Volume 4, Issue 2 - 23rd Annual Conference of the European Association of Law and Economics, Madrid, Spain

The 23rd Annual Conference of the European Association of Law and Economics (EALE) was held September 14-16, 2006 in Madrid, Spain. Five papers have survived a strictly anonymous refereeing procedure of the highest standard as the ones to be published here in the Review of Law and Economics.

Emissions trading is becoming increasingly popular in environmental law. Allowances to trade emissions can either be auctioned off or handed out free of charge by means of grandfathering. Although grandfathering is frequently used in emissions trading schemes, it is a popular view in the economic and legal literature that grandfathering is inconsistent with the polluter-pays principle. We come to a different, more nuanced view. The question of whether polluters pay under grandfathering depends on how the polluter-pays principle is interpreted. We present a taxonomy of interpretations. Based on an efficiency interpretation of the principle, consistency is demonstrated by emphasizing the economic impact of the opportunity costs of gratis allowances and the lump sum nature of the subsidy that is inherent to grandfathering. Inconsistency can only be claimed based on an equity interpretation of the polluter-pays principle. Allocating allowances free of charge means that polluting firms receive a capital gift making their shareholders richer, which may be perceived as unfair. We draw two conclusions. First, contrary to what some have claimed, grandfathering is compatible with an efficiency interpretation of the polluter-pays principle. Second, only auctioning is consistent with an extended form of this principle. Auctioning ensures not only that pollution costs are internalized (efficiency), but also that producers buy their allowances before they pass on those costs to consumers (equity).

Tort reform may not affect all segments of society equally. Studies have shown that many tort reforms disproportionately reduce compensation to women, children, the elderly, disadvantaged minorities, and less affluent people. This study goes beyond tort reform’s disproportionate effect on compensation, to explore whether tort reform also has a disproportionate effect on accidental death rates. We explain that, theoretically, tort reform’s care-level effects and activity-level effects may disproportionately impact the accident rates of different groups. Using the most accurate, comprehensive data on medical malpractice tort reforms and state-level data from 1980-2000, we examine empirically whether tort reforms indeed have such a disproportionate effect. The results from our empirical analysis are consistent with our theoretical predictions. We find that the impact of tort reform varies substantially among demographic groups. When we consider the net effect of all the reforms in our study together, our results suggest that women, children, and the elderly do not enjoy tort reform’s benefits as much as men and middle-aged people. In fact, they might even be harmed by reform.

This paper studies the effect of limited liability on corporate architecture. Corporate architecture is to be interpreted as the organizational instruments firms use to organize themselves into a coordinating, hierarchical ordered association of people. In this paper, it specifically refers to the use of four governance instruments within the firm to control the behavior of employees. These four are decision control rights, reward schemes, information systems and conflict resolution rules. Limited liability influences the way in which an incorporated group of firms employs each of these instruments. The most important effects are that limited liability makes it advantageous to allocate decision rights lower in the organization, use higher-powered reward schemes and economize on information systems. The effects lead to a saving of coordination costs within incorporated groups compared to unincorporated groups. Corporate groups thus differ in their governance arrangement from firms that have not organized in corporate groups. Alternatives that restrict limited liability have the effect of centralizing rights, flattening reward schemes and increasing investment in information systems. If corporate groups have attuned their architecture optimally, then restricting, or abolishing, limited liability generates additional coordination costs.

The problem of multitasking concerns the dilemma of designing incentives for an agent among an array of tasks when some tasks are more difficult to observe than others. So far the multitasking approach, as introduced by Holmstrom and Milgrom, has only been used in the context of incentive schemes based on positive rewards resulting in the use of lower-powered incentives in comparison with single-task settings. The main argument of the paper posits that these results can also be applied to incentive schemes based on negative rewards such as a liability system. The underlying idea claims that the additional utility from an increase in the first task due to a positive deterrence effect is lower than the disutility from a decrease of the second less observable or unverifiable task due to rising opportunity cost for the agent. The idea is discussed in the context of the optimal design of medical malpractice regimes.

We argue that during the crystallization of common and civil law in the 19th century, the degree of discretion in judicial rulemaking, albeit influenced by the comparative advantages of both legislative and judicial rulemaking, was mainly determined by the anti-market biases of the judiciary. The different degrees of judicial discretion in both legal traditions were thus adapted to different circumstances, mainly the unique, market-friendly, evolutionary transition enjoyed by English common law as opposed to the revolutionary environment of the civil law. On the Continent, constraining judicial discretion was essential for enforcing freedom of contract and establishing a market economy. The long-term confluence of both branches of the Western legal system towards lesser freedom of contract is explained as a consequence of increased perceptions of exogenous risks and changes in the political system. These favored the adoption of sharing solutions that interfered with market-supporting institutions and removed the cognitive advantage of parliaments and political leaders.