Showing papers in "European Journal of Law and Economics in 2006"

The relationship between copyright software protection and piracy: Evidence from europe

Abstract: This paper provides an empirical analysis of the relationship between software protection and national piracy rates across 23 European countries over a period of three years (1994, 1997, and 2000). The analysis not only constructs a new index of copyright software protection but remedies previous econometric and methodological shortcomings by applying a macro level panel data technique. Results indicate that copyright software protection and income are the most determinant factors of software piracy. In addition, the model predicts an inverted U relationship between piracy and per capita income. Moreover, the above findings are robust to the inclusion of other descriptors suggested by the empirical literature on piracy.

Reorganization in US and European Bankruptcy law

Abstract: European countries have amended their bankruptcy statutes in the past decades to increase the likelihood of a company’s continuation in bankruptcy. Liquidation procedures are ill suited to realize the full value of the company as a going concern. An infusion of new finance raises company valuation and makes continuation through reorganization more likely. Reorganization preserves value, if general creditors as the main beneficiaries of reorganization play a crucial role in reorganization proceedings. Legal origins of national bankruptcy legislations are less important in explaining the incidence of reorganization than national attitudes towards failure and the prevalence of equity over debt finance.

An Optional European Contract Law Code: Advantages and Disadvantages

Abstract: Should the EU introduce an Optional European Contract Law Code and what should it look like? By applying economic theories of federalism and regulatory competition (legal federalism), it is shown why an Optional Code would be a very suitable legal instrument within a two-level European System of Contract Laws By allowing private parties’ choice of law to a certain extent, it can combine the most important advantages of centralisation and decentralisation of competences for legal rules Through differentiated analyses of three kinds of contract law rules (mandatory substantive rules, mandatory information rules and facilitative law), important conclusions can be reached: which kinds of contract law rules are most suitable to be applied on an optional basis (eg facilitative law) and which might be less so (eg a core of information regulations) Furthermore a number of additional general conclusions about the design and scope of an Optional EU Code and some conclusions in regard to sales law are derived

Severance payments for dismissed employees in Germany

Abstract: This contribution investigates severance payments for dismissed employees in Germany. Particularly, it responds to two questions: “Who receives severance payments?” and “By which characteristics is the level of severance payments determined?”. Individual and collective dismissals are analyzed separately. This is the first study on this issue using individual representative data—the German Socio-Economic Panel—and multivariate methods. The results indicate that rather women, persons with many years of tenure and working in large firms receive severance payments. There is a huge variance in the size of the payments. The most important determinants are the previous wage, tenure and age.

Institutions and contracts : franchising

Abstract: This paper investigates a new dataset of franchise networks in nine countries in order to assess whether and to what extent do institutions influence the practice of franchising. Our regressions relate the structure of franchise networks (the rate of franchised units as opposed to corporate units) to individual parameters supposed to reflect the extent of moral hazards on the franchisor's and franchisee's sides and, more specifically, to various institutional parameters of the franchisor's country, namely, the legal tradition, the level of procedural formalism, the constraints imposed by labour regulation and the effectiveness of trademark protection. While agency theory parameters seem to perform rather badly in this international setting, institutions such as trademark protection and labour regulation have more explanatory power: greater trademark protection encourages franchising and the impact of labour regulation is mostly positive, depending on the type of labour regulation that is being considered. The effect of legal tradition and formalism seems negligible once these parameters are taken in.

Predatory Bidding in Competitive Tenders : a Swedish Case Study

Abstract: Public procurement by competitive tendering is an important part of European policies to encourage competition in network industries previously dominated by public companies. In recent years, the appearance of very low bids has become an issue in several countries. We discuss predatory bidding from a theoretical, practical and legislative point of view. A case of tendering for train services in Sweden is used to illustrate the possibilities to detect an abnormally low bid. An analysis of projected costs and revenues is complemented with a method using historical data on previous tenders. One conclusion is that there is scope for reform in national competition policies in European Union member states concerning multinational enterprises participating in local tenders.

Board composition and corporate governance–A multivariate analysis of listed Danish firms

Abstract: The article conducts a multivariate analysis using a sample of listed Danish firms in order to examine what describes board composition. This issue also relates to corporate law that stipulates the legal boundaries of board composition. In recent years, several European countries, including Denmark, have issued various codes for good corporate governance, in the form of soft law. Such initiatives have been launched, even though the questions of what describes board composition, as well as, the legal profession's influence on board structure, have not been fully uncovered. This study shows that four factors explain Danish board structure. These factors can be interpreted by the following dimensions; the lawyer oriented, the business person oriented, the internationally oriented and finally the traditionally oriented board. Thus, the paper shows that a higher proportion of insider ownership increases the first dimension, whereas a higher remuneration increases the business person orientation of the board. If firm size increases, the international dimension of the board increases and if a firm experiences less growth board structure becomes more traditional.

Fraud, banking crisis, and regulatory enforcement: Evidence from micro-level transactions data

Abstract: Can widespread fraud cause large scale banking crises? We address this issue in the context of the recent Turkish banking crisis of 2000, which was followed by a severe recession and currency crisis. Using detailed micro-level transactions data, we show that related lending and back-to-back loans across banks were used to circumvent regulation and transfer deposits to private holding companies that were ruined. Our evidence suggests that systemic fraud coupled with weak enforcement of conventional regulatory principles can be a source of banking crisis.

Transparency and accountability of central banks in their role of financial stability supervisor in OECD countries

Abstract: We aim to get a better understanding of the accountability of central banks in their role of financial stability supervisors, distinguishing between three crucial elements: (1) the legal basis for the financial stability task, (2) providing of information on financial stability, and (3) the formal relationship between the accountable and the accountee. We conclude that in most OECD countries the law does not provide a clear objective for financial stability supervisors. Many central banks nowadays publish a stand-alone financial stability report. In most countries there are hardly any accountability measures in place regarding the objective of financial stability.

Is tax competition harmful and is the EU an optimal tax area

Abstract: This paper examines the issue of harmfulness of tax competition commenting on issues like welfare, growth, redistribution, harmonization and individual freedom A simple game theoretical ap proach is formulated, where for the first time the two players start from unequal initial conditions, thus influencing strategy and outcomes Next we propose the new criterion of Optimal Tax Area under which the possibility and feasibility of tax harmonization is examined The policy implication of our paper is that we do not expect harmonization for direct taxes like corporate taxes in the EU in the near future and if so, harmonization of corporate tax rates on low levels We conclude that both more theoretic research and empirical evidence are needed before we can answer with certainty whether tax competition is harmful or not

Strict liability versus negligence when the injurer's activity involves positive externalities

Abstract: In this paper, I assert that, if the potential injurer’s activity involves externalities unrelated to accidents, the strict liability rule minimizing only the social cost associated with accidents does not induce the social optimum. I also demonstrate that if the externalities are positive, the negligence rule can perform better than the strict liability rule by selecting the due care appropriately, whereas it cannot if the externalities are negative. This argument can be applied to the product liability law.

The relative success of private funders and government funders in funding important science

Abstract: Regression analysis is used to test the effects of funding source (and of various control variables) on the importance of the article, as measured by the number of citations that the article receives. Funding source is measured by the number of private and the number of government grants mentioned in the acknowledgements section. The importance of an article is measured by an “early” count (of citations through October 1992), and a “late” count (of citations through July 2002). Using either measure of article importance, the evidence suggests that private funders are more successful than the government at identifying important research.

A difficulty with oaths: On trust, trustworthiness, and signalling

Abstract: In the wake of the Enron and Worldcom financial scandals that rocked Wall Street in 2002, the US government’s financial regulatory body, the Security and Exchange Commission (SEC) took the unprecedented step in June 2002 of requiring that the chief executives and chief financial officers of America’s 947 biggest companies to swear on oath that their company results and financial reports were to the best of their knowledge accurate. The one-off order was quickly followed by the passing of the Sarbanes-Oxely act, which will require many more CEOs and CFOs to certify their company reports and financial statements at regular intervals. In this paper we apply a simple signalling model to examine whether or not this type of institutional signal of trustworthiness is always efficient. We find that in the presence of signalling costs, the separating equilibrium can be socially inefficient as well as causing a general loss of trust.

Reporting on financial derivatives –A Law and Economics perspective

Abstract: Fearing Enron-like financial fiascos concerning derivatives, accounting standards boards have issued new standards aimed at promoting higher transparency and reducing information asymmetries. After persistent reluctance, and despite significant criticism, the pertinent International standard, with some exceptions, was finally adopted by the E.U., for the sake of intra-European and cross-Atlantic accounting harmonization, for which the standard constituted sine-qua-non. These reluctance and criticism are not unfounded, as the standards might paradoxically result in increased information asymmetries, not easily mitigated by additional disclosure, and ultimately resulting in distortion of capital allocation and corporate governance mechanisms. Suggestions for more efficient solutions are outlined herein.

Explaining the choice between alternative insolvency regimes for troubled companies in the UK and Sweden

Abstract: Over the past 20 years UK and Swedish insolvency law has moved in the direction of company rescue rather than enforcing secured creditor priority. However, both countries show a low take up rate of rescue procedures. This paper uses a cost-benefit approach to examine the choices faced by key stakeholders using the now conventional transaction cost paradigm. The paper argues that it is predominantly the ex post indirect and time costs which explain the poor take up of customised rescue procedures. In both countries the ex ante cost of delay in filing also presents a tough challenge not fully addressed by policymakers.

The institutional-evolutionary antitrust model

Abstract: The purpose of this article is to provide an alternative antitrust model to the mainstream model that is used in competition policy. I call it the Institutional-Evolutionary Antitrust Model. In order to construct an antitrust model one needs both empirical knowledge and considerations of how to adequately deal with norms. The analysis of competition as an evolutionary process that unfolds within legal rules provides the empirical foundation for the model. The development of the normative dimension involves the elaboration of a comparative approach. Building on those foundations the main features of the Institutional-Evolutionary Model are sketched out and it is shown that its use leads to systematically different outcomes and conclusions than the dominant antitrust ideals.

Why are the United States and the European Union failing to regulate the internet efficiently? Going beyond the bottom-up and top-down alternatives

Abstract: This paper analyzes the different approaches for Internet regulation. We use the United States and European Union to illustrate the alternative approaches of self-regulation and government intervention. Our research suggests that both systems have serious shortcomings that could be ameliorated by the use of a mixed system for Internet regulation in which both the private and public sector have a role. The case study of privacy rights self regulation in the United States and its failure to effectively provide privacy regulation serves as our empirical evidence. We provide guidelines for both the government and the private sector in defining and enforcing privacy regulation.

Mortgage credit risk in EU countries: Constraints on exploiting the single currency market

Abstract: The adoption of a single EU currency market raises questions about how individual country mortgage policies are likely to affect the gains that can be realized from this larger market. We use an option pricing model to provide some perspective on this issue. We address questions such as how does the risk exposure of a mortgage guarantee program in one country compare with those in other countries? What kind of effects do any such differences or varying legal restrictions on lender recourse have? Do the programs help complete financial markets? That is, are the programs structured as unsubsidized financial intermediaries which help allocate risks? Or, are the programs essentially wards of the state which encourage risk taking? In short, we aim to provide a simple, tractable way to think about how individual country policies affect the ability to exploit the potential offered by the larger market. Our conclusions are three. First, when correctly structured, mortgage default insurance can be expected to reduce non-price rationing at an actuarially fair price. It follows that to the extent that such programs lead to more complete markets without subsidies they are also more efficient than are the many schemes now used which rely on subsidies to address mortgage market incompleteness. Second, considerable care must be exercised in the development of such instruments. In a number of countries the pricing policies do not appear to be prudent. The program terms imply either that regulators often expect a much safer economic environment than seems likely, or, alternatively, the programs have been conveying either unbudgeted subsidies or incurring contingent liabilities. Such liabilities have already been realized in Sweden, and the current exposure in the Netherlands as well as with the restructured program in Sweden, appear to be large. Finally, we find that the potential geographical risk diversification provided by the single currency market can be expected to reduce mortgage rates and improve risk allocation. However, legal, fiscal, and regulatory issues with respect to credit risk limit the ability to exploit this larger market.

An economic analysis of contracts signed between tour operators and travel agents

Abstract: The tour operating process is based on many phases, one of which is the distribution of tourist products through the telephone, websites (direct sale) and through the traditional channel of exploiting travel agents’ skills and experience (indirect sale) This paper provides an economic analysis of contracts characterizing the relationship between tour operators and travel agents by taking into account risk-sharing, incentives and flexibility of contractual alternatives The first part focuses attention on existing agreements regulating commercial and marketing aspects of the economic relationship with tour operators of both independent agents and agents belonging to a network, something whose importance is increasing over time After the analysis of standard contracts, the paper describes controversial factors limiting the use of a potential compensation system based on a relative performance evaluation that, given the characteristics of the tourist market, could give firms a number of advantages

Fisher Body revisited: Supply contracts and vertical integration

Abstract: The vertical integration of Fisher Body by General Motors has been a leading example in both the transaction-cost theory and the property-rights theory of the firm. The present paper makes the following contributions. First, we show how a simple extension of the property-rights theory of the firm (which allows for contractible trade) is able to rationalize the observed ownership arrangements, supply contracts, and investment behavior both before and after integration. Second, the model lends support to Klein’s (2000) view that an increase in demand for closed automobile bodies was pivotal for vertical integration.

On the unification of legal rules in the European Union

Abstract: Unification of legal rules in Europe is not a new phenomenon. However, nowadays, Europe is still an area with many different jurisdictions. This paper studies the process of unification of legal rules in the European Union within a non-cooperative game-theoretical framework. This paper contributes to the understanding of the process by concentrating on the role of the European Commission.

Difficulties in the criminal prosecution of insider trading—A clinical study of the Bekaert case

Abstract: If the enforcement of insider trading prohibition is of crucial importance to ensure the integrity of financial markets, then the current criminal prosecution in Europe fails in reaching this goal. This article illustrates several difficulties in prohibiting and prosecuting insider trading by using a clinical study of the Belgian industrial company Bekaert, NV. It is shown that courts currently seem to lack knowledge of the functioning of financial markets to assess an insider trading case. Therefore their decisions give little guidance to future litigants. Using, a law and economics framework, this clinical study is clarifying in several aspects compared to a traditional legal analysis. The analysis focuses on two aspects of an insider trading case. First, the price-sensitive character of the information is examined. Second, the standard of proof is examined.

Efficient compensation for employees' inventions

Abstract: We analyze a legal reform concerning employees' inventions in Germany. Using a simple principal-agent model, we derive a unique efficient payment scheme: a bonus which is contingent on the project value. We demonstrate that the old German law creates inefficient incentives even if litigation cost is zero. However, the new law (concerning university employees) and the pending reform proposal (concerning other employees) also fail to implement first-best incentives. With suboptimal incentives to spend effort on inventions, the government's goal, an increase in the number of patents, is likely to be missed.

Internal dealing regulation and insiders’ trades in the Italian financial market

Abstract: We analyze insiders’ trades in the Italian financial market. Insiders buy undervalued stocks, but they also act as positive feedback traders. They exploit short term market movements with abnormal returns around trades: they purchase (sell) stocks after a price decline (increase) and trades are followed by a partial reversal. They time the market mainly through purchases immediately communicated to the market and sales (and in part purchases) communicated quarterly to the market. It seems that insiders do not manipulate the market but strategically choose the size of trades, while they are interested to disclose immediately purchases of the assets of the company they prefer not to do it in case of sales.

What kind of ‘generalized’ systems of preferences?

Abstract: Relations between Developed and Developing Countries are constantly being subjected to new and increasingly challenging situations, but there is a generally held belief that Developing Countries should be treated differently. However, both the nature and the extent of this differential treatment are sensitive issues. Against this background, this article examines Generalized Systems of Preferences as unilateral instruments for development cooperation, and considers the problems caused by the discretionary nature with which they have traditionally been implemented.

Gresham's law in politics: Why are politicians not the most remarkable men for probity and punctuality?

Abstract: Economists have always criticized politicians' behaviour. Adam Smith called politicians “crafty and insidious"; and, more recently Brennan and Buchanan have applied Gresham's law to politics, arguing that the man for whom the expected profit is highest will be the highest bidder for political power. However in their model there is not an argument to explain why these people are elected to public offices.

Forced to make mistakes: Reasons for complaining about Bebchuk's scheme and other market-oriented insolvency procedures

Abstract: Bebchuk's proposal for bankruptcy reform is analysed, in particular his claim that using options is fair and prevents justified complains. However, the proposal has a systematic bias against junior creditors and former shareholders because they have to pay for unavoidable mistakes in estimating the company's value, may lack the financial resources to exercise their options and lose by a day of reckoning. A market solution will be specified that is simpler and at least as fair as Bebchuk's scheme according to his own standards. However, a complete solution to these problems may have to be a non-market one.

When it pays to be honest: How a variable period of good conduct can improve incentives in personal bankruptcy proceedings

Abstract: Consumer bankruptcy regulation in the United States as well as in many other countries allow consumers to petition for a partial debt discharge. Usually, a debt release is possible when the debtor behaves in the creditors’ best interest and after filing for bankruptcy signs over her entire disposable income for a fixed period. Depending on the country the period lasts between three and six years. We show that a fixed period distorts the consumer’s ex-post incentives to work hard. Instead, we suggest to adequately reduce the outstanding claim and to make debt release contingent on payment. When the consumer manages to pay back the reduced amount, the rest of the initial debt should be discharged immediately. In effect, the consumer becomes the residual claimant of her endeavors. The period of good conduct is effectively variable.

Competition in the Netherlands and Belgium: Service sector evidence

Abstract: This paper examines competition in the Dutch and Belgian service sector for the period 1995–1999. The paper explores the link between firm profitability and market structure, and provides evidence of a non-optimal functioning of both markets. While analysis reveals the existence of a market sector effect in both countries, this effect is larger in the Dutch sample than in the Belgian sample, implying that the Dutch service sector is less competitive than the Belgian service sector. An analysis of the market friendliness of regulations in both countries does not provide a comprehensive explanation for this finding.

European integration from the agency theory perspective

Abstract: European integration is a process in which national governments look for higher levels of integration and promote new requests for allocations from the supranational authority while the balance between the benefits and costs of the supranational collective action becomes increasingly favourable. This process may be analyzed as an agency problem where different national governments, acting as principals, try to lead a single agent—the supranational authority—to make a decision on the level of integration. In this paper, decisions on integration of equilibrium are studied as the result of a non co-operative two-stage game, where national governments outline their political support strategies in the first stage and the supranational authority decides the level of integration in the second stage.