Volume 5, Issue 1

We examine how macroeconomic instability affects risk of bankruptcy and liquidation. In periods of macroeconomic instability more firms become financially distressed, while the number of potential acquirers falls. Reorganization systems such as Chapter 11 can decouple liquidation from macroeconomic conditions. We develop a model in which a firm's bankruptcy and acquisition hazards are co-determined by firm-level and sector-level factors, and by macroeconomic conditions. As a control, we also estimate the model for the UK, which is an economy without an equivalent system to Chapter 11. Differences in the responsiveness of bankruptcy to instability are largely attributable to reorganization under Chapter 11.

This article determines the optimal standard of proof in criminal law in a trade-off between three costs: the injustice cost of wrong convictions, the injustice cost of wrong acquittals, and the cost to society of the criminal act itself. The standard of proof affects the level of crime through its impact on deterrence. The article applies the expresssion for the optimal standard to the crime of sexual violation against women. While the result must be interpreted with caution, the analysis indicates that for this crime the concern for prevention may have a significant effect on the optimal standard of proof. (JEL K14, K40, K42).

The economic literature on crime and law enforcement shows that the optimal level of deterrence increases when maximal fines rise. This paper shows that this view may be incorrect. In particular, if the gains from crime can be disgorged, as is usually the case in reality, then increasing the maximal fine may reduce the optimal level of deterrence. This may happen if offenders' wealth is less than the monetary value of the harm that offenders cause.

This paper analyzes a concept that has attracted relatively little attention in the literature, even though the concept is important to both theoretical analysis and human behavior in general. Specifically, the concept of a benchmark and its implications are explored. In advancing an argument, economists are taking the existing literature as the departure point and trying to add value. Controversies and/or debates between economists are often related to the fact that their arguments are based on different benchmarks. In addition, benchmarks are also prevalent in the other social sciences, with Weber’s ideal types in sociology and various doctrines in legal studies as clear examples. Both theoretical and behavioral benchmarks are illustrated, and a synthesis is provided. In essence, benchmarks are tools and the functioning and maintenance of these tools are affected by cost/benefit considerations pertaining to all tools. Moreover, as behaviors are inevitably related to benchmarks, having a better benchmark improves the efficiency of resource allocation. It is argued that the economic worldview, once adopted, constitutes a useful benchmark for the general public. The reasons are provided and possible ingredients of such a worldview are suggested.

In Kelo v. City of New London, the U.S. Supreme Court left it to the states to protect property against takings for economic development. Since Kelo, thirty-seven states have enacted legislation to update their eminent domain laws. This paper is the first to theoretically and empirically analyze the factors that influence whether, in what manner, and how quickly states change their laws through new legislation. Fourteen of the thirty-seven new laws offer only weak protections against development takings. The legislative response to Kelo was responsive to measures of the backlash but only in the binary decision whether to pass any new law. The decision to enact a meaningful restriction was more a function of relevant political economy measures. States with more economic freedom, greater value of new housing construction, and less racial and income inequality are more likely to have enacted stronger restrictions, and sooner. Of the thirteen states that have not updated, Arkansas, Oklahoma and Mississippi are highly likely to do so in the future. Hawaii, Massachusetts and New York are unlikely to update at all.

This paper presents a mechanism for regulating pollution when industry harm--but not individual firms' contributions--is observable. The mechanism is based on a modification of Cooter and Porat's Total Liability for Excessive Harm (TLEH). We propose an alternative mechanism of Shared Social Costs (SSC), where firms share the total cost of industry harm and abatement costs. In cases where the abatement costs for each firm are verifiable, SSC may provide an efficient alternative to TLEH. The mechanisms are largely equivalent, but require different types of information for the regulator. For a legal target to be set in TLEH, it requires either knowing the cost functions of individual firms or accommodating error costs by gradually reducing the legal target until the efficient level is found. On the other hand, SSC requires observing individual firms' actual abatement expenditures as opposed to knowing their cost functions. Both rules provide efficient incentives for abatement, and require being able to observe and monetize industry level harm. We show that SSC leads to efficient incentives for entry and exit, has appealing incentives for innovation, and can be applied advantageously to remediation. In markets with heterogeneous firms, we propose weighting cost-sharing by firms' market shares.

Tax planning is an area of growing interest and this paper is an attempt to contribute to the small formal literature on this topic. The paper analyzes the case of tax planning that manipulates the tax system to impose lower effective tax rates on gains than on losses, and proves that such tax planning may provide firms with an incentive to produce more than the social optimum. This inefficiency is different from the general inefficiency entailed by income taxation, captured by the conventional notion of excess burden. A low asymmetric tax may be more distortive than a high symmetric tax rate.

A semicommons regime exists when the efficient use of a resource requires the co-existence of both common and private uses. In a seminal article, Henry Smith examined the system of semicommons property in regard to medieval open fields. In such a system, peasants shared common land for collective grazing, but used privately owned scattered strips for grain growing. This paper provides the first formal model of semicommons property regimes. Our model demonstrates (1) how the costs of strategic behavior in semicommons regimes may outweigh those in commons regimes and (2) how semicommons regimes may solve collective action problems by introducing anticommons arrangements. We extend previous property literature by offering new insights as to conditions in which mixed property regimes emerge and fragmentation solutions are favored.

In negligence law, “unavoidable accident” is the risk that remains when an actor has used due care. The counterpart of unavoidable accident is “negligent harm.” Negligence law makes parties immune for unavoidable accident even when they have used less than due care. Courts have developed a number of methods by which they “sort” accidents to unavoidable accident or to negligent harm, holding parties liable only for the latter. These sorting techniques are interesting in their own right and also provide a way of conceptualizing the relationship between specific negligence and res ipsa loquitur, which are two variants of the negligence rule. One judicial sorting technique reveals a paradox of negligence law. New safety technology often reduces the amount of unavoidable accident and simultaneously increases the expected number of “compliance errors,” or routine negligent lapses, that actors will make. Paradoxically, an actor’s use of new safety technology can make it more likely that a court will sort an accident to negligent harm as opposed to unavoidable accident. The article develops these theoretical ideas through a series of graphical illustrations analogous to those of traditional price theory.

This article uses a social welfare approach to determine if and when the institution of constitutional judicial review of property regulation and expropriation is efficient. A model is proposed in which property rights protection is a component of social costs. Constitutional judicial review is assumed to either add to or subtract on net from those costs, affecting social welfare generally. It will be shown that under realistic conditions, reflected in real instances, that constitutional judicial review might not enhance economic efficiency or overall social welfare. We show that the efficiency of constitutional judicial review is likely to vary within the larger institutional context.

California’s Attorney General was pleased to announce that “An unintended but positive consequence of ‘Three-Strikes’ has been the impact on parolees leaving the state….The growth in the number of parolees leaving California is staggering.” Law enforcement officers in other states were presumably less pleased. A displaced criminal is a benefit to California but a cost to other states. If such criminal spillovers are important, law enforcement will over-invest in policies that encourage displacement. We test whether California’s three-strikes law led to significant criminal spillovers.

This paper is concerned with the economic incentives of crime among agents within a private organization. Specifically, we present a contest model of a college basketball game to identify the winners, losers, and social welfare consequences of point-shaving corruption in men’s NCAA basketball as an example of participation in illicit activities. It is shown that, under reasonable conditions, such activities lower the level of social welfare derived from college basketball play by reducing aggregate efforts in a game and distorting relative efforts across teams. We then examine the economic incentives of a player to point-shave and discuss player-types that are at a relatively high risk of engaging in point-shaving corruption. Private and public mechanisms to minimize corruption are compared in terms of efficiency, and a differential “honesty premium” is derived and discussed as an efficient way for the NCAA to decrease the incidence of player corruption.

Evaluations of the societal burden associated with injury typically employ a cost of illness (COI) framework, focusing on direct costs, such as medical costs, and indirect costs, such as reduced productivity. However, nonfatal injuries that have long-lasting or permanent consequences can significantly reduce the quality of life for those affected. While COI evaluations are useful in demonstrating the economic burden attributable to injury, they typically do not cover quality of life losses. This study estimates the value of quality of life losses associated with consumer product injuries. We use ex post data based on jury awards in product liability lawsuits involving nonfatal product-related injuries. By combining data on monetary compensation awarded in these cases with estimates of the reduction in quality adjusted life years (QALYs) due to the injury suffered, we are able to estimate the component awarded for quality of life losses. Our findings suggest that these awards are rational and systematic, and that the most significant determinant appears to be injury severity, measured as the QALY loss. The values for life and quality of life losses implied by jury awards appear reasonable (if not somewhat low) when compared to the values obtained in the value of a statistical life literature.

The earliest economic theory of discrimination proposed the subsequently neglected idea of a "vicious circle" of discrimination (Myrdal, 1944). We draw on psychological evidence (that people derive utility from believing that the world is just) to propose a behavioral economic model in which the vicious circle envisaged by Myrdal can arise. We demonstrate the power of this approach through an application to the issue of whether and how to justify penalty enhancements for hate crimes against members of disfavored groups. The crucial assumption is that individuals engage in biased inference in order to preserve their Belief in a Just World, thus attributing the disproportionate victimization of a group to that group's negative characteristics, rather than to the hate-motivated preferences of offenders. In a simple two-period setting, we show that disproportionate victimization of the disfavored group in the first period can lead to additional crime against that group in the second period. The reason is that potential offenders' inferences about the victimized group's characteristics become more negative as a consequence of disproportionate victimization, raising the net benefits of crime against that group (under the assumption that the benefits of crime depend partly on the victimized group's perceived characteristics). Our main result is that penalty enhancements can reduce the social harm due to these extra crimes.

Deterrence theory proposes that legal compliance is influenced by the anticipated risk of legal sanctions. This implies that changes in law will produce corresponding changes in behavior, but the marijuana decriminalization literature finds only fragmentary support for this prediction. But few studies have directly assessed the accuracy of citizens’ perceptions of legal sanctions. The heterogeneity in state statutory penalties for marijuana possession across the United States provides an opportunity to examine this issue. Using national survey data, we find that the percentages who believe they could be jailed for marijuana possession are quite similar in both states that have removed those penalties and those that have not. Our results help to clarify why statistical studies have found inconsistent support for an effect of decriminalization on marijuana possession.

This paper investigates the structure of incremental liability rules. Necessary and sufficient conditions are derived for an incremental liability rule to be efficient. A liability rule, in the ordinary sense of the term, to be called a standard liability rule, is a rule which specifies the proportions in which the loss, in case of accident, is to be apportioned between the victim and the injurer as a function of their proportions of non-negligence. An incremental liability rule is a rule which specifies (i) which of the two parties, the victim or the injurer, is to be the non-residual liability holder; and (ii) the proportion of the incremental loss, which can be ascribed to the negligence of the non-residual party, to be borne by the non-residual liability holder. The necessary and sufficient conditions for an incremental liability rule to be efficient, derived in the paper, can be stated as follows: Let the party which is the residual liability holder when both parties are non-negligent be designated as r and the other party as nr. An incremental liability rule is efficient for every admissible application iff its structure is such that: (i) If party r is negligent and party nr is non-negligent, then party r must remain the residual liability holder. (ii) If party nr is negligent and party r is non-negligent, then party nr must either become the residual liability holder or liability of nr must be equal to the entire incremental loss which can be ascribed to the negligence of nr.

This article examines firms’ motivations for environmental overcompliance. A theoretical model is developed to identify the internal and external factors that influence firms’ decisions for environmental overcompliance. An empirical analysis is then conducted to determine the statistical significance of those factors using the primary data collected in an industrial survey in Oregon. The results suggest that diverse factors influence business decisions for environmental overcompliance, including market forces, regulatory pressures, and personal values and beliefs of upper management toward environmental stewardship.

Conventional wisdom suggests that under contingent fee contracts, attorneys have an excessive incentive to settle the case; therefore, a plaintiff should retain the authority over settlement decisions. We show, by contrast, that when the plaintiff possesses private information about the outcome of a trial and makes a take-it-or-leave-it settlement demand, delegating settlement authority to an attorney under a contingent fee contract increases the probability of settlement and the plaintiff’s equilibrium payoff. We also show that contingent fee contracts with attorney control over settlement are more efficient than hourly fee contracts, as the former involve a higher probability of settlement. The intuition behind these results is that the attorney’s greater reluctance to go to trial allows him to more effectively signal the plaintiff’s type through the settlement demand.

Game-theoretic models incorporating neo-classical economic assumptions can be a powerful tool for identifying and analyzing issues relevant to legal policy. In this paper I argue that, where those assumptions are deficient, the efficacy of and insights from such models can be improved by incorporating insights from experimental social sciences. Following this paradigm, I propose an expansion of the neo-classical deterrence model of criminal behavior to incorporate, as reputation effects, social scientific theory regarding the effects of in-group norms on behavior. Analysis of the expanded model shows that there are material differences between the classic and expanded models in predictions, the latter of which are more consistent with macro-level observations. I then discuss some substantive implications of the predictions of the expanded model for criminal legal policy.

This paper investigates crime against enterprises, using a simple modelling framework and enterprise surveys conducted in 34 countries in Europe and Asia between 2002 and 2005. The empirical results show that crime has an especially large negative impact on micro enterprises that handle large cash balances. Enterprises with worse business conduct are also more likely to be targeted by crime. The perception of crime is shown to be associated with experience of street crime on the enterprise level and experience of organized crime on the country level. The paper also highlights the deterrent effect of crime on enterprise investment decisions.

The law and economics literature on multiple causation generally distinguishes between causal uncertainty and joint causation. For cases of causal uncertainty it has been shown that proportional liability, a fractional share rule, may lead to socially optimal incentives for the level of care. However, for cases of joint causation fractional share rules tend to be inefficient. This paper argues that the crucial distinction is not so much between the uncertainty or jointness of the causal elements, but rather between the additivity or non-additivity of risk factors. We develop an approach that integrates causal uncertainty and joint causation. We show that an apportionment rule that assigns liability in proportion to the probability of causation always yields efficient incentives when the risk factors are additive. In non-additive cases the proportional rule has an efficient equilibrium outcome (and this equilibrium is unique for almost all parameter settings) when tortfeasors act independently and simultaneously. But it is not always efficient when tortfeasors act in concert or act sequentially. We apply our approach to four recent cases from English jurisprudence. These cases illustrate that both causal uncertainty and joint causation may involve additive as well as non-additive risks.

Despite the fact that public corporations ought to be risk neutral, they often carry insurance. This note first considers why insurance (or, more precisely, the package of services provided by insurance companies) might create value, regardless of the risk preferences of managers, shareholders, or other corporate stakeholders. One motive is that their contractual counterparties—buyers, lessors, and lenders—require that they carry insurance. Three explanations for why the requirement might be value enhancing are proposed

We examine the time it takes to reach a verdict (deliberation time) using a unique dataset on the deliberation times of actual juries in criminal and civil cases. Duration model results indicate that case complexity, the unanimity of verdicts and the process of voir dire affect deliberation times, whereas jury size, prior juror experience and the gender composition of juries are not significant correlates. The results shed empirical light on an important correlate of trial accuracy using real-world data, in contrast to previous research that employed mock jury data.

This paper shows that when a product innovation is protected by both patents and trade secrets, under U.S. law the innovator can be induced to license a rival even if patent protection is very broad and there are no partially competitive older products. This opportunity may benefit society. Nevertheless, some legal restrictions in force at the moment do not permit society to reap all potential gains. Since incentive and efficiency considerations suggest that a socially optimal contract should provide for both a negative fixed fee and post-patent royalties at the same unit level as before a patent’s expiration, we conclude that per se prohibitions of these practices are unjustified.

A state’s right to prohibit unions from compelling employees to pay dues even when they are covered by a collective bargaining agreement has its basis in the 1947 Taft-Hartley amendments to the National Labor Relations Act (1935). After the amendment's passage, twelve states passed “right-to-work” laws--as did ten more states in the intervening years. Although there has been considerable research on the effect of right-to-work laws on union density, organizing efforts, industrial development and some study of wage differences, there has been little or no examination of the legislation’s influence on business and economic conditions across states. In this paper, the average differences in business conditions, employment, personal income, wages and salaries, and proprietors’ income across states that have enacted right-to-work laws versus those states that did not, are examined assuming that the legislation is endogenous and controlling for state real economic growth, region, and year. Although right-to-work states may be more attractive to business, this does not necessarily translate into enhanced economic verve in the right-to-work state if there is little “trickle-down” from business owners to the non-unionized workers. While the number of self-employed is higher and business bankruptcies lower on average in right-to-work states, there is no significant difference in capital formation or employment rates, ceteris paribus. In addition, per-capita personal income and wages are both lower, yet proprietors’ income is higher in right-to-work states.

We develop a model of lawmaking to study the efficiency implications of, and variation in, jurisdictions’ choices between promulgation of indigenously developed laws and legal transplants. Our framework emphasizes the sequential nature of lawmaking, the ubiquity of uncertainty, considerations about ex-ante promulgation versus ex-post adjustment costs, and the importance of the political context of legal reform. In discerning the patterns of inefficiencies in both transplantation and indigenous lawmaking, we elucidate the role of heterogeneity of interests and adaptability of a legal system. We also find that domestic corruption per se need not justify transplantation of foreign legal models. Our results support the view that local conditions are a crucial determinant of the appropriate path of institutional reform.

Property law usually addresses encroachments with ejectment. Building encroachments differ, however, as restoring a landowner’s property claims implies the reversal of often large costs sustained by the builder. The authority thus confronts the following dilemma: either it stands by the landowner, thereby facing the social costs of undoing significant investments and possibly supporting an opportunistic landowner that tries to hold up the builder, or it defends the investment of the builder thereby endorsing a kind of private eminent domain. In addressing building encroachments, national property laws have deployed different remedies ranging from a property rule in favor of the landowner to a property rule in favor of the builder with a variety of liability rules, often hybridized with property rules, in between. This paper models the builder-owner conflict after the theory of optional law (Ayres, 2005); it frames different national solutions into a common analytical setting; and it evaluates the different laws in their relative allocative and distributive outcomes and their capacity to constrain opportunistic behavior.

Journalists sued for defamation may refuse to reveal their anonymous sources. To escape liability under the traditional English rule, they then need to show proof that the news is correct. By contrast, many US states have switched the burden of proof such that plaintiffs must first present evidence that the news is false. Focusing on the incentives of sources to leak, we find that the American rule reduces the frequency of type I errors (true stories are not learned by the society) at the expense of a higher frequency of type II errors (the society believes wrong stories). The American rule is superior when courts are likely to find the truth without knowing the identity of sources, and when firms can severely punish even honest sources. Furthermore, when courts rule that sources must be revealed, they should ensure a higher compliance rate of journalists under the American rule.

This paper examines the decision faced by a plaintiff who has successfully established liability, but the judge has reduced the jury’s award under a procedure known as a remittitur. The plaintiff has the choice of accepting the remittitur or having a new trial. An analysis of the rules surrounding remittiturs in US federal court shows that there is almost no advantage to choosing a new trial rather than to accept the remittitur, no matter how small the resulting award may be.

In a tournament competitors may cheat to gain an advantage. This paper considers the problem of deterrence and finds that tournaments reflect special circumstances that are not present in a traditional model of law enforcement. The traditional model considers sanctions and monitoring as the instruments of deterrence. In a tournament the prize structure plays a critical role in determining both the costs and benefits to cheating. We consider ways in which the prize structure can be manipulated in order to reduce monitoring costs.

The subsidiarity principle was formally adopted in 1992 by the European Union to limit excessive centralization of competences. According to the subsidiarity test, a given policy responsibility should be allocated to the lowest possible level of government, unless there is evidence that the central government (the Union) has a comparative advantage in fulfilling the task under consideration. Contrary to its stated goal, the adoption of the subsidiarity principle was followed by a wave of intense centralization. In this paper, we address this paradox by studying the effects and the limitations of the subsidiarity test in promoting an optimal level of centralization.

The 2005 U.S. Supreme Court decision Kelo v New London allows using eminent domain to transfer property from one private party to another when it serves a broadly defined public purpose such as economic development. This paper examines the effect of this doctrine on the size of state and local governments. In the leviathan model, constitutional constraints are needed to control government expansion. The Kelo decision removes one such constitutional constraint on how state and local governments gain command over privately owned resources. The empirical results show that the breadth of eminent domain power affects the size of the public sector; states that explicitly empower their local governments to use eminent domain for private economic development have larger state and local public sectors than those that do not.