Showing papers in "European Journal of Law and Economics in 2002"

European Corporate Laws, Regulatory Competition and Path Dependence

Abstract: Beyond the well-known discussion in regard to the Cassis de Dijon of the European Court of Justice, implying the mutual recognition of national product regulations, the topic of mutual recognition and regulatory competition has emerged again in the realm of European corporate laws (“Centros” of the ECJ in 1999). Can effective competition among European corporate laws be expected? In the US a broad discussion has developed whether the existing competition process among US corporate laws leads to permanent legal improvements by legal innovations or to a race to the bottom. Beyond this discussion a new point has been raised recently: the possibility and importance of path dependence as a potential problem for the efficacy of competition among corporate laws (lock-ins). For the analysis of this problem we apply the concept of technological paradigms and trajectories to legal rules in corporate law and introduce “legal paradigms,” which direct the search for better legal solutions in certain directions and might be stabilized by certain factors (esp. complementarities to other legal rules) leading to considerable path dependence effects. Our results show that path dependence might play a crucial role for competition among European corporate laws, even if the principle of mutual recognition would be introduced to corporate laws in the EU, implying that competition among European corporate laws might be difficult and sluggish. Consequently the question arises whether additional meta-rules should be established that might mitigate the problem of path dependence and lock-ins in regulatory competition in corporate law.

Law or finance: evidence from Finland

Abstract: Although it is widely acknowledged that the benefits of corporate governance reform could be substantial, systematic evidence on such reforms is scant. We both document and evaluate a contemporary corporate governance reform by constructing 18 measures of shareholder and creditor protection for Finland for the period 1980–2000. The measures reveal that shareholder protection has been strengthened whereas creditor protection has been weakened. We also demonstrate how the reform is consistent with a reorganisation of the Finnish financial market in which a bank-centred financial system shifted from relationship-based debt finance towards increasing dominance by the stock market. We find evidence that the development of shareholder protection has been a driver of the reorganisation, whereas the changes in creditor protection have mirrored market developments.

The Structure of Ownership Rights in Franchising: An Incomplete Contracting View

Abstract: The paper offers an explanation for the structure of ownership rights in franchising networks which emphasize the role of intangible assets. By applying the incomplete contracting theory of the firm we argue that the structure of ownership rights depends on the distribution of intangible assets between the franchisor and the franchisee. The higher the franchisor's (franchisee's) intangible assets relative to the franchisee (franchisor), the more ownership rights should be transferred to him. This hypothesis was tested by using data from the Austrian franchise sector. The empirical results are supportive of the hypothesis. 1. Problem The franchise relation involves the sharing of intangible assets between the franchisor and the franchisee, i.e., the brand name of the franchisor and the local know-how of the franchisee. These assets represent proprietary knowledge that cannot be easily transferred because investments in such assets are costly if not impossible to observe and monitor (Teece 1980). The franchisor faces the problem of maximizing the returns to his intan- gible assets when they are dependent on local intangible investments of the franchisee. Therefore, substantial residual risk for local outlets is borne by the franchisee who has the residual rights of control of the local promotion and services. Since these investments cannot be specified in the contract, asset ownership is critical to the market success of the product or service. The present article focuses on a property rights explanation of the ownership structure in franchising networks by emphazising the role of intangible assets as determinant of ownership structure. By applying the incomplete contracting theory of the firm (Hart and Moore 1990; Hart 1995) we argue that ownership should be given to the franchisee when he has to make intangible investments that generate a large fraction of residual income. Ownership increases the bargaining power concerning the division of residual income and therefore gives incentives to make intangible ex ante

Regulation and Third-Party Discrimination in the German Electricity Supply Industry

Abstract: Despite the monopolistic networks, the liberalized electricity supply industry in Germany is unregulated; the network-access charges are only subject to competition law, not to ex-ante approval. This paper explores the consequences of this policy by analyzing empirical observation with the theory of vertical relations. It concludes that the authorities' focus should be on the level of the access charges and not on discriminatory behavior. Unregulated access charges imply that the integrated firms have different incentives as compared to the independent entrants with respect to the competitive markets. Thereby, the principle of a level playing field is violated.

Corporate Governance in Spain (with an Application of the Power Indices Approach)

Abstract: This paper describes the governance system of Spanish listed firms in the early 1990's. Although the institutional setting of the Spanish Stock Exchanges differs little from other European national markets, we found important differences in several aspects of corporate governance. In particular, some of the standard mechanisms of control (e.g. boards and institutional shareholders) do not play an active role, whereas ownership is relatively concentrated. Moreover, power indices suggest that controlling blocs of large shareholders are very likely to form. We thus conclude that the ownership of shares is a pivotal mechanism in the governance of Spanish corporations.

Tacit Collusion in the Frequently Repeated Multi-Unit Uniform Price Auction for Wholesale Electricity in England and Wales

Abstract: Tacit collusion between National Power and PowerGen, the dominant generators in England and Wales for most of the 1990s, was widely speculated but was not definitively proven. In the event of a legal determination, the best available evidence is a test of suspicious patterns of bidding behavior. The methodology has two stages: the first is to show that the suspects behave “differently” from the rest, which are assumed competitive; the second stage is to ask whether or not strategies of suspects affect one another. Results: the impact of suspects on the aggregate bid function can not be explained away by costs and common market events, and a seemingly unrelated regression (SUR) on strategies of the suspects reveals bid inter-dependence and co-ordination on demand trends. A quarter of the dynamic indicators support an inference of tacit collusion. The existence of multiple equilibria in supergames, however, prevents a conclusive statement.

Economic Consequences of Transfer Fee Regulations in European Football

Abstract: We discuss the effects of three different transfer fee systems in European football on contract lengths, wages, profits, education incentives and the number of talents being educated. The different regimes, being used until the Bosman judgement of 1995, currently in use, and recently proposed by the European Commission differ with respect to the transfer fee an initial club must accept in case of a transfer depending on whether a player has a valid contract or not. In particular, we argue that due to its averse effects on investment incentives, the Commission should refrain from its Suggestion of abolishing freely negotiable transfer fees. Our analysis also sheds some light on the issue under which circumstances binding long-term contracts should be allowed in general labor law.

Market Domination: Tests Applied to the Danish Cement Industry

Abstract: We propose an economic interpretation of the definition of a dominant position used by the European Court of Justice (ECJ). Then we apply co-integration techniques to test econometrically whether the sole Danish producer of cement holds a dominant position. Import penetration tests show that its conduct is independent of import price and quantity, so it can act to a considerable extent independently of its competitors. We also test whether it can act independently of its customers and find that its demand is inelastic with respect to its price. It thus holds a dominant position on the relevant Danish market.

Corporate Financial Performance and the Use of Takeover Defenses

Abstract: This paper tests the hypothesis that the threat of a contested takeover improves corporate performance. This is done by a cross-sectional analysis of listed Danish firms with and without effective takeover defenses. Takeover defenses adopted by Danish firms mainly consist of dual class voting rights often in combination with foundation ownership. Using simultaneous equation estimation to deal with the problem of causation, the results show that unprotected firms do not outperform protected firms. This suggests that management in unprotected firms are disciplined by other corporate governance mechanisms than the market for corporate control, including the legal protection of shareholders.

The European Court of Justice and the Annulment of the Tobacco Advertisement Directive: Friend of National Sovereignty or Foe of Public Health?

Abstract: In Case C-376/98 Germany v Council the European Court of Justice annulled a Directive which banned the advertisement and sponsorship of tobacco. The judgment sanctions regulatory policy-making at the national rather than the Community level. The paper examines the legal basis of the annulment, its effect on economic efficiency and the implied role of the Court in the formulation of public policy in Europe. Within the institutional limits of the judicial power to determine policy, the Court focused on whether or not disparate national laws restrict free movement and distort competition and affirmed the primacy of the nation state to regulate economic activity.

Collusion and Facilitating Practices: A New Perspective in Antitrust Analysis

Abstract: A systematic revision of the notion of facilitating practices is put forward in this paper, with the purpose of relaxing the long-debated tension between economic and legal perspectives on oligopoly. Whereas the law knows of just one collusive illegal conduct, namely agreements, in economic theory the focus on internal enforcement makes the distinction between agreements and other behaviour resulting in the collusive outcome irrelevant. However, the tension may be relaxed, at least in a number of relevant circumstances, provided the focus of competition law shifts from straightforward co-ordination on market strategies to the firms' concerted efforts in the design and implementation of given organisational arrangements of the oligopolistic industry, to which an anticompetitive object can be attached. The theoretical analysis is extensively supported by examples drawn from some recent decisions of the European Commission and the Italian Competition Authority.

Influence of the code civil in the Netherlands

Abstract: The subject of this paper is the influence of the Code Civil in the Netherlands. First, the history of the codification in the Netherlands is examined. Then, attention is paid to the Burgerlijk Wetboek (BW) of 1838, the predecessor of the Dutch civil code of the present day. It is investigated whether this BW is a copy of the Code Civil or a work on its own. Within this framework, the reasons why the Code Civil had an extraordinary influence are shortly mentioned. Finally it is explained how this BW has developed to our BW of 1992. The Code Civil was the model for the BW of 1838. This does not mean that the BW is a copy of the Code. It was not simply a translation. The BW is influenced by the Code Civil, but this does not justify the view that the Netherlands adopted French law. On the contrary: some French rules were removed. Former Dutch law was inserted instead of the French rules or as a supplement to the BW. A large part of the Code is based on joint roots, and the most important common background is Roman law. Those rules cannot be qualified as French law. Besides this there are also typical French provisions, some originated by the French Revolution. With regard to this rules the question is whether these are French rules or universal rights. It can be argued that the BW of 1838 is an improved version of the Code Civil.

The Political Economy of Water Effluent Charges in France: Why are Rates Kept Low?

Abstract: The French water effluent charge was set up thirty years ago. However, its design differs significantly with the Pigovian tax envisaged in economic textbooks. In particular, various studies have shown that the tax rate is too low to significantly affect the polluters' behaviour. The paper is a case study of this charge and aims to understand why rates are low. It consists of a careful political economy analysis of the institutional setting through which the water effluent charge is implemented using both historical evidence and simple modelling. The fact that the charge is combined with regulation plays a crucial role in explaining its rate.

Hormones, risk management, precaution and protectionism. An analysis of the dispute on hormone-treated beef between the European Union and the United States

Abstract: The first commercial dispute settled by the WTO under the Sanitary and Phytosanitary Agreement concerned the disagreement between the European Communities and the United States over the European import ban on meat and meat products derived from cattle to which hormones have been administered for growth promotion purposes. The purpose of this paper is twofold: First, we analyse the WTO's approach to the notion of risk in the use of hormones and the role this played in reaching its decision to declare the EC ban on hormone-treated beef imports inconsistent with its obligations under the Sanitary and Phytosanitary Agreement. Second, we discuss the way in which the precautionary principle has been dealt with in the settlement of this conflict. We then show how this dispute has paved the way to a debate on the concept of protectionism to be applied in this kind of dispute. The European Commission in a recent communication on the precautionary principle has launched this debate.

The Making of the French Civil Code An Economic Interpretation

Abstract: The code Napoleon has been one of the first (on such a scale), the most important and the most pervasive processes of codification that ever took place. The purpose of our paper is to provide an economic analysis of the making of this codification. We compare customary codification and contractual codification: while the former amounts to the crystallisation of socially accepted practices, the latter consists in a creation of rules through a writing process. These theoretical differences are less clear-cut when history mixes practices and reasoned arguments. We then show that the making of the code Napoleon reflects it since it borrows from the social contract and the spontaneous order traditions.

Cross Border Health Care : an Analysis of Recent ECJ Rulings

Abstract: Recent rulings of the European Court of Justice show a trend towards a virtual European health-care basket. Four developments underlie this trend. First, the competence of the European Union seems to mature in the field of health care. Secondly, through a variety of authorisation procedures, individual Member States can to a large extent determine the conditions for cross border care. Thirdly, recent court cases indicate that the co-ordination of cross border care increasingly becomes a EU matter. Finally, in particular border regions, more flexible procedures for cross border care are being developed. An analysis of these developments from an (economic) institutional/constitutional point of view shows that potential Pareto-improvements can be expected from recent changes. These improvements depend on the institutional/constitutional framework into which these rules and engagements are embedded. Our analysis suggests that, although the current (increasing) role for the EU seems desirable, diminishing the role that individual Member States can play is not. National authorisation procedures, local/regional arrangements and flexible rulings are mechanisms that can secure an efficient level of output and an optimal size of the jurisdiction responsible for cross border care. This leads to the following recommendations: • Current authorisation procedures (which differ per Member State) have to be maintained in order to secure an optimal community size for cross border services and goods; • Bilateral agreements and flexible procedures in cross border regions should be stimulated in order to adapt institutional arrangements to the demand for cross border care by (a group of) individuals. • The increased competency of the EU in the field of health care can best be used to make authorisation procedures more consistent and stimulate regional cross border care arrangements.

Does More Deterrence Require More Punishment? [or Should the Punishment Fit the Crime?]

Abstract: Deterrence as a policy issue is usually a societal, or macro, concern. However, the traditional approach in the economic analysis of law, building on the work by Gary Becker, treats deterrence at an individual, or micro, level: an increase in deterrence is accomplished simply by adding marginal criminals to the set of already-deterred individuals. In the absence of zero prices, raising both the level of enforcement and punishment is, ceteris paribus , the only cost-efficient way to increase deterrence because these two factors are complements in deterring an individual. In this paper we aggregate the Becker-type model to derive a societal level production function for deterrence. We demonstrate that aggregation can cause enforcement and punishment to become independent or even substitutes in production. The expansion path for deterrence can be like that for the Becker model (positively sloped), or it can be vertical, horizontal, or even backward-bending. Therefore, a cost-effective increase in deterrence can call for a rise in the level of one deterrent factor while the other is held constant or even lowered. In the latter case, some previously deterred individuals may exit the deterred set, while a larger number enter the set. Our paper shows that the Becker-type prescription for increased deterrence may not be optimal because enforcement and punishment may no longer be complements at the macro level. We conclude with references to considerable recent empirical work that is consistent with our theoretical results.

Market Transparency and Collusion: On the UK Agricultural Tractor Registration Exchange

Abstract: We review the decision by the European Commission in the case of the UK Agricultural Registration Exchange. We propose a theoretical model, offering a basis for some of the intuitive arguments used by the Commission on the anti-competitive role of information exchange in the case of price and non price collusion. Market transparency on non price data is shown to be a collusion facilitating device which may achieve stability in otherwise unstable cartels.

Was Napoleon a Benevolent Dictator? An Economic Justification for Codification

Abstract: Legal history has seen important codifications, among others the Code Napoleon of 1804. These are usually justified by the search for legal harmonisation and coordination. We refine the argument by claiming that a legal rule can be understood as a standard with network externalities. In that view, codification may be analysed as a means to internalise adoption externalities when the market is characterised by legal inertia or instability, in particular when agents adopt opportunistic and free riding behaviours. We also argue that codification should not be systematically opposed to market coordination but may on the contrary provide a useful complement to the market process so as to achieve an equilibrium in the legal market. We then provide a few illustrations and discuss the behaviour of the codification authorities.

A Note on Optimal Law Enforcement under Asymmetric Information

Abstract: We show that the probability of apprehension and punishment is usually reduced in a framework with asymmetric information, leading to more offenses being committed. A positive correlation between crime and asymmetry of information in the enforcement process is established. Some suggestions concerning the efficiency of private versus public enforcement are drawn.

Complex Individualism and Legitimacy of Absolute Property Rights

Abstract: In this article my purpose is to go thoroughly into the ideas expressed by economists regarding the legitimacy of absolute property rights. I visit the Lockian argument taken up by Murray Rothbard (1.1) and the principle of the finder keeper clarified by Israel Kizner (1.2). I argue that it is impossible to legitimate either the property of the finder keeper or the property of oneself if man does not think of himself as an individual. Indeed individualism becomes the cultural prerequisite required to acknowledge the rights of the finder keeper and the goods obtained through labour. Here, Hayek's complex individualism is akin to the hypothesis of the social animal of Benjamin Constant and the work of Gabriel Tarde on the transformation of law. The individual is both an effect and a cause of property rights.

Assessing the Effect of Incentive Regulation on Productive Efficiency in Telecommunications in the United States

Abstract: The use of incentive regulation in telecommunications in the United States requires accurate measurement of the change in productivity. An approach to measuring productivity change, the Malmquist index approach, is introduced that not only provides a measure of that change but also allows for a decomposition into two mutually exclusive and exhaustive components—changes in technical efficiency over time and shifts in technology over time. Using annual data on four output measures and six input measures for the period 1988 to 1999 for nineteen local exchange carriers, the results indicate that productivity increased by about 5.5 percent per year. This growth is due primarily to innovation rather than improvements in efficiency. Of the nineteen LECs in the sample, eleven were operating efficiently throughout the entire 1988–1999 period. Of the remaining eight, four showed a slight improvement in efficiency while the efficiency of four declined. In the aggregate, however, there was virtually no change in efficiency. Finally, a comparison is made between two methods of estimating the change in productivity. The conventional growth accounting approach yields a lower estimate of the rate of change in productivity than the Malmquist index approach yield. The difference between these estimates is interpreted as the lower bound of the bias associated with the conventional growth accounting approach to measuring the growth in productivity.

The Sovereign German States and the Code Napoleon. What Spoke for its Adoption in the Rhine Confederation

Abstract: In the principality of Hesse-Nassau and the other states of the Rhine Confederation (1806–1814) the sovereign princes were eventually to comply with Napoleon's wishes and adopt the Code Napoleon (CN). The subject treated here is how this adoption came about.

Votes and Outcomes: Rethinking the Politics-Like-Markets Metaphor

Abstract: Legislative and political bodies seldom work like markets. This paper revisits the politics-like-market analogies considering the role of logrolling in political representation. These considerations will hopefully facilitate the assessment of the normative implications of the “commodification” of political consensus. While certainly corroding some of the aspirational and expressive qualities of the political system, logrolling would ensure a greater opportunity for cardinal preferences to be captured in political decision-making.

Ex Ante and Ex Post Allocation of Risk of Illegality: Regulatory Sources of Contractual Failure and Issues of Corrective and Distributive Justice

Abstract: The pursuit of welfare objectives through contract law rules could be exemplified in the case of illegality and subsequent nullity sanctions attached to a contract that violates certain regulatory rules. The effectiveness of contractual allocation of risk of illegality (regulatory prohibitions), therefore, varies, depending on which contract theory prevails. Maintaining the validity of a prohibited and failed contract, and allocation of the relevant risks, is crucially dependent on whether we adhere to a welfare or rights-based theory of contract. In this paper we argue that impossibility of ex ante and ex post allocation of risk of illegality is the logical outcome of the adherence to a welfare theory of contract law, as maintaining even a minimum validity of the failed contract would result in some welfare losses. According to this approach unjust enrichment could not be rectified because it would diminish the optimal enforcement of welfare objectives. On the other hand, and despite such prohibition and illegality, a rights-based theory would resist opportunistic and rent-seeking behaviour and would ensure the validity of the contract and just allocation of losses and gains, which arise from the failure of the prohibited contract.

Restricted Charitable Donations and the "Cy Pres" Doctrine

Abstract: Courts apply the “cy pres” doctrine to best approximate deceased donor restrictions when these become illegal or impossible to carry out I show, in a model of strategic donations, that a commitment to further protect deceased donor restrictions attracts more funds today at the price of inefficient allocation of funds tomorrow The analysis identifies the benefits and costs of relaxing the doctrine, suggesting that a more flexible application by properly balancing its impact on present donations and future efficiency concerns, if feasible, would better serve to promote intergenerational social welfare

The Informational Role of the Arbitration Clause

Abstract: We analyse the role of an arbitration clause as a quality signal. We model a contractual relationship between one buyer and two sellers, one of which offers a high-quality product, the other a low-quality product. With a certain probability, the product is defective. The sellers have the choice of either taking the case to court if the product is defective, or including an arbitration clause in which case an arbitrator determines the indemnity payment. Under some conditions, only the high-quality seller offers an arbitration clause, which then serves as a quality signal.

Agreements of Economic Integration and the Choice of National Environmental Policies

Abstract: This paper analyzes the question whether and in which respect agreements of (regional) economic integration affect the choice of environmental policies by individual countries. We focus our interdisciplinary analysis on the agreements of the World Trade Organization (WTO), the European Union (EU) and the European Economic Area (EEA). We find that these agreements primarily restrict a country's choice among possible instruments to achieve a certain environmental level or target, but do, in principle, not restrict its choice with regard to the environmental target or level itself. We also show that this type of restriction is likely to benefit the individual countries and the world as a whole because it tends to promote the implementation of more efficient environmental policy instruments. A brief analysis of the case of Switzerland illustrates this point.

The Short-Lived Influence of the Napoleonic Civil Code in 19th Century Greece

Abstract: During the Greek War of Independence (1821–1827) from the Ottomans—which had a nationalistic and liberal character—and for the first decades after the liberation, a number of liberal French-educated politicians and scholars attempted unsuccessfully to introduce the Napoleonic Civil Code (or some clone of it) as the Greek Civil Code. Despite the fertile political and intellectual ground for such an introduction, they failed to achieve their goal due to the “temporary” introduction of Justinian's Roman law as the Greek civil law. This led the Greek academic community to Pandektenrecht and the predominance of the 19th century German legal theory (boosted by its organized propagation on the part of a number of German-educated legal scholars).