Showing papers in "American Law and Economics Review in 2004"

Law and Firms’ Access to Finance

Abstract: Why does a country's legal origin influence its firms' access to finance? Using data from over 4,000 firms in 38 countries, the authors show that firms in countries with French legal origin face significantly higher obstacles in accessing external finance than firms in common law countries. Next, their results indicate that French legal origin countries tend to have (1) less adaptable legal systems, as defined by the degree to which case law and principles of equity rather than simply statutory law are accepted foundations of legal decisions, and (2) less politically independent judiciaries, as defined by the degree of tenure of supreme court judges and their jurisdiction over cases involving the government. Finally, the authors find that the adaptability of a country's legal system is more important for explaining the obstacles that firms face in contracting for external finance than the political independence of the judiciary. So, they distinguish among competing explanations of why law matters for financial development by empirically documenting the links running from international differences in legal origin to the operation of the financial system at the firm level.

Detecting Manipulation in Futures Markets: The Ferruzzi Soybean Episode

Abstract: Manipulation -- the exercise of market power in a futures market -- is a felony, but recent court and regulatory decisions have made conviction of a manipulator problematic. Instead, regulators attempt to prevent manipulation. Deterrence by conviction is more efficient than prevention if manipulations can be detected with high probability. An analysis of the Ferruzzi soybean episode of 1989 demonstrates how to detect manipulation with standard statistical techniques. It is exceedingly unlikely that the price and quantity relations observed in May and July 1989 were the result of competition; they instead reflect market power. The ability to detect manipulation reliably suggests that existing regulation of manipulation in futures and securities markets is inefficient because it relies on costly prevention rather than deterrence. Copyright 2004, Oxford University Press.

Punish Once or Punish Twice: A Theory of the Use of Criminal Sanctions in Addition to Regulatory Penalties

Abstract: Though clearly distinct in nature and procedure, both regulatory agencies and courts frequently rely on similar instruments to sanction the same or very similar kinds of illegal behavior. In this article, we develop a theory of the use of criminal sanctions in addition to regulatory penalties. We show that, even though it is generally more effective to have a penalty imposed by a regulatory agency rather than by the courts, under some conditions it is optimal to have both. The article provides three arguments: agency costs when delegating law enforcement, legal error, and collusion between a regulatory agency and an offender. The objective of the article, though, is not limited to the determination of the theoretical conditions that can make the use of both sanctioning schemes optimal. Our analysis is also relevant to the application of a specific legal doctrine, the Double Jeopardy Clause. Copyright 2004, Oxford University Press.

Alcohol Prohibition and Cirrhosis

Abstract: This article uses state-level data on cirrhosis death rates to examine the impact of state prohibitions, pre-1920 federal antialcohol policies, and constitutional prohibition on cirrhosis. State prohibitions had a minimal impact on cirrhosis, especially during the pre-1920 period. Pre-1920 federal antialcohol policies may have contributed to the decline in cirrhosis that occurred before 1920, although other factors were likely substantial influences as well. Constitutional Prohibition reduced cirrhosis by about 10-20%.

Using Stationarity Tests in Antitrust Market Definition

Abstract: Using Stationarity Tests in Antitrust Market Definition* In this Paper it is argued that, if two products or geographic areas belong inthe same market, their relative price must be stationary. Hence stationaritytests like the ADF and the KPSS can be helpful in delineating the relevantmarket for Antitrust purposes, particularly for abuses of dominant positionsand agreements between competitors. The proposed procedure is closelyrelated with cointegration analysis but has more general validity. Anapplication to the Italian milk market illustrates the technique.JEL Classification: L41Keywords: antitrust market definition, dickey-fuller test, KPSS test, mergerguidelines and stationarityMario ForniDipartimento Di Economia PoliticaUniversita di Modena e Reggio EmiliaVia Berengario 5141100 MODENAITALYTel: (39 59) 417 852Fax: (39 59) 417 948Email: forni@unimo.it For further Discussion Papers by this author see: www.cepr.org/pubs/new-dps/dplist.asp?authorid=128014 * Support from the Italian Antitrust Authority (AGCM) is gratefullyacknowledged. The Paper reflects the views of the author, not necessarilythose of the AGCM. The author thanks Fabio Massimo Esposito, MassimoFerrero, Michele Grillo, Mauro La Noce and Pierluigi Sabbatini for helpfulcomments.Submitted 09 February 2002

Publish or Paris? Evidence of How Judges Allocate Their Time

Abstract: A utility-maximizing model of judicial behavior predicts that, all else equal, judges who have stronger preferences for publishing opinions, who have lighter workloads, or who are able to write publishable decisions more efficiently are more likely to publish their decisions. Using federal district court judges' decisions regarding the constitutionality of the Federal Sentencing Guidelines, this article presents empirical support for these predictions. Many judicial, institutional, and other characteristics are examined that should be correlated with a judge's workload or with a judge's taste for, or efficiency in, publishing opinions. These analyses find that, all else equal, judges who held prior political positions, who received higher American Bar Association (ABA) ratings, who had lighter caseloads, who had longer tenures, who struck down the guidelines, or who had a greater chance of promotion to a U.S. court of appeals were more likely to publish their decisions. In addition, judges' publication decisions were significantly affected by the prior decisions of judges in the same district, but little affected by those of judges in other districts. Copyright 2004, Oxford University Press.

Was the Antitrust Action that Broke Up the Movie Studios Good for the Movies? Evidence from the Stock Market

Abstract: The Paramount antitrust litigation was a series of eight actions brought by the Department of Justice (DOJ) beginning in 1938 and ending in 1949 against the major motion picture studios. In the early cases the DOJ succeeded in changing industry contracts, but it took a decade of litigation to accomplish what the DOJ wanted, which was to break up the studios and force them to sell their theater chains. We use stock market evidence to evaluate the impact of events in the Paramount litigation on firm value. By the stock market's assessment, the Supreme Court decision was the major event. But the impact of this and other decisions on integrated and nonintegrated defendants, and on a nondefendant, does not support the view that the courts dismantled a successful monopoly; indeed, the contrary may be true. Copyright 2004, Oxford University Press.

Penalty Enhancement for Hate Crimes: An Economic Analysis

Abstract: This article develops an economic analysis of penalty enhancements for bias-motivated (or "hate") crimes. Our model allows potential offenders' benefits from a crime to depend on the victim's group identity, and assumes that potential victims have the opportunity to undertake socially costly victimization avoidance activities. We derive the result that a pattern of crimes disproportionately targeting an identifiable group leads to greater social harm (even when the harm to an individual victim from a bias-motivated crime is identical to that from an equivalent non-hate crime). In addition, we consider a number of other issues related to hate crime laws.

Protection for Whom? Creditor Conflict and Bankruptcy

Abstract: In the absence of a bankruptcy law, private debt collection remedies generally result in an ad hoc disposal of the debtor's assets, which reduces the aggregate value of creditors' claims. We show that creditors will often choose not to write private contracts that would prevent this inefficient behavior, even though these contracts would be to the mutual benefit of all creditors. Our analysis therefore provides an economic rationale for the existence of a bankruptcy law that makes a collective resolution compulsory for all creditors. We argue that such a mandate is a requisite part of any effective bankruptcy system, including proposals for market-based resolutions of insolvency. Copyright 2004, Oxford University Press.

Toward a Signaling Explanation of the Private Choice of Corporate Law

Abstract: Corporate actors can choose their corporate domicile and have considerable freedom to choose terms in corporate charters. Although contractarian corporate law literature almost always analyzes the private choice of corporate law through the lens of agency costs, this article considers the choice for its informational content. A particular law may be chosen by an entrepreneur not because it reduces agency costs, but because it signals quality to outside investors. The article considers the choice of a Delaware domicile. Higher expected litigation costs for relatively low quality firms that accompany a Delaware domicile could imply that choosing Delaware signals a relatively high quality firm. Alternatively, the size and structure of the franchise tax in Delaware could give rise to a signal of quality from locating there. The article considers the ambiguous welfare implications of the signaling analysis and the debate over mandatory versus enabling rules in corporate law. It also suggests how the signaling analysis might apply to the debate over the private choice of a securities regulation domicile. Copyright 2004, Oxford University Press.

Mandatory Arbitration and Civil Litigation: An Empirical Study of Medical Malpractice Litigation in the West

Abstract: This article looks at the effect that pretrial, statutorily required screening panels in Nevada have had on medical malpractice litigation. I use two unique data sets on litigation in Nevada and neighboring states from 1983--88, during which the Nevada legislature enacted screening panels. Applying time-series and difference-in-difference analyses, I show that observed decreases in Nevada with respect to damage awards, attorney's fees, and duration in litigation reflected a broader secular trend. The panels did, however, reduce the relative probability of claims requiring resolution by the Nevada courts. Copyright 2004, Oxford University Press.

The Denominator Blindness Effect: Accident Frequencies and the Misjudgment of Recklessness

Abstract: People seriously misjudge accident risks because they routinely neglect relevant information about exposure. Such risk judgments affect both personal and public policy decisions (e.g., choice of a transport mode) but also play a vital role in legal determinations, such as assessments of recklessness. Experimental evidence for a sample of 422 jury-eligible adults indicates that people incorporate information on the number of accidents, which is the numerator of the risk frequency calculation. However, they appear blind to information on exposure, such as the scale of a firm's operations, which is the risk frequency denominator. Hence, the actual observed accident frequency of accidents/exposure is not influential.

Agency Law and Contract Formation

Abstract: A number of issues in the common law arise when agents make contracts on behalf of principals. Should a principal be bound when his agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow? The tradeoffs resemble those in tort, so the least-cost-avoider principle is useful for deciding when contracts are valid, and may be the underlying logic behind a number of different doctrines in agency law. In particular, an efficiency explanation can be found for the undisclosed principal rule, under which the principal is bound even when the third party is unaware that the agent is acting as an agent.

Delivering Legality on the Internet: Developing Principles for the Private Provision of Commercial Law

Abstract: The development of commercial trade on the Internet has generated a demand for commitment services not met by publicly provided law. In this environment, privately provided means of delivering legality to support trade have emerged, supplying "trust" and "assurance" services through digital certificates and digital seal programs. I survey these developments and from them generate a set of principles to guide economic analysis of privately provided commercial law. Copyright 2004, Oxford University Press.

The Economics of Agency Law and Contract Formation

Abstract: This article addresses issues that arise in agency law when agents make contracts on behalf of principals. The main issue is whether the principal should be bound when the agent makes a contract with some third party on his behalf which the principal would immediately wish to disavow. The resulting tradeoffs resemble those in tort law, so the least-cost-avoider principle is useful for deciding when contracts are valid and may be the underlying logic behind a number of different legal doctrines applied to agency cases. In particular, an efficiency explanation can be found for the undisclosed principal rule, which says that the principal is generally bound even when the third party is unaware that the agent is acting as an agent for him.

Filing a Nuisance Claim to Induce Successive Lawsuits

Abstract: In this article, I provide a rationale for nuisance suits. I show that a plaintiff may file a nuisance suit if he expects that his suit may induce suits by other plaintiffs. If an initial plaintiff is too pessimistic about this possibility, a nuisance suit may not be filed even though it would be meritorious with joinder with another plaintiff. In this case, lawyers may play the role of reducing such coordination failure due to asymmetric information by providing potential plaintiffs with relevant information. Copyright 2004, Oxford University Press.

Protecting Homemakers’ Marriage-Specific Investments under No-Fault Divorce: A Model for Restructuring Alimony in Civil-Law Countries

Abstract: The radical reform of Greek family law in 1983 included the introduction of no-fault divorce. This study examines the impact of the new liberalized divorce law on the well-being of homemakers in long-duration traditional marriages. We reviewed a sample of reported judicial decisions on postdivorce maintenance and found that Greek judges render restrictive interpretations of the general standards of need, adequacy, and sufficiency. We conclude that judges have failed to compensate full-time homemakers for their nonpecuniary contributions, and we propose a reliance-based alimony model that judges can use to protect financially weaker spouses upon divorce. Copyright 2004, Oxford University Press.