Showing papers in "European Journal of Law and Economics in 2004"

Violent Crime in the United States of America: A Time-Series Analysis Between 1960–2000

Abstract: This paper empirically assesses the effects of socio-economic and demographic variables on violent crime in the United States. Using national-level time-series data over the period 1960–2000, an unrestricted vector autoregressive (VAR) model was estimated for overall violent crime, murder, rape and assault. The results indicate that there is no long-run relationship among the examined variables, but significant short-run relationships hold. Imprisonment growth, income inequality, alcohol consumption, and racial composition of the male youth population are shown to influence the short-run behaviour of violent crime.

Democracy, Sea Power and Institutional Change: An Economic Analysis of the Athenian Naval Law

Abstract: The present essay attempts to test the validity of the theory of institutional change based on the concept of property rights, in the remote historical setting of Classical Athens. The “Naval Law” introduced by Themistocles in 483-2 BC, established the institution of trierarchy to produce warships to face the Persian invaders. This reform led to the first attempt to define the costs and benefits of public goods in the field of national defense. Thus, institutional change in Ancient Athens, through an efficient arrangement of property rights and duties, had long-term consequences on economic performance, creating a new growth path and ensuring economic prosperity and social justice for more than 150 years.

Foundation Ownership and Financial Performance: Do Companies Need Owners?

Abstract: A curious ownership structure is found in Northern Europe—foundations that own and operate business companies. The foundations are non-profit entities, they have no members and no owners, and they cannot be dissolved. In many cases, these entities control more than 50% of the votes in successful international companies. Obviously, this structure completely blocks the market for corporate control, but it also violates other basic principles of agency theory and corporate finance. Nevertheless, we present evidence that a sample of foundation-owned companies listed on the Copenhagen Stock Exchange are at least as efficient as other listed companies in terms of risk adjusted stock returns, accounting returns and Tobin’s Q. Thus, they question whether profit-seeking ownership is a necessary condition for competitive enterprise.

Wine Reputation and Quality Controls: The Origin of the AOCs in 19th Century France

Abstract: Even though they were officially settled during the second half of the 1930s, the AOCs (Appelations d'origine controlee) constitute the outcome of a long process that took place over the 19 th century and that reached its apogee between 1905 (the date of adoption of the law on fraud and falsification) and 1914. This article studies the pre-history of the AOCs in order to elucidate in which circumstances collective marks are required, that is, when neither the market alone nor the individual marks provide efficient information on the quality of goods. Historical experience confirms the theoretical conclusion that economic agents try to bind a mark to a territory in order to enjoy a rent. However, before 1905, a halt to this ambition came much less from the ex-ante law than from its judicial interpretations. But unlike theoretical predictions, rules and procedures are much less surrogates than complements while the recourse to a framework law (loi cadre) rather than to a law or to a decree is not necessarily synonymous with decentralization.

Simultaneous and Sequential Anticommons

Abstract: This paper defines a framework for anticommons analysis based on the fragmentation of property rights. In differentiating between sequential and simultaneous cases of property fragmentation, we describe and assess the equilibria obtained under each scenario. Our model reveals how the private incentives of excluders do not capture the external effects of their decisions. Moreover, our model suggests that the result of underutilization of joint property increases monotonically in both (a) the extent of fragmentation; and (b) the foregone synergies and complementarities between the property fragments. Within this context, we can therefore explore important implications for possible institutional responses to a range of issues raised by the concept of property fragmentation.

Positive, Normative and Functional Schools in Law and Economics

Abstract: During its relatively short history, the law and economics movement has developed three distinct schools of thought. The first two schools of thought, often referred to as the Chicago or positive school and the Yale or normative school, developed almost concurrently. The functional school of law and economics, which developed subsequently, draws from public choice theory and the constitutional perspective of the Virginia school of economics to offer a third perspective which is neither fully positive nor fully normative. Various important methodological questions have accompanied the debate between these schools concerning the appropriate role of economic analysis in the institutional design of lawmaking and the limits of methods of evaluation of social preferences and aggregate welfare in policy analysis. These debates have contributed to the growing intellectual interest in the economic analysis of law.

The Evolution of a Fiscal Constitution When Individuals are Theoretically Uncertain

Abstract: In contrast to the contractarian approach to constitutional economics, we follow Voigt (1999) in assuming that constitutional rules are closely connected to informal institutions and that their evolution is a matter of interest group activity and implicit re-interpretation. We add to this the assumption of theoretical uncertainty of individuals regarding the working properties of constitutional rules. Collective learning processes are considered as the third driving force of constitutional evolution, and at the same time as the source of path-dependencies which allow suboptimal constitutions to persist. Finally, it is argued that direct legislation offers more protection than a written fiscal constitution.

Regulatory threat in vertically related markets : the case of German Electricity

Abstract: This paper applies the concept of regulatory threat to analyse the electricity supply industry in Germany, where in contrast to other European member states there is no ex-ante regulation of network access charges. Instead, network access relies on industrial self-regulation and ex-post control by the Cartel Office. The paper extends the concept of regulatory threat to vertically related markets, stressing an optimal balance between the level of the network access charges and discrimination against third parties. The conceptual framework appears to explain developments in the German electricity sector accurately and thus provides a useful tool for policy analysis.

Incomplete Contracts, Intellectual Property and Institutional Complementarities

Abstract: In the New Property Rights model ownership of assets should be assigned to the most capable agents. While, in a world of incomplete contracts, the application of the model to IPRs provides insights on the nature of their second best allocation, suggesting a direction of causation going from technology to property rights, also the opposite direction of causation may arise: owners of IPRs tend to develop more capabilities in the production of new IPRs. For some firms and countries, a virtuous complementarity between the development of IPRs and skills arises. For others, the disincentive effect of the exclusion from intellectual property has more damaging consequences than the lack of access to material capital.

On the origins of the franco-german emu controversies

Abstract: EMU represented an important change in the economic constitution of the European Union. It is, to a large extent, a culmination of a process of Franco-German reconciliation and understanding. However, in the postwar period, there were significant differences in thought and economic policy-making in Germany and France. France was dominated by the “tradition republicaine”, giving a central role to the state in economic life. In Germany, the federal structure of the state went together with the social market economy. In this paper an analysis is presented of these differences in thought and economic policy-making, how they evolved through time, and how they contributed to shaping the nature and economic constitution of the European Union. The focus of the paper is on the Rome Treaties, the Werner Report and the Maastricht Treaty process.

Criminal Behavior: A Real Option Approach With an Application to Restricting Illegal Insider Trading

Abstract: Traditionally, criminal behavior is analyzed within an expected utility framework. This paper offers an alternative model to analyze criminal behavior based on real option models. It is shown that all criminal decisions can be analyzed as real options, in a sense that they confer the possibility but not the obligation to commit a crime in the future. The criminal option model is a richer model compared to conventional economic models of crime, because it takes into account four additional variables. As such, the conventional economic analysis of crime is a special case of criminal option models. The criminal option model is then applied to the enforcement of illegal insider trading. Based on the six value-drivers of criminal options, an active management strategy can be developed for the criminal as well as for the legislator.

The Value of Waiting in Lawmaking

Abstract: Political actors and legislative bodies often invoke net present value calculations to support proposed legislative change. This paper explores the idea that adopting a law is like investing in a productive asset to identify possible misleading applications of net present value calculations. Investment involves incurring a present cost in the expectation of future benefits. Legal systems can be regarded as making investment decisions when incurring present lawmaking costs that will generate benefits over time. Lawmaking investments share, in varying degrees, three important attributes with other investment decisions. First, lawmaking costs cannot be recovered if the enacted rules prove to be ineffective or undesirable at a later time. That is, lawmaking investments are partially or completely irreversible. Second, there is often uncertainty over the future benefits of the legislation. Chosen rules may prove ineffective or changes in the social or economic circumstances may render them obsolete over time. Third, like any investment decision, timing is an issue for lawmakers to determine: lawmaking innovation or revision of current rules can be postponed. Often delays in such investment decisions come at a cost, given the forgone benefits of the investment in the immediate future. This paper focuses on the value of waiting in lawmaking, illustrating the interaction among the above factors in identifying the conditions that determine the optimal timing of legal intervention. The basic model is followed by two extensions. In the first extension, we allow for some learning and informational benefit from the immediate implementation of the new law. In a second extension, we allow for political time preference to affect the lawmaking choice.

Leniency Program: A New Tool in Competition Policy to Deter Cartel Activity in Procurement Auctions

Abstract: This paper discusses the impact of a leniency program on incentives within cartels The objective of this program is to encourage a cartel member to confess and implicate his co-conspirators with hard evidence about their collusive agreement We develop a simple model of cartel behavior under a first-price sealed-bid procurement auction and we show how an effective leniency program can prevent the internal coordination of cartel members

The Impact of a Break-Through Rule on European Firms

Abstract: We analyze the impact of a 75 pct. Break-Through rule on 1,035 European firms with dual class shares. In 3–5 pct. of the firms the controlling owners incur a direct loss of control, while in another 11–17 pct. of the firms, the controlling owners are likely to incur a loss of control. Firms in Germany, Italy and the Scandinavian countries are more likely to incur a loss of control. The restrictions that the Break-Through rule put on the ability of these firms to issue new shares to outsiders without changing the control structure are also estimated. We conclude that a significant number of firms with dual class shares in the European Union will be affected by a 75 pct. Break-Through rule.

Stakeholder Orientation vs. Shareholder Value—A Matter of Contractual Failures

Abstract: This article analyzes the conflict of interests between shareholders and other stakeholders, including when such conflicts of interests may arise. It is argued that shareholder value cannot be justified simply by referring to any prerogative property rights of the shareholders. Instead, shareholder value coincides with the efficient hypothetical perfect contract. However, due to contractual failures in certain bargaining situations, management may be unable to “internalize the firms externalities”. This means that in these situations there is a tradeoff between a broad duty of loyalty for management in listed firms and other traditional remedies. The theoretical insights are applied on a case from the Danish Supreme Court (Louis Poulsen A/S) where the interests of the stakeholders were decisive. It is shown that the verdict may instead harm the relevant stakeholders illustrating how cautious the legal system should use a doctrine based on the “company's interests”. In addition, the notion of a firm's social responsibility is critically evaluated together with the associated pitfalls of accepting this concept.

On the Design of Efficient Priority Rules for Secured Creditors: Empirical Evidence from A Change in Law

Abstract: This article assesses the effect of a reduction in secured creditor priority on distributions and administrative costs in liquidating bankruptcy cases by reporting the first empirical study of the effect of a priority change. Priority reform had redistributive effects in liquidating bankruptcy. As expected, average payments to general unsecured creditors were significantly higher after the reform than before the reform and payments to secured creditors decreased. Reform did not increase the size of the pie to be distributed in bankruptcy. Nor did it increase the direct costs of bankruptcy.

Property Rights in Endangered Species: The Wolverine Case

Abstract: The Scandinavian wolverine is a predator that kills many reindeer belonging to the Sami, the indigenous population of northern Scandinavia. The wolverine is also an endangered species. Hunting is, therefore, illegal. The intended conservation is ineffective, however, due to poaching. In this paper we suggest a property rights regime for the protection of the endangered wolverine. We also want to contribute to a solution to a long-standing conflict between the urban South and the North of Sweden. General conditions essential for an efficient protection of endangered species by property rights are outlined. In the suggested regime Sami villages with reindeer herders as members become the owners of the wolverines. Reindeer breeding and wolverine protection thereby become joint operations. Remuneration for wolverine protection will be received from the Swedish State that pays for wolverines living in the grazing area. The system can presumably be financed by a redistribution of current subsidies to the Sami.

Mediation as Signal

Abstract: This paper analyzes mediation as a signal. Starting from a stylized case, a game theoretical model of one-sided incomplete information, taken from Cho and Kreps (1987), is applied to discuss strategic effects of mediation. It turns out that to reject mediation can be interpreted as a “negative signal” while the interpretation of accepting or proposing mediation is ambiguous and does not necessarily change the prior beliefs of the uninformed party. This asymmetry suggests that, in equilibrium, there is an excess of mediation.

Product Liability in the European Union: Compensation and Deterrence Issues

Abstract: In Europe a common standard of strict liability has been introduced with the European directive 85/374. The implementation of this Directive has not led to an expansion of product liability cases. Moreover neither the product nor the insurance market has been dislocated as in the United States. Both the fact that most liability cases continue to be discussed under national legislation—even when it is based on liability with fault—and the different price of insurance in Eurpean Countries show that the directive did not reach its harmonisation goals. We discuss the optional provisions that limit strict liability under the directive, but claim that the scarce impact of liability laws—in spite of increasing concerns for product safety—may be due to compensation provided by the Welfare State and to the cost of access to justice in Europe. Compensation by the Welfare State is inadequate with respect to the internalisation of the cost of accidents especially when public institutions do not file claims against liable producers. Product safety regulation should have performed the deterrence function. However we also point out that the threat of reputation losses is a powerful incentive for firms to carefully control product safety, when consumers increasingly care about product quality and accidents are heavily advertised by media.

Harmonization of Environmental Regulations When Firms are Judgment Proof

Abstract: In an environmental setting, we examine different forms of harmonization based on either strict liability or negligence assuming the firm is judgment proof. When there is competition in standard setting then negligence dominates strict liability if there is upward pressure on standards. This upward pressure on standards arises as jurisdictions attempt to raise negligence standards. The desire to raise standards is affected by the degree of judgment proofness.

European Regional Policy and Backward Regions: Implications Towards EU Enlargement

Abstract: In this paper we show that the success of the EU Regional Policy, in terms of boosting growth in objective 1 regions, will mean a big opportunity for Central and Eastern European Countries (CEECs) and hence the increases in competition arising from an enlarged European market combined with a suitable regional development policy should in the future boost the growth of those countries. In the last part of the paper we made a simulation for the funding envelope from 2007, based on the 2000‐2006 budget. We show that the figures of the Agenda 2000 provide enough financial support for 90% of the total CEEC population and for 75% of “current” objective 1 population.

Judicial Independence, Judicial Promotion and the Enforcement of Legislative Wealth Transfers—An Empirical Study of the New Zealand High Court

Abstract: This paper investigates the Landes-Posner thesis on judicial independence using data on public law decisions in which the government was the defendant decided in the New Zealand High Court over the period 1958‐2001. We use survival analysis to examine whether successive New Zealand governments have promoted judges from the High Court to the Court of Appeal (which stands above the High Court) on the basis of political considerations, the quality of the judge’s decision-making or both. Our findings suggest that the quality of decision-making has generally been important. Consistent with the weak form of the Landes-Posner hypothesis we find no evidence that governments have used their powers to punish judges who decided cases against them. On the contrary, we find some support for the strong form of the Landes-Posner thesis that governments positively use their powers to secure judicial independence.

Can Making It Harder to Convict Criminals Ever Reduce Crime

Abstract: This paper attempts to find the optimal level of the burden of proof needed in criminal cases in order to minimize crime. It also aims to provide an explanation for the higher burden of proof required in criminal cases than civil cases. It assumes that police officers receive incentive payments for convictions in cases they investigate. Although the direct effect of a higher burden of proof requirement is to reduce the probability of conviction, the indirect effect is to force police officers to build stronger cases and put more effort into finding suspects who are more likely to be guilty. Moreover, the increase in the marginal probability of conviction potential criminals face when they actually commit a crime increases. These factors imply that a reduction in the burden of proof will not necessarily reduce crime.

A Political Economy Perspective of Judicial Review in the European Union: Judicial Appointments Rule, Accessibility and Jurisdiction of the European Court of Justice

Abstract: The paper examines the benefits the sovereign member states of the EU expect to derive by granting the European Court of Justice the power to review the collective policy making decisions of the EU legislative bodies. Using the methodology of constitutional political economy it investigates the one-country one-judge rule of judicial appointments in the ECJ, the restrictions imposed on litigants to access the ECJ and the limits on the jurisdiction of the ECJ to review EU legislation. It also analyses how the presence of judicial review affects the size of the policy measures taken by the policy makers.

Structural Reform Policy Privatisation and Beyond-The Case of Greece

Abstract: Privatisation, coupled with liberalisation and competition, constitutes one of the most popular policy options to improve the performance of state-owned enterprises However, in Greece, it was only after 1991 that privatisation started to gain ground in the political and economic agendas of governments Drawing upon the theoretical underpinnings of privatisation, the paper overviews and critically analyses the new legal framework on denationalisation in Greece The paper argues that, though the modernisation of the legal regime is welcomed, the Greek government has failed to treat privatisation as part of wider structural reforms aiming at enhancing competition and foreign investment The paper concludes that wider structural reforms, including regulatory reform and liberalisation, as well as combating corruption and bureaucracy and promoting transparent capital markets, are absolutely necessary in order to create a competitive environment, which would both complement and support privatisation efforts

‘Full’ Compensation Criteria: An Enquiry into Relative Merits

Abstract: The principle of ‘full’ compensation is said to restore the victim of an accident to the position he was in before the tort The conventional ‘pre-tort position’ of the victim is taken to be the one in which he bears no accident losses at all Therefore, a negligent injurer is required to compensate his victim fully In an interesting paper in this journal, Van Wijck and Winters (2001) have reinterpreted the ‘pre-tort position’ of the victim, and proposed an ‘alternative’ specification of liability for the purpose of compensation We study the relative merits of the two compensation criteria We show that while the alternative compensation criterion is indeed insightful from economic as well as legal point of view, at the same time it suffers from some serious limitations

The Commonality Between Economics and Law

Abstract: The development of law and economics is a success story in the expansion of economics into other social sciences since the 1960s. The success has been attributed to the fact that economics offers a powerful set of analytical tools with a forceful theory of human behavior. But if this is the only reason, then the move of economics into other social sciences such as political science and sociology should have been equally successful. This, however, has not been true, and the discrepancy calls for an explanation. The commonalities between economics and law in both subject matter and analytical approach provide a more convincing explanation; some of the difficulties faced by the legal economists can also be explained by an appreciation of the commonalites between economics and law.

Exclusive Safeguards and Technology Transfer: Subcontracting Agreements in Eastern Europe's Car Component Industry

Abstract: We study the rationale for the use of exclusivity to protect transfer of technology in subcontracting agreements. The legal possibility arises through the EU Notice on Subcontracting. Empirically, the link between exclusive agreements and technology transfer among firms in the automotive supply industry in EU candidate countries is surprisingly weak, although with exclusive-supply or exclusive-buying clauses in subcontracting agreements upstream transfer of technology is more likely. Exclusive agreements are often reciprocal, and are typically passed on. Downstream firms are more likely to face and use vertical restraints. Technology trickles upstream: Multinational final assemblers transfer more technology than lower-tier suppliers.

Truth-Bonding and Other Truth-Revealing Mechanisms for Courts

Abstract: In trials witnesses often gain by slanting their testimony. The law tries to elicit the truth from witnesses by cross-examination under threat of criminal prosecution for perjury. As a truth-revealing mechanism, perjury law is crude and ineffective. We develop a perfect truth-revealing mechanism, which exactly offsets the gain from slanted testimony by the risk of a possible sanction. Witnesses testify voluntarily under the mechanism. Implementing an effective truth-revealing mechanism requires a witness to certify accuracy by posting bond. If events subsequently prove that the testimony was inaccurate, the witness forfeits the bond. By providing superior incentives for telling the truth, truth-bonding could combat some distortions by factual witnesses and interested experts, including “junk science.”