Dietmar
  5. Firms Merge in Response to Constraints By Boone, Jan
  6. Legal Costs as Barriers to Trade By Turrini, Alessandro Antonio; van Ypersele, Tanguy
  7. Bribes, Lobbying and Development By Harstad, Bård; Svensson, Jakob
  8. Legal vs Ownership Unbundling in Network Industries By Cremer, Helmuth; Crémer, Jacques; De Donder, Philippe
  9. Computing Abuse Related Damages in the Case of New Entry: An Illustration for the Directory Enquiry Services Market By Martinez Granado, Maite; Siotis, Georges
  10. How Corruption Hits People When They Are Down By Hunt, Jennifer
  11. Should Courts Always Enforce What Contracting Parties Write? By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  12. Active Courts and Menu Contracts By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  13. Do Changes in Regulation Affect Employment Duration in Temporary Work Agencies? By Manfred Antoni; Elke J. Jahn
  14. Regulating Damage Clauses in (Labor) Contracts By Gerd Muehlheusser
  15. Home Market Effect, regulation costs and heterogeneous firms. By Toshihiro Okubo; Vincent Rebeyrol
  16. Do capital market and trade liberalization trigger labor market deregulation ?. By Hervé Boulhol
  17. Doing Business in Indonesia: Legal and Bureaucratic Constraints By Ross H. McLeod
  18. Airport Noise Regulation, Airline Service Quality, and Social Welfare By Jan K. Brueckner; Raquel Girvin

  1. By: Miguel Sanchez
    Abstract: When fairly homogeneous taxpayers are affected by common incomeshocks, a tax agency's optimal auditing strategy consists of auditing alow-income declarer with a probability that (weakly) increases with theother taxpayers' declarations. Such policy generates a coordination gameamong taxpayers, who then face both strategic uncertainty - about theequilibrium that will be selected.and fundamental uncertainty - about thetype of agency they face. Thus the situation can be realistically modelledas a global game that yields a unique and usually interior equilibriumwhich is consistent with empirical evidence.Results are also applicable to other areas like regulation or welfarebenefit allocation.
    Keywords: Keywords: Tax Evasion, Coordination/Global Games,Expectations, Asymmetric Information
    JEL: H26 D82 D84 C72
    Date: 2006–02
  2. By: Svetlana Andrianova (University of Leiceter); Nicolas Melissas (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: We consider a set-up in which a principal must decide whether or not to legalise a socially undesirable activity. The law is enforced by a monitor who may be bribed to conceal evidence of the offence and who may also engage in extortionary practices. The principal only declares the activity illegal if the activity if "very harmful" and if the private benefit (received by the agent if she breaks the law) is "high". We present comparative static results and highlight policy implications.
    Keywords: Moral Hazard, Collusion, Non-contractive Output, Rewards and Punishments
    JEL: D82 L22 K4
    Date: 2006–09
  3. By: Davis S. Kaplan (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Joyce Sadka (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Jorge Luis Silva-Mendez (Stanford Law School)
    Abstract: Using a newly assembled data set on procedures filed in Mexican labor tribunals, we study the determinants of final awards to workers. On average, workers recover less than 30% of their claim. Our strongest result is that workers receive higher percentages of their claims in settlements than in trial judgments. We also find that cases with multiple claimants against a single firm are less likely to be settled, which partially explains why workers involved in these procedures receive lower percentages of their claims. Finally, we find evidence that a worker who exaggerates her claim is less likely to settle.
    Date: 2006–09
  4. By: Graham, Stuart J.H.; Harhoff, Dietmar
    Abstract: This paper assesses the impact of adopting a post-grant review institution in the US patent system by comparing the “opposition careers” of European Patent Office (EPO) equivalents of litigated US patents to those of a control group of EPO patents. We demonstrate several novel methods of "twinning" US and European patents and investigate the implications of employing these different methods in our data analysis. We find that EPO equivalents of US litigated patent applications are more likely to be awarded EPO patent protection than are equivalents of unlitigated patents, and the opposition rate for EPO equivalents of US litigated patents is about three times higher than for equivalents of unlitigated patents. Patents attacked under European opposition are shown to be either revoked completely or narrowed in about 70 percent of all cases. For EPO equivalents of US litigated patents, the appeal rate against opposition outcomes is considerably higher than for control-group patents. Based on our estimates, we calculate a range of net welfare benefits that would accrue from adopting a post-grant review system. Our results provide strong evidence that the United States could benefit substantially from adopting an administrative post-grant patent review, provided that the post-grant mechanism is not too costly.
    Keywords: litigation; opposition; patent system; post-grant review
    JEL: K11 K41 L10
    Date: 2006–05
  5. By: Boone, Jan
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M\&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: constraints; deregulation; efficiency defence; merger waves; pro/anti-competitive mergers
    JEL: G34 K21 L40
    Date: 2006–07
  6. By: Turrini, Alessandro Antonio; van Ypersele, Tanguy
    Abstract: Recent evidence shows that the 'home bias puzzle' in international trade may be associated with the mere presence of national borders (McCallum (1995)). In this paper we provide a theoretical framework to explain why borders may matter so much for trade. Our argument is that even between perfectly integrated and similar countries the legal system differs, so that legal costs are higher when business is done abroad. Using a matching model of trade, we show that legal costs asymmetry produce home bias in an essentially different way than traditional trade costs. To estimate the relevance of legal costs in displacing trade we estimate gravity equations augmented with variables capturing the extent of legal asymmetries. Evidence from inter-national trade across OECD countries and intra-national trade across French support the view that legal asymmetries act as relevant obstacles to trade.
    Keywords: cross-border trade; legal costs; matching
    JEL: F12
    Date: 2006–07
  7. By: Harstad, Bård; Svensson, Jakob
    Abstract: Why are firms more likely to pay bribes to bureaucrats to bend the rules in developing countries while they instead lobby the government to change the rules in more developed ones? Should we expect an evolution from bribing to lobbying, or can countries get trapped in a bribing equilibrium forever? Corruption and lobbying are to some extent substitutes. By bribing, a firm may persuade a bureaucrat to "bend the rules" and thus avoid the cost of compliance. Alternatively, firms may lobby the government to "change the rules". But there are important differences. While a change in the rules is more permanent, the bureaucrat can hardly commit not to ask for bribes also in the future. Based on this assumption, we show that (i) an equilibrium with corruption discourages firms to invest, (ii) firms bribe if the level of development is low, but (iii) they switch to lobbying if the level of development is sufficiently high. Combined, the economy might evolve from a bribing to a lobbying equilibrium, but too large bribes may discourage the necessary investments for lobbying eventually to become an equilibrium. The outcome is a poverty trap with pervasive corruption. This poverty trap is more likely if penalties on corruption are large and the regulatory costs are high.
    Keywords: corruption; development; lobbying
    JEL: D72 D92 O16 O17
    Date: 2006–07
  8. By: Cremer, Helmuth; Crémer, Jacques; De Donder, Philippe
    Abstract: This paper studies the impact of legal unbundling vs ownership unbundling on the incentives of a network operator to invest and maintain its assets. We consider an industry where the upstream firm first chooses the size of a network, while several downstream firms then compete in selling goods and services that use this network as a necessary input. We contrast the (socially) optimal allocation with several equilibrium situations, depending on whether the upstream firm owns zero, one or two downstream firms. The first situation corresponds to ownership unbundling between upstream and downstream parts of the market. As for the other two cases, we equate legal unbundling with the following two assumptions. First, each downstream firm maximizes its own profit, without taking into account any impact on the upstream firm's profit. Second, the upstream firm is not allowed to discriminate between downstream firms by charging different access charges for the use of its network. On the other hand, we assume that the upstream firm chooses its network size in order to maximize its total profit, including the profit of its downstream subsidiaries. Our main results are as follows. Because the investment in the network is not protected, at the time at which it is made, by a contract, the upstream firm will not take into account the interests of its clients when choosing its size. This effect can be mitigated by allowing it to own part of the downstream industry. In other words, ownership separation is more detrimental to welfare than legal unbundling. We also obtain that these results are robust to the introduction of asymmetry in network needs across downstream firms, imperfect downstream competition and downstream investments.
    Keywords: China walls; vertical separation
    JEL: L22 L51 L95
    Date: 2006–07
  9. By: Martinez Granado, Maite; Siotis, Georges
    Abstract: A number of European countries, among which the UK and Spain, have opened up their Directory Enquiry Services (DQs) market to competition. In Spain, both local and foreign firms challenged the incumbent as of April 2003. The latter abused its dominant position by providing an inferior quality version of the (essential) input, namely the subscribers’ database. We illustrate how it is possible to quantify the effect of abuse in situation were the entrant has no previous history in the market. We use the UK experience to construct the relevant counterfactual, that is the "but for abuse" scenario. After controlling for relative prices and advertising intensity, we find that one of the foreign entrants achieved a Spanish market share substantially below what it would have obtained in the absence of abuse.
    Keywords: abuse of dominance; competition policy; telecommunications
    JEL: C22 L41 L96
    Date: 2006–09
  10. By: Hunt, Jennifer
    Abstract: Using cross-country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non-victims to bribe public officials. Misfortune increases victims' demand for public services, raising bribery indirectly, and also increases victims' propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: bribery; corruption; governance
    JEL: H1 K4 O1
    Date: 2006–09
  11. By: Luca Anderlini; Leonardo Felli; Andrew Postlewaite (Department of Economics, Georgetown University)
    Abstract: We find an economic rationale for the common sense answer to the question in our title — courts should not always enforce what the contracting parties write. We describe and analyze a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. We study a buyer-seller multiple-widget model with risk-neutral agents, asymmetric information and ex-ante investments. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, if the court enforces all contracts, pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. In some cases, an ambiguous court that voids and upholds both with positive probability may be able to increase welfare even further. Classification-JEL Codes: C79, D74, D89, K40, L14.
    Keywords: Optimal Courts, Informational Externalities, Ex-Ante Welfare.
  12. By: Luca Anderlini; Leonardo Felli; Andrew Postlewaite (Department of Economics, Georgetown University)
    Abstract: We describe and analyze a contractual environment that allows a role for an active court. The model we analyze is the same as in Anderlini, Felli, and Postlewaite (2006). An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. In Anderlini, Felli, and Postlewaite (2006) the possibility of “menu contracts” between the informed buyer and the uninformed seller is described but not analyzed. Here, we fully analyze this case. We find that if we maintain the assumption that one of the potential objects of trade is not contractible ex-ante, the results of Anderlini, Felli, and Postlewaite (2006) survive intact. If however we let all “widgets” be contractible ex-ante, then multiple equilibria obtain. In this case the role for an active court is to ensure the inefficient pooling equilibria do not exist alongside the superior ones in which separation occurs. Classification-JEL Codes: C79, D74, D89, K40, L14.
    Keywords: Optimal Courts, Informational Externalities, Ex-ante Welfare, Informed Principal, Menu Contracts.
  13. By: Manfred Antoni (Institute for Employment Research (IAB), Nuremberg); Elke J. Jahn (Harvard University, IAB Nuremberg and IZA Bonn)
    Abstract: Over the past three decades Germany has repeatedly deregulated the law on temporary agency work by stepwise increasing the maximum period for hiring-out employees and allowing temporary work agencies to conclude fixed-term contracts. These reforms should have had an effect on the employment duration within temporary work agencies. Based on an informative administrative data set we use hazard rate models to examine whether the employment duration has changed in response to these reforms. We find that the repeated prolongation of the maximum period for hiring-out employees significantly increased the average employment duration while the authorization of fixed-term contracts reduced employment tenure.
    Keywords: temporary agency work, regulation, labor law, duration analysis, hazard rate models
    JEL: C41 J23 J40 J48 K31
    Date: 2006–09
  14. By: Gerd Muehlheusser (University of Bern and IZA Bonn)
    Abstract: We analyze the role of damage clauses in labor contracts using a model in which a worker may want to terminate his current employment relationship and work for another firm. We show that the initial parties to a contract have an incentive to stipulate excessive damage clauses, which leads to ex post inefficiencies. This result is due to rent seeking motives a) between the contracting parties vis-à-vis third parties and b) among the contracting parties themselves. We then show that, by imposing an upper bound on the amount of enforceable damages, a regulator can induce a Pareto improvement; in some cases even the first best can be achieved.
    Keywords: damage clauses, penalty doctrine, breach of contract, asymmetric information, labor contracts
    JEL: K12 K31 M12
    Date: 2006–10
  15. By: Toshihiro Okubo (Graduate Institute of International Studies, Geneva (HEI)); Vincent Rebeyrol (Panthéon-Sorbonne Economie)
    Abstract: This paper studies how market-specific entry sunk costs (regulation costs) affect the Home Market Effect (HME) with firm heterogeneity in marginal costs. our model is based on the Dixit-Stiglitz monopolistic competition model with firm heterogeneity plus regulation costs difference. We find that a regulation costs gap works as dispersion force by inducing a market potential gap, which reduces the HME and could cause the reverse HME or the anti-HME. The HME first rises and then fall in terms of trade openness, whereas the HME rises in terms of regulation costs gap coordination by technical barriers to trade (TBT) agreements. Firm heterogeneity dampens the dispersion force by the regulation costs difference and thus works as an agglomeration force. Firm heterogeneity causes a perfectspatial sorting, in which a large country attracts only high productivity firms, and vice versa.
    Keywords: Home market effect, firm heterogeneity, regulation costs, technical barriers to trade.
    JEL: F12 F15 R12 R38
    Date: 2006–07
  16. By: Hervé Boulhol (IXIS CIB et Panthéon-Sorbonne Economie)
    Abstract: Previous analyses showed that product market deregulation often precedes labor market (LM) reforms. This paper introduces LM imperfections within an economic geography framework, the level of optimal LM regulation being based on each country's social preferences. Due to capital mobility, opening the economy to a country with a deregulated LM puts pressure on LM institutions. As the fall in trade costs increases the intensity of the agglomeration force, LM regulation loses in efficiency. The threat of relocation drives changes in LM policy, with suggests that the effect of liberalization might be found primarily in the weakening of employment protection, resulting in minimal actual relocations.
    Keywords: Deregulation, wage bargaining, capital mobility, agglomeration, relocations.
    JEL: F12 F16 F20 J41 J42
    Date: 2006–09
  17. By: Ross H. McLeod
    Abstract: The World Bank's new series of Doing Business reports attempt to measure the relative ease of doing business in countries around the world. The output of this research is a set of rankings that enable each country to see how it looks relative to the others from the point of view of private sector businesses. This paper highlights a number of concerns about the Doing Business methodology, and presents a critique of the 'law and finance' view regarding the influence of legal system origins on countries' economic performance, which was highly influential in the first of the Doing Business reports. Selected data from the 2006 report are used to explain why Indonesia is having difficulty getting back to Soeharto-era rates of economic growth. The report's findings in relation to Indonesia are then interpreted within the framework of an analysis of the way the Soeharto 'franchise' operated.
    Keywords: business regulation, contract enforcement, law and finance, legal heritage
    JEL: K2 K4 L51 P14 P52
    Date: 2006
  18. By: Jan K. Brueckner (Department of Economics, University of California-Irvine); Raquel Girvin (Transporation Sciences, University of California-Irvine)
    Abstract: This paper explores the impact of airport noise regulation on airline service quality and airfares. It also characterizes the socially optimal stringency of noise limits, taking both noise damage and the various costs borne by airlines and their passengers into account. The analysis also investigates the effect of noise taxes, as well as the optimal level level of such taxes. Along with the companion paper by Girvin (2006a), this work represents the first complete theoretical investigation into the economics of airport noise regulation using a model where the interests of the key relevant stakeholders are captured.
    Keywords: Conflict; Airport noise; Flight frequency: Airfares
    JEL: L0 L9 Q2
    Date: 2006–09

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