Volume 7, Issue 2 - CESifo Conference in Law and Economics

This issue of the Review of Law and Economics contains a selection of papers presented at the 1st Annual CESifo Conference in Law and Economics, which took place at Munich, in May 2010.

Information provided by an agent affects the prices at which equity transactions take place. The agent may breach his duty either by spending too little effort at investigating relevant matters or by unduly manipulating the obtained information. As a consequence of such breach of duty, market participants may suffer from losses. Legal systems provide a rather disparate array of remedies without providing a coherent theory that would support the design of these remedies. The present paper proposes a general principle according to which courts may award expectation damages and it identifies sufficient conditions under which such damages would generate incentives for the agent to investigate with due care and to duly disclose the information.

In 2004, a section was added to the German Protection against Dismissal Act, establishing a new procedure to dismiss an employee, given a predetermined severance payment. Most legal scholars presume the change to be without impact, while a minority of experts claims it to be either beneficial or unfavorable to employees. Our theoretical model suggests that firms will use the new procedure, but that the change in payoffs is indeterminate and, therefore, an empirical issue. Exploiting the fact that collective dismissals are not directly affected by the amendment, difference-in-differences estimates based on panel data for West Germany indicate that the legal change did have a negative effect on severance pay.

We study the desirability of interventionist harmonization of legal standards across multiple, mutually interdependent jurisdictions which strive to adapt law to their local conditions, as well as to synchronize it with other jurisdictions. In a setting where jurisdictions are privately informed about their local conditions, we contrast the regime of decentralized standard-setting with two means of interventionist harmonization: through centralization and through allocation of lawmaking authority to a particular jurisdiction. Our analysis illuminates the importance of patterns of interjurisdictional linkages in delineating the scope for, and the appropriate means of, interventionist harmonization. We find that greater jurisdictional interdependence – the hallmark of globalization – does not per se justify interventionist harmonization, unless increased interdependence results in notable asymmetries in the pattern of jurisdictional interdependence. We also show that, in the presence of cross-jurisdictional externalities, harmonization is, contrary to conventional predictions, not desirable when local preferences are homogeneous across jurisdictions.

This paper focuses on the normative analysis of intellectual property rights, in light of the technological revolution of the Internet and accompanying technologies. After a brief overview of the various philosophical justifications for awarding intellectual property rights, it identifies two major Law and Economics paradigms for the analysis of intellectual property: the incentives paradigm, which is founded upon the public goods analysis of neo-classical microeconomic theory, and the tragedy of the commons literature, which is based on the economic analysis of externalities. The paper raises several points of critique towards both frameworks of analysis and especially towards their inability to point to the desirable extent of intellectual property rights (IPR) and the direction of their reform required as the result of the recent technological revolution. It further criticizes the dominant contemporary Law and Economics writings in this field as shifting to a new proprietary paradigm that pre-assumes information to be an object of property, overlooking its fundamental differences from physical property and focusing on its management rather than on its initial justifications. The paper is concluded with some tentative thoughts on the general notion of “Property Rights” in light of the contemporary approach concerning intellectual property.

We study the effects of introducing class action lawsuits into a competitive environment where some firms have an intrinsic motivation to implement efficient care. The standard aggregation argument in favor of class action holds that there will be increasing efficiency due to lower litigation costs. In the short run, intrinsically motivated firms benefit from the introduction of a class action procedure. In the long run, new intrinsically motivated entrants are attracted into the market, thereby increasing consumer surplus. Overall, the average care level increases.

I present the following proposal: information revealed during non-cartel investigations by competition law enforcement authorities, such as evaluation of mergers and acquisitions (M&As) or investigation of monopolization (dominance) conduct, should be directly used to investigate and prosecute cartels. Currently, in several jurisdictions, information acquired in, for example, an M&As investigation typically cannot be directly used for a cartel case due to the underlying statutes and the legal and administrative procedures that govern information use. Reviewing the management and corporate strategy literature, I note that M&As form a vital part of firms’ core business strategy, with the longer-run strategic aspects being more important. These longer-run strategies could be jeopardized if the firms were engaging in collusion, as the likelihood of detection and prosecution would increase under the proposed rule change, which would punish bad (collusive) behavior. I argue that irrespective of exactly how many cartels are actually prosecuted via this channel, the proposal has the likelihood of creating a meaningful deterrent effect. I also discuss the potential downsides related to Type 1 errors and administrative costs. Overall, I argue that the proposed rule change could increase the efficiency and effectiveness of cartel enforcement, and open an additional front in the fight against hardcore cartels that operate within jurisdictions as well as internationally.

In this paper we consider the relationship between the media and the outcome of civil litigation. We present a model dividing lawsuits into two main stages: a signaling stage and a rent-seeking contest. During the first stage the judge is exposed to signals regarding the true position of the defendant, and in addition pays attention to signals reported by the media. The judge forms an initial prejudice towards the plaintiff and the defendant based on the ratio between the true merit of the case and the burden of proof required to establish the plaintiff’s claim (the preponderance of the evidence). Then, we turn to the second stage and provide the plaintiff and the defendant with an opportunity to invest resources in order to influence their winning probabilities. We show how the media can influence the process with biased reports.

This paper addresses the question of whether in-house or contracted maintenance of campus safety in U.S. colleges will be justified on efficiency grounds in the future. According to our analysis, the answer will crucially depend on whether emergency exceptions to amendments such as the Buckley Amendment (FERPA) will be more frequently applied by schools and tested in the courts. If the latter will be the case, we presume the resulting court rulings to be defining an implementable minimum quality standard. It is argued that the Virginia suicide-legislation that was passed before the Virginia Tech shooting could offset such a potential minimum standard. With or without a minimum standard, our model can make a point for in-house maintenance of campus safety. However, the two scenarios bear completely different policy implications.

Recent empirical studies suggest a need for a flexible patent regime responding to industry differences. In practice, industry-specific modifications of patent length already exist but lack theoretical foundation. This paper intends to make up for this neglect by scrutinizing in what direction industry characteristics influence optimal patent length. It is found that patents ought to be shorter, the more intense competition, the higher R&D productivity, and the more intricate reverse engineering in an industry are. Unlike similar Schumpeterian growth models, this model assumes Cournot competition and introduces an empirically substantiated measure of industry differences in the ability to catch up with a technological leader. It is found that for most empirically plausible cases the familiar inverted-U relation between patent length and growth carries over to the Cournot set-up.