Volume 8, Issue 1

The standard economic model of crime since Becker (1968) is primarily concerned with deterrence, but actual punishment policies appear to rely on imprisonment to a greater extent than is prescribed by that model. One reason may be the incapacitation function of prison. The model developed in this paper seeks to incorporate incapacitation into the standard model. A key finding of the hybrid model is that when prison is the only form of punishment and the probability of apprehension is fixed, incapacitation can result in a longer or a shorter optimal prison term compared to the deterrence-only model. Other aspects of the standard model are studied within the context of the hybrid model.

While the market for auto lending at first appears to be highly competitive, many consumers lack the ability to obtain accurate information about price. In many markets, uninformed consumers can “free ride” off the knowledge of informed consumers. Auto lending, however, differs from traditional markets because price is not transparent and ultimately depends upon both the credit worthiness of the individual borrower and the details of the auto loan (term length, payment-to-income ratio, etc.). Auto dealers in this market act as agents of both consumers (identifying suitable auto lenders) and lenders (identifying prospective borrowers). Given the asymmetric information in the market, prices paid by consumers for auto loans vary widely even after controlling for factors such as credit worthiness. While the majority of auto loans are written without any markup, some consumers are charged thousands of dollars in addition to the risk-based interest rate. For example, the top 5% of customers account for over 40% of dealer markup from auto lending. While charging different prices to different consumers is not illegal, one of the apparent consequences in auto lending is that minority consumers – African-Americans and Hispanics in particular – have systematically been charged a higher markup on auto loans than White borrowers. It is this fact – coupled with federal laws outlawing discrimination in credit markets – that led to a series of lawsuits against auto lending institutions. This paper reviews the theory and evidence of subjective markups on auto loans and examines how class action litigation has changed the auto lending market.

Most contracts in which we engage in the marketplace, we do not care to read. Consequently, a classic question arising in the law of contracts is whether, and to what extent, the content of such agreements ought to be subject to special scrutiny by courts, regulators or legislatures. This paper, accordingly, develops an economic theory of the optimal regulation of unread contracts. Under a prevalent view, when contract drafters are repeat players, there is little need for regulatory intervention, as the drafters’ concern for their reputation serves a disciplinary function, which guarantees the efficiency of the drafted terms. Alternatively it is often maintained that a small percentage of informed consumers can guarantee efficiency. Our paper revisits these insights and finds them flawed in three main respects. First, the mere assumption of repeat play does not, in and of itself, guarantee the sustainability of reputation. The socially desirable equilibrium, in which reputation disciplines sellers, is but one of many possible equilibria to which the market might converge and nothing guarantees that the optimal equilibrium would be selected. Second, even if the desirable equilibrium is sustained, it is expected to guarantee the efficiency of only some contractual provisions, not all. In particular, a reputation-minded drafter will tend to include efficient terms only to the extent that they pertain to high-probability contingencies, but not if they pertain to low-probability events. Finally, the influential conviction of contract law theorists that an informed minority of consumers is sufficient to guarantee the efficiency of contract terms is shown to be inapplicable when the majority’s lack of information emanates from their failure to read. We identify a regulatory framework that functions as a corrective measure to the above-mentioned failures. The suggested framework both serves to eliminate inefficient equilibria; and guarantees the efficiency of those aspects of the contract that reputation fails to remedy, i.e. provisions governing low probability contingencies. Although the rules of legal doctrine are not framed in the language of the proposed theory, we argue that the legal doctrine incorporates much of the same principles. Hence, the theory is not merely prescriptive, but also, to some extent, explanatory.

Beginning in the early 1980s, the U.S. Government reformed the patent law in ways that made patents easier to acquire and defend, but further efforts to expand the rights of patent owners had stalled by the mid-1990s. I use a political economy model to explain these changes in terms of the shifting constituency interests represented by members of the U.S. Congress. As the distribution of patenting became less skewed in the 1980s, more members represented constituencies likely to benefit from inefficient patent policy. But as the distribution of patent holding became more skewed once again in the later 1990s, support for expansions of patent rights decreased.

The theoretical literature debates whether debtors should be permitted to contract with lenders over control rights in bankruptcy. Proponents point to coordination benefits from concentrating control rights; detractors point to inter-creditor agency costs. A recent reform of UK bankruptcy law provides an opportunity to test these theories. Until 2003, UK bankruptcy law permitted firms to give complete ex post control to secured creditors, through a procedure known as “receivership.” A bankruptcy reform then required firms to use a different procedure, “administration,” which confers greater control on unsecured creditors. We present empirical findings from a hand-coded sample of 340 bankruptcies from both before and after the change in the law. Whilst gross realizations have increased following the change in the law, these have tended to be eaten up by increased bankruptcy costs. We infer that dispersed and concentrated creditor governance in bankruptcy may be functionally equivalent.

We address the long-standing judicial debate over inquisitorial and adversarial procedures in criminal trials, focusing on the incentives to collect evidence of a defendant ’s guilt or innocence. We demonstrate three shortcomings of the former procedure: (i) a judge may suffer a trilemma, or a quandary among three tasks she confronts, i.e., an incentive scheme to improve the performance of one task impairs the performance of one or two of the others; (ii) it underperforms the latter procedure in collecting evidence at cost if private interests in winning a suit are more motivating than the public interests in avoiding erroneous judgments; (iii) incentive arrangements are so constrained that it may be impossible to induce high efforts of investigation. However, shortcoming (ii ) might be negated when private interests lead adversely to obscuring, rather than revealing evidence.

I consider individuals’ incentive to engage in Pareto inefficient behavior towards their spouse, which I envision as stealing within marriage. Under unilateral divorce, I predict this incentive is lower for some individuals, and higher for no one. Therefore, the incentive to steal within marriage is lower, in aggregate. Empirically, I find unilateral states have 80% more marriage and family therapists, ceteris paribus. If therapists are a mechanism to reduce stealing within marriage, then this evidence is consistent with the theory.

This paper examines the implications of the brain sciences’ mechanistic model of human behavior for our understanding of crime. The standard rational-choice crime model is refined by a behavioral approach, which proposes a decision model comprising cognitive and emotional decision systems. According to the behavioral approach, a criminal is not irrational but rather ‘ecologically rational,’ outfitted with evolutionarily conserved decision modules adapted for survival in the human ancestral environment. Several important cognitive as well as emotional factors for criminal behavior are discussed and formalized, using tax evasion as a running example. The behavioral crime model leads to new perspectives on criminal policy-making.

Empirical studies of judicial behavior using judge-level data are scarce and almost exclusively focused on higher court judges in the U.S. The majority of disputes in any legal system, however, are adjudicated by lower court judges and conclusions about judicial behavior from one legal system cannot be generalized to other legal systems. This paper draws on unique judge-level data to study judicial performance at lower courts in Slovenia, a post-socialist member state of the European Union struggling with implementation of an effective judicial system. We first examine the determinants of judicial productivity and elucidate the role of a judge’s demographic characteristics, education, experience, salary, promotion concerns, and case specialization. We then explore the possible tradeoff between the quantity and the quality of judicial case resolution, shedding light on the benefits and costs of those legal reform measures that aim to increase judicial productivity in Slovenian lower courts.

Market manipulation is a poorly understood phenomenon, due in part to legal standards that categorize manipulative behavior as either an act of outright fraud or as the nebulous use of market power to produce an artificial price. In this paper, we consider a third type of behavior that can trigger a manipulation – uneconomic trading. We demonstrate that uneconomic trading has characteristics of both fraud and market power, thus providing a foundation for analyzing manipulative behavior in a manner consistent across “fraud-based” and “artificial price” statutes. We develop an analytical framework to assist this process that describes price-based manipulation as an intentional act (the “trigger”) made to cause a directional price movement (the “nexus”) to benefit financially leveraged positions that tie to that price (the “target”). This framework could simultaneously improve market liquidity and compliance by providing definitional and analytic certainty concerning what behavior does and does not constitute a market manipulation.

The judicial process is modeled as a biform contest. A sufficient condition for a non-empty core is provided, and it is shown that the effect of the severity of charges on the core is ambiguous. The practice of plea bargaining actually applies Moulin’s (1984) mechanism which non-cooperatively implements the Kalai-Smorodinsky (1975) bargain solution, implying that equilibrium plea deals are regressive. Namely, defendant’s gain and social cost from a guilty plea deal both increase with the severity of the crime. The charge reduction rate is inversely related to the defendant’s, and positively related to the prosecutor’s, “fear of ruin” index.