Volume 7, Issue 1

Since 2005, all of the teachings of the Roman Catholic Pope have been copyrighted. Given that it is a tenet of the church to spread the faith and teach all people, this would seem at odds with any restrictions on access. Yet the Catholic Church is by no means an exception, and other religions have likewise resorted to copyright. This paper presents a simple model to attempt to rationalize the exercise of copyright by a religious organization. The analysis also provides more general insights concerning the workings of copyright, which appears to function more like a right to levy a tax than like a right to set a monopoly price, as currently believed.

On September 29, 2008, the U.S. House of Representatives voted to reject HR 3997 (known as the original $700 Billion Bailout Bill). On October 3, the House reversed course and voted to approve the Emergency Economic Stabilization Act of 2008 (EESA). This paper applies a political voting model to these two House votes – the rejection of the bill on September 29 and its passage on October 3. Both economic conditions and PAC contributions matter in explaining the two votes, but their effect is attenuated by the individual legislator’s power. PAC contributions from the American Bankers Association appear to matter for explaining those legislators who switched. The role of ideology in explaining either the September 29 or October 3 vote is limited.

A firm’s impact on social objectives such as environmental standards can often be moderated by procedures–the workplace rules that guide employee behavior. The legal framework can provide incentives for firms to adopt such procedures. For example, firms could be immunized from liability for harm when a suitable procedure has been put in place. However, such immunization tends to deliver excessive incentives for proceduralization, and sometimes also insufficient incentives for firms to enforce procedures. Despite these disadvantages, there are cases in which procedural immunization is socially desirable.

Despite the fact that blackmail constitutes a voluntary transaction between two parties, it is deemed to be a criminal offense in most legal systems. The traditional economic approach to this so-called 'paradox of blackmail’ emphasizes welfare loss generated by the costly rent-seeking activities of potential blackmailers as the primary justification for its criminalization. This argument, however, does not extend to cases in which potentially damaging information about the victim was acquired by the blackmailer at no cost. It also does not seem to shed light on a related puzzle: why is it legal for a potential victim to bribe the other party with the purpose of achieving the same final outcome (suppression of information) as in the case of blackmail? This paper addresses these questions in a simple model of bargaining under asymmetric information, which is used as a unified framework for studying both blackmail and bribery. Under asymmetric information the bargaining outcome is not efficient, regardless of the distribution of the bargaining power. However, when the blackmailer is a monopolist seller of the information, inefficiency results from his demands being too high relative to the social optimum, providing justification for the practice of penalizing blackmail. On the other hand, when a victim is the monopolist buyer of the information, the equilibrium offer is inefficiently low, implying that its punishment would be counterproductive. These arguments provide further support for the claim that under reasonable assumptions the criminalization of blackmail can be justified on efficiency grounds.

This essay discusses and refutes allegations by A.C. Pigou and R.H. Coase that a competitive, private-ownership economic system that conforms to the neoclassical model fails to allocate resources efficiently. The essay then suggests a source of inefficiency that differs from and is much more limited in application than are those offered by Pigou and Coase; and the suggested source, moreover, is compatible with the neoclassical model.

We find an economic rationale for the common sense answer to the question in our title – courts (that maximize parties’ welfare under a veil of ignorance) should not always enforce what the contracting parties write. Courts can improve on the outcome that the parties would achieve without their intervention. We study a buyer-seller model with risk-neutral agents and asymmetric information. 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, inefficient pooling obtains in equilibrium. By voiding some contracts the court is able to induce them to separate, and hence improve ex-ante welfare. Our results can also be interpreted as supporting the normative case for mandatory rules in contract law.

The paper defines, implements and compares two empirical tests of relevant markets. While the SSNIP test compares an initial industry equilibrium to an out-of-equilibrium situation, the 1984 US Merger Guidelines test compares the same initial equilibrium to a second equilibrium outcome. We define these concepts formally and apply them to the computer server industry by estimating a model on a large dataset. We find several smaller relevant markets in the low-end segment of servers. In addition, we find that the results might be quantitatively significantly different between the two approaches as the SSNIP test changes prices uniformly and does not take into account the multi-product pricing strategies of the firms.

Under the conditional fee arrangement, a lawyer receives an upscale premium if a case is won. In this article, we develop an asymmetric information game of settlement and litigation in order to compare hourly and conditional fees with regard to their effects on the number of frivolous suits being filed, the settlement rate of cases, and the total costs of litigation. The main result shows that a conditional fee schedule improves the efficiency of the litigation process under the English fee-shifting rule by undermining frivolous plaintiffs' incentives to file suit and then reducing total expenditures. It hence provides an additional theoretical foundation for the recent switchover from hourly fees to conditional fees in the United Kingdom.

Due to the costs of negotiating treaties, signatories may defer the resolution of uncertainty to the future rather than include all possible states of nature in a treaty. This particularly will be the case when addressing uncertainty will increase the negotiating costs. In such a context, the existence and form of compliance institutions is of particular importance. We develop a formal model to consider the relationship among treaty negotiation, compliance institutions, and uncertainty over future states of nature. In our model, states of nature determine the costs of compliance with a treaty. We explain that when resolving uncertainty is deferred to the future and compliance costs are unobservable, an escape clause facilitates viability of a treaty. When escape is considered to be de jure compliance, and signatories are incompletely informed about one another's compliance costs, an incentive for opportunistic breach arises. In such a context, we demonstrate that a dispute resolution mechanism that discloses compliance costs of a signatory invoking escape can deter spurious use of the clause. We incorporate uncertainty through the specification of a discrete time, continuous-state stochastic compliance function. Because many policies for which treaties are negotiated exhibit persistence in their costs of compliance, we contrast compliance cost processes with and without persistence. We explain how persistence in compliance costs that exhibit uncertainty may undermine the effectiveness of an escape clause, even with a dispute resolution mechanism. Persistence also increases the cost of negotiation by increasing the expected costs of compliance, which may result in fewer commitments, rendering the treaty less viable. We examine two options to mitigate these effects: dynamic adjustment of commitments through an institutional compliance structure specified in the treaty, and renegotiation. When an escape clause fails to preserve compliance under persistence, dynamic adjustment may be more likely, as renegotiation requires a stronger commitment to the agreement. When dynamic adjustment entails periodic scheduled reconvening of signatories, however, compliance may be undermined and disputes may be more frequent.

This paper analyzes how the forfeiture of illegal gains impacts the deterrence of illegal acts. We show that when public authorities introduce a claim on illegal gains as part of a sanction it may, counter-intuitively, increase crime in a setting in which criminals may invest in avoidance activities to lower the probability of detection.

This paper examines the effect of voluntary efforts to self-audit on compliance with Clean Air Act regulations. It also examines the effect that state audit privilege and immunity laws have on the incentives for auditing and for improving compliance. Using data for a sample of S&P 500 firms, we correct for the endogeneity of the environmental audit decision by estimating a bivariate probit model with 'compliance status’ and 'decision to self-audit’ as two discrete choice variables. Our empirical analysis controls for compliance and self-auditing incentives created by regulatory and community-based pressures. We find that those facilities belonging to firms that have been subject to inspections in the past, that face a stronger threat of liabilities for Superfund sites, and that are more visible due to size are more likely to undertake an environmental audit. State audit privilege and immunity laws are not found to have a statistically significant effect on incentives for self-auditing. Facilities that self-audit are more likely to be in compliance with Clean Air Act regulations. However, audit privilege policies are found to have a statistically significant negative impact on compliance while audit immunity laws are found to have an insignificant impact on compliance.

While second-party punishment is suitable in small groups, third-party punishment is much more common in large societies, where it is generally recognized as a social norm enforcement device that may guarantee social stability. However, in large societies, the presence of a potential additional third-party punisher who observes the norm violation and decides to intervene becomes more probable. The question arises as to whether third-party punishment would be robust with respect to an enlargement of the pool of potential altruistic punishers, namely the introduction of a second potential punisher. The relevance of this question is evident because, should the case be that the presence of several potential third-party punishers activates free-riding attitudes, third-party punishment may decline or even collapse altogether. In our paper we compare, by means of an economic experiment, punishment by a single third party (the Stand-Alone case) with punishment by third parties (In-Group environment). Shifting punishment choices into this “enlarged environment” allows us to study, in a systematic way, the complex relationship between the punisher’s expectations about her/his peer’s punishment decisions and her/his own punishment choices. Our data suggest that individual punishers are heterogeneous as to their individual punishment characteristics and the presence of a second punisher affects their choices to a certain extent. Consequently, the implementation of voluntary punishment depends on the distribution of types within the population. This result allows both to put into discussion the extreme emphasis devoted to voluntary third-party punishment as the “golden cornerstone” of spontaneous social order and to explain why large developed societies need institutional legal systems as the root of stability.

This study investigates the effects of the corporatization process – i.e., the transformation of a municipal firm into a limited liability company – on the production costs of local public services whose ownership is maintained by the local government. Theoretical analysis predicts that, even without privatization, corporatization is a potentially effective way to improve efficiency (Shleifer and Vishny, 1994; Stiglitz, 2000). We explore this issue by using information on a typical local utility, such as the bus service provided by public transit systems in Italy, which experienced a reform of the governance towards the corporatization structure during the ’90s. The results on a sample of 33 local bus companies over the period 1993-2002 show that, even if public ownership persists, the transformation of a municipal enterprise into an autonomous company – corresponding to the first stage of the corporatization of local utilities in Italy – or into a limited liability company exerts a reducing impact on production costs.

By comparing the behavior of those US banks which faced Securities Class Actions (SCAs) in the 2000-2008 period with a control group of non-sued banks, we investigate the regulatory effects of this collective litigation procedure. The paper improves upon previous research by accounting for the endogenous nature of SCAs with respect to bank performance. This issue is addressed using an instrumental variable related to court severity. Two-Stage Least Squares estimates provide evidence that SCAs can stimulate more cautious attitudes towards risk, prompting the accumulation of reserves and recapitalization. We also find they are likely to enhance bank efficiency. However, our results also suggest that SCAs significantly increase dividend payouts while inducing a contraction of bank assets. SCAs are also likely to represent a warning signal of insolvency, as it emerges from the higher probability of being sued in case of high incidence of non-performing loans. We add an extension to the main analysis considering the probability of bank failures as a function of SCA occurrence. Results indicate that the latter is not likely to accelerate the former.

When courts are congested, the risk associated with facing a defaulting tenant is high for landlords. They tend to compensate for this risk by increasing rents to include a “risk premium.” This has the effect of making the probability of defaulting increase, as well as further overloading the courts. Using a simple model we show in this paper how a better equilibrium can be reached when the resources of the judiciary are slightly increased. Our explanation is that a rise in public legal resources not only allows courts to produce more decisions (direct effect), but also reduces the number of cases coming in by giving landlords an incentive to charge lower rents (indirect effect). The synergy of the two effects creates a multiplier of public expenditure on justice.