Showing papers in "European Journal of Law and Economics in 2011"

Voluntary versus enforced tax compliance: empirical evidence for the “slippery slope” framework

Abstract: The “slippery slope” framework is an alternative approach for research in tax compliance that suggests two key variables to obtain taxpayers’ compliance: trust and power. Furthermore, two forms of compliance are distinguished. It is hypothesized that voluntary compliance depends primarily on trust in authorities, whereas enforced compliance is a function of the power attributed to authorities. Using a large data set (N = 3,071) on taxpayers from Austria, the United Kingdom, and the Czech Republic, these hypotheses could be confirmed. Furthermore, whereas voluntary compliance seems to be positively related to age and education, enforced compliance is negatively related to education.

The right of withdrawal in the treaty of Lisbon: a game theoretic reflection on different decision processes in the EU

Abstract: The ways of decision-making within the EU have significantly changed in the last decades: The rule of unanimity has been more and more substituted by majority voting in order to speed up decision-making processes in a Union of 27 heterogeneous member states. A third possibility is now offered by the Lisbon Treaty including a constitutional right of withdrawal. A member state encountering a loss in its benefits caused by a decision made by majority voting may now demand compensating transfers by using the right of withdrawal. It might threaten to leave the EU if the compensation is denied. Hence, does this mean that member states now have regained a negotiation power comparable to the right to veto? Using a game theoretic approach we investigate the amount of compensating transfers to be offered under majority decisions with exit option compared to decisions requiring unanimity.

Mandatory accounting disclosure by small private companies

Abstract: This article analyzes how mandatory accounting disclosure is grounded on different rationales for private and public companies. It also explores technological changes, such as computerised databases and the Internet, which have recently made disclosure of company accounts by small companies potentially less costly and more valuable, thanks to electronic filing and universal online access to credit information systems. These recent developments favour policies that would expand the scope of mandatory publication for small companies in countries where it is voluntary. They also encourage policies to reduce the costs and enhance the value of disclosure through administrative reforms of filing, archive and retrieval systems. Survey and registry evidence on how the information in the accounts is valued and used by companies is consistent with these claims about the evolution of the tradeoff of costs and benefits that should guide policy in this area.

Organized crime, money laundering and legal economy: theory and simulations

Abstract: This paper proposes a dynamic model to simulate the relationships between the profits of organized crime, money laundering and legal investments. We develop a macro framework in which organized crime can increase its possibilities to invest in the legal sector by resorting to effective but costly money laundering schemes. The model explores the conditions under which the effectiveness of money laundering causes a positive trend in the legal assets owned by the criminal organizations. We use the model to simulate the total amount of legal wealth generated by organized crime through drug trafficking in different world regions, with particular attention to Europe.

The size of the underground economy in Germany: a correction of the record and new evidence from the modified-cash-deposit-ratio approach

Abstract: Based on the Ahumada et al. (Rev Income Wealth 53(2):363–371, 2007) critique we revise existing estimates of the size of the German underground economy. Among other things, it turns out that most of these estimates are untenable and that the tax pressure induced size of the German underground economy may be much lower than previously thought. To this extent, German policy and law makers have been misguided during the last three decades. Therefore, we introduce the Modified-Cash-Deposit-Ratio approach, which is not subject to the recent critique and apply it to Germany for the period 1960–2008.

A case of mistaken identity: George Stigler, “The Problem of Social Cost,” and the Coase theorem

Abstract: “The Problem of Social Cost” is rightly credited with helping to launch the economic analysis of law. George Stigler plays a central role in the professional reception of Coase’s work and, in particular, of the idea that came to be known as the Coase theorem. While Coase’s negotiation result was taken up in the scholarly literature not long after the publication of “The Problem of Social Cost,” it was Stigler who gave the theorem its name and introduced it to scores of readers in The Theory of Price (1966). His remaking of Coase’s idea into a “theorem” had significant rhetorical force, which, combined with the challenge that it pose to received thinking about externality problems, both lent credibility to the idea and made it a force to be reckoned with. The present paper analyzes Stigler’s various commentaries on the Coase theorem with a view to getting at both how Stigler understood the theorem and its import and why he exhibited such a fascination with it over the last 30 years of his life.

The socioeconomic and demographic determinants of crime in Iran (a regional panel study)

Abstract: The raising trend both in violent and property crime are of major concern in Iran. Using a panel data modeling (province wide), the paper provides an econometrics assessment of the relationship between crime against properties and violent crimes as functions of deterrent, social, economic and demographic factors in Iran, in the framework of Becker-Ehrlich crime supply theory. The findings indicate that, although deterrence hypothesis is not confirmed for burglary and assault, it explains the variations of murders and threats. Economic factors play key role in burglary and threat explanation, but they do not affect willful murders, however, Literacy explains both murders and threats. Average of families’ income is explored as a deterrent factor for crime against properties.

Assessing viability of Finnish reorganization and bankruptcy firms

Abstract: The objective of the Finnish Bankruptcy Act (FBA) is to give the assets of a non-viable firm to the bankrupted estate and divide them by the creditors of the firm (liquidation). However, the objective of the Finnish Company Reorganization Act (FCRA) is to recover a temporally financially distressed firm that is viable. In these acts, the viability concept is used to refer to a firm that is able to pay its financial obligations in the future. FBA is not efficient if a viable firm is filed for bankruptcy and liquidated. In the same way, FCRA is not efficient if a non-viable firm is filed for reorganization. The purpose of this study is to assess viability of Finnish firms filed for reorganization and bankruptcy. Logistic regression analysis is used to extract two measures for viability. The first measure is based on financial statement information only while the second one takes account of both financial and non-financial information. The estimation sample comprises data from 43636 viable and 98 non-viable firms. The resulted measures are used to assess viability of a sample of firms filed for reorganization and bankruptcy in 2004. In general, the results show that the greater part of firms filed for reorganization is non-viable whereas many of bankruptcy firms are viable. This reflects an occurrence of filtering failure.

Economic Crisis and Morale

Abstract: The functioning of welfare states and tax systems is fostered by social norms to obey the rules of the system. Morale can change and react to new incentives. In particular, a deep economic crisis with increasing unemployment and reduced prospects for market income may have a norm eroding effect. This study explores the link between economic crisis and morale. Our theoretical reasoning is based on an economic approach to the evolution of norms, according to which norms are influenced by self-interest. A distinction is made between two dimensions of citizens’ morale: benefit and tax morale. Our econometric evidence based on data from the World Value Survey suggests that a sharp hike in unemployment reduces the morale standards along both dimensions. The crisis impact on benefit morale is conditional on the existence of generous benefit schemes.

On the Political Economy of the Informal Sector and Income Redistribution

Abstract: In this paper we analyze a general equilibrium model in which agents choose to be employed in formal or in the informal sector. The formal sector is taxed to provide income subsidies and the level of redistribution is determined endogenously through majority voting. The model is simulated to produce qualitative results and to illustrate the differences between economies with different distributional features. We show that a distortion in the democratic rule in favor of the rich reduces transfers while the size of the informal sector may remain at high levels. Despite a greater demand for redistribution in societies where the majority has few resources (skills), we find that political systems which work in favor of a rich minority will produce little redistribution. Our results call for pro-poor measures such as free training and education programs that should be offered to those who cannot afford it.

The simple economics of class action: private provision of club and public goods

Abstract: This article uses economic categories to show how the reorganisation of civil procedure in the case of class action is not merely aimed at providing a more efficient litigation technology, as hierarchies (and company law) might do for other productive activities, but that it also serves to create a well defined economic organization ultimately aimed at producing a set of goods, first and foremost among which are justice and efficiency. Class action has the potential to recreate, in the judicial domain, the same effects that individual interests and motivations, governed by the perfect competition paradigm, bring to the market. Moreover, through economic analysis it is possible to rediscover not only the productive function of this legal machinery, but also that partial compensation of victims and large profits for the class counsel, far from being a side-effect, are actually a necessary condition for reallocation of the costs and risks associated with the legal action.

EU VAT frauds

Abstract: The paper analyzes the VAT frauds issues in the European Union after the abolition of the internal customs. All the suggested solutions based on the origin principle create distortions in the “one market” and have a doubtful efficiency. The reverse-charge regime for all business to business transactions joint with VAT at the last stage also creates heavy discriminations. The current system based on the destination principle joint with ad hoc measures—such as specific reverse-charge, rebate and margin regime under evidence that VAT due has been paid, joint/several liability…—and a consistent information-exchange-system may provide a less distorting solution.

An introduction to the law and economics of class action litigation

Abstract: The consolidation of similar claims for compensation into a single large class of plaintiffs is referred to as “class action litigation.” This practice can have both social costs and social benefits. For an example of the social benefits of consolidating separate claims, if the facts giving rise to the claims are substantially similar, then there may be significant savings in litigation and court administrative costs from presenting those facts once rather a multitude of times. There may, however, be significant social costs to creating a class of litigants and consolidating their claims. For example, this practice may empower those with frivolous negative expected-value claims to wring an unwarranted settlement from the defendant or defendants. The article surveys other sources of social cost and benefit from class-action litigation, reviews the empirical literature on these actions, and examines recent U.S. policy debates about reforming class-action litigation. The article concludes that class-action litigation can have substantial net social benefits but only if courts assiduously oversee the class certification process so as to identify and forestall the social-cost-generating aspects of class-action litigation.

Property rights and externalities: the uneasy case of knowledge

Abstract: Drawing from Coase’s methodological lesson, this article discusses the specific case of knowledge, which was for a long time chiefly governed by exchange mechanisms lying outside the market, and has only recently been brought into the market. Its recent, heavy “colonization” by the property paradigm has progressively elicited criticism from commentators who, for various reasons, believe that the market can play only a limited role in pursuing efficiency in the knowledge domain. The article agrees with the enounced thesis and tries to provide an explanation of it that relates to the fact that in specific circumstances property-rights can produce distinct market failures that affect the social cost and can consequently prevent attainment of social welfare. In particular, the arguments set forth here concern three distinct externalities that arise when enforcing a property rights system over knowledge. First, the existence of a property right may itself alter individual preferences and social norms, thus causing specific changes in individuals’ behaviour. Second, the idiosyncratic nature of knowledge, as a collective and inherently indivisible entity, means that its full propertization can be expected to produce significant harm. Third, property rights can cause endogenous drifts in the market structure arising from the exclusive power granted to the right holder: though generally intended as a necessary mechanism for extracting a price from the consumer, in the knowledge domain property rights can become a device for extracting rents from the market.

The meaning of regulatory costs

Abstract: Regulatory costs are an essential aspect of the efficiency and quality of regulations. Moreover, they are a genuine loss of welfare which have a negative impact on national income. Surprisingly, regulatory costs are often neglected or misinterpreted in regulatory assessments, except—though only recently—for administrative compliance costs. One important reason is the lack of a clear and consistent definition as well as a practical and exhaustive typology of regulatory costs. This conceptual paper presents a cost taxonomy that takes into account all costs of regulation. We identify 16 direct and two indirect regulatory cost types. The former are costs borne by society in preparing and implementing regulations. For the government, they consist of information, decision-making, drawing-up, planning, administrative start-up, operational, monitoring, and enforcement costs. Citizens and businesses, on the other hand, incur rent-seeking, information, planning, three types of compliance, delay and enforcement costs. The indirect costs comprise the efficiency loss plus, in the event of poorly designed or market-based regulation, also transaction costs. The neglect of any of these costs may lead to the underestimation of costs in absolute or relative terms and thus to inefficient regulatory choices.

Intellectual property rights on creativity and heritage: the case of the fashion industry

Abstract: Recently, as different projects aiming to define and reinforce property rights in the fashion industry have been elaborated and discussed, a lot of papers have been dedicated to the question of property rights in this industry. Our paper considers the problems from a specific point of view; it focuses on the relation between property rights and creativity. If property rights allow the allocation of the majority of standard industrial goods without any special difficulty, however, when they are applied to creative goods, new problems arise. Then, for us, the persistence of a low system of IPRs in the fashion industry does not mainly derive from its efficiency but from the characteristics of the inputs that are used in the creative production process. They constitute strong constraints for defining, entitling, legitimating, enforcing, valuating and exchanging property rights. Thus, the different economic actors develop different kinds of strategic behaviour in order to obtain earnings and can try to protect copyrights, trademarks, new assets, old assets (heritage), private or collective assets, and so on. The institutional characteristics of this specific industry—such as the models of management, the type of ownership, the size of the firms, … lead to different historical models of management through IPRs. Peculiarly, the financial groups that integrate fashion into the new luxury industries currently try to implement new IPRs and to move towards a stronger system of IPRs but the management model of the street fashion puts an obstacle to this project.

The costs of class actions: allocation and collective redress in the US experience

Abstract: Once a preserve of the American legal landscape, the class action device today transcends geographic boundaries. In the past decade, efforts have intensified to establish collective litigation instruments in diverse legal terrains outside the United States—including Europe—often with the common goal of allowing some form of collective legal redress while avoiding perceived disadvantages of class actions in the American experience. Today more than ever, from legislators to litigants to scholars, European reformers face the challenge—and the opportunity—of making fundamental choices about the scope and shape of the collective legal remedies they wish to make available. Choices about the shape of the class action device reflect foundational judgments about the proper allocation of costs, and there is much from the US experience that can inform Europe’s prospective reformers. This article describes the history and current status of class action rules in the US, and then compares class actions and another form of extra-compensatory damages—one type of punitive damages—as means of doing the same thing. Although neither punitive damages of this sort nor class actions generally have traditionally existed in civil law systems, they both—and especially this particular form of punitive damages—can, from an economic view, be made to vindicate the same kind of social cost accounting goals. By considering these legal devices together, we hope to shed light on crucial choices facing Europe as it grapples with how best to provide collective legal redress in light of the lessons of the US experience with class actions.

Detecting illegal activities: the case of cartels

Abstract: This paper considers enhancements of a comparatively new method to detect cartels, the System of Cartel Markers (SCM), introduced by Blanckenburg and Geist (Int Adv Econ Res 15(4):421–436, 2009) The aim of SCM is to find illegal collusion on legal markets with observable market data It uses expected behavior patterns such as low level of capacity utilization, slackness of price adjustments to exogenous shocks, excess rates of return, nearly constant capacities, less price changes and lower variance of capacity growth rate However, the testing of cost efficiency is lacking so far Following Leibenstein’s (Am Econ Rev 56:392–415, 1966) X-inefficiency theory, we assume that cartel members face lower competition and hence, tend to be less cost efficient Therefore, we enhance SCM and use cost efficiency as a further marker in order to detect cartels We apply SCM to the German cement cartel and find empirical support for some markers The proposed methodology may be used for antitrust screening and regulatory purposes

The case against lawyers’ contingent fees and the misapplication of principal-agent models

Abstract: In this paper the case against the principal-agent modeling of most economic transactions is made about liberalizations of professional services that introduced in many European countries schemes of professionals’ remuneration contingent on outcomes—i.e. “contingent fees” for lawyers. If the relationship between the professional and clients is seen according to the principal-agent model, contingency fees can be economically justified. The case is quite different, however, if the situation is seen as one of authority under bounded rationality and unforeseen/asymmetrically gathered events. A game theoretical thought experiment aimed at checking the case for or against using agency models is carried out. It shows that (i) in the case of a self-interested professional, notwithstanding that overall utilitarian efficiency may be safeguarded, contingent fees leads to not respecting the fiduciary obligations (to detriment of Pareto optimality, impartial and loyal treatment of all clients, and the obligation to promote all the clients’ welfare). (ii) In the case of the professional’s willingness to comply with deontology standards—requiring impartial protection of all the clients’ rights and welfare, under a condition of minimal individual rationality—contingent fees lead nevertheless to making useless deontological motivations and to a loss of efficiency in utilitarian sense. A Pareto optimal, impartial, as well as efficient, arrangement aimed at maximizing the total volume of damage compensation is then considered. Nevertheless the main result is that, even if motivations to conform to such principles were available, under a contingent fee contract the professional could not carry out them because of the logic of the incentive contract. Thus, notwithstanding its widespread acceptance in the law and economics literature, agency theory seems not suitable in general for designing efficient and fair contracts and economic institutions.

Libertarian paternalism is an oxymoron: an essay in defence of liberty

Abstract: Sunstein and Thaler’s proposal for ‘libertarian paternalism’ in their paper titled “Libertarian Paternalism is not an Oxymoron” (LPNO from here on) is based on the contention that paternalism is sometimes (1) inevitable and (2) non coercive, and (3) that individuals do not always make ‘rational’ decisions. The first two contentions are untrue, and the question of whether individuals make ‘rational’ decisions as judged by the axiomatic definition of neo-classical economic theory is vestigial to the ideas and policy prescriptions of classical liberal and libertarian political economy. The paper, fraught with definitional confusions and methodological difficulties, is a superior example of how correct empirical observations and laudable advancements in identifying cognitive characteristics that may be relevant to economic analysis can lead to unsound theories due to methodological deficiencies. Policy prescriptions in the long run must take an institutional form; the greatest deception of the paper lies in its omission of any discussion on such an institution, which, I believe by logical necessity would be a Platonist autocratic bureaucracy. A consistent application of libertarian paternalism is the ‘road to serfdom’.

Incentive effects of class actions and punitive damages under alternative procedural regimes

Abstract: In an economic perspective, punitive damages and class actions can be viewed as sharing a common economic function—creating optimal deterrence. Building on Parisi and Cenini (Class actions for Europe: perspectives from law and economics, ELGAR, 2010), we study the effect of alternative procedural regimes on the effectiveness of punitive damages and class actions. Specifically, we compare the workings of punitive damages and class actions in the American and English (“loser-pays”) regimes. Our findings help explain the limited use and late adoption of class actions and punitive damages in Europe.

Toward an asymmetric Coase theorem

Abstract: Various reformulations of the Coase theorem have developed normative corollaries on the choice of optimal remedies in the presence of positive transaction costs. In this article, we consider the extent to which these propositions are affected by the presence of asymmetric transaction costs, and we offer a reformulation of the Coase theorem which takes into account asymmetrical transaction costs. Our analysis combines several insights from the existing literature on property-type vesus liability-type remedies, identifying the conditions for the superiority of each type of remedy. Further, we consider the possible use of mixed remedies and identify the optimal scope of such solution.

The unsustainable rationality of Impact Assessment

Abstract: The idea behind evidence-based instruments for policy-making is to provide objective information regarding the costs, benefits and risks involved in legislative proposals. An example of these instruments is the integrated Impact Assessment system, which has been in place in EU policy-making since 2003. Impact Assessments are designed according to rational decision models and aim to enhance the neutrality and objectivity of policy-making. This paper draws a comparison between the rational paradigm emerging from the EU template and the empirical evaluations carried out to date on Impact Assessments. It questions the conventional concept of Impact Assessments as rational policy-making instruments, because of the influential roles played by individual knowledge and data quality.

What do cattle and bees tell us about the Coase theorem

Abstract: Two empirical studies on well-known externalities seem to confirm Coase’s (J Law Econ 17(2):357–376, 1960) insight, according to which transactions on property rights will occur if their gains are greater than their costs. However, the trespassing cattle case (Ellickson in, Stanford Law Rev 38(3): 623–687, 1986) shows that neighbours do not refer to legal entitlements and settle their disputes without monetary transaction, which may be due, according to us, to other impediments to bargaining than transaction costs: some social norms prevent the market from developing. Such a market exists in the pollinating bees case (Cheung in, J Law Econ 16(1): 11–33, 1973), but we show that, if transactions over ‘externalities’ are facilitated, other externalities, which remain at its borders, are also handled with social norms. Both studies contribute to an institutional description of the functioning of a market over rights or of its impediments.

Ronald Coase, “The Problem of Social Cost” and The Coase Theorem: An anniversary celebration

Abstract: The articles gathered in this special issue were written in homage to Ronald Coase (who was born 100 years ago) and to ‘‘The Problem of Social Cost’’ (that was published 50 years ago), an article evidently of the utmost importance for ‘‘law and economics’’ in particular and, more broadly, also for economics. The legacy of Coase is therefore important and indeed multiple. This introduction, and this issue, would be too short to remind in what it consists while thousands of pages were written on the subject—among which can be singled out Medema’s Ronald H. Coase (An Intellectual Biography) (1994) and The Legacy of Coase (1995). The celebration of the 50th anniversary of the publication of ‘‘The Problem of Social Cost’’ nonetheless offers us the opportunity to remind or revisit important elements about Coase’s 1960 path-breaking article. In the first place, it may not be useless to stress that, as the standard history of law and economics goes, ‘‘The Problem of Social Cost’’ represents nothing less than the beginning of ‘‘modern’’ (Hovenkamp 1990, p. 494) or ‘‘new’’ (Posner 1975) law and economics—by which it is of course not meant that law and economics did not exist before Coase and did not evolve after Coase: not only, there were economists who paid attention to the legal dimension of economic phenomena before Coase but the latter established a new paradigm (Manne 1993), bringing rigour and formalism to approaches—essentially those developed by the old institutionalists—too descriptive and lacking of a solid theoretical background. But also, ‘‘The Problem of Social Cost’’ marks the entering in a new era does not mean that law and economics did not continue to evolve after Coase. From this perspective, it would be unfair to ignore that other contributors have also played a crucial role—for the instance the other ‘‘founding fathers’’ identified by the American Law and Economics Association in 1991, Guido Calabresi, Henry Manne and Richard Posner. Similarly, one should not

Conceptions of rationality in law and economics

Abstract: Law and economics is going through a paradigm shift as the influential behavioral school is challenging and remolding its very foundation, i.e., homoeconomicus model. However, neither of the approaches captures the essence of interaction between entrepreneurial heterogeneous agents. The Misesian homoagens approach adequately addresses the deficiencies of the predominant paradigm, opening doors to a far richer legal-economic analysis incorporating real world dynamics of complex market processes.

The scope of punishment: an economic theory

Abstract: The harm caused by many acts is not certain but probabilistic. Current public enforcement of the law combines harm-based sanctions (usually in criminal law) with act-based sanctions (very common in administrative law and regulation). We propose an economic theory of the choice between harm-based and act-based sanctions in public enforcement. The efficiency of act-based versus harm-based sanctions is analyzed and a typology of the determinants is drawn up. Our model suggests that harm-based sanctions are more efficient when (1) acquiring information about the act is important, (2) engaging in harm avoidance activities is advisable, (3) judgment-proofness is not a very significant problem, (4) punishment is especially costly, (5) changes in law are expensive or difficult to negotiate and (6) on average, potential criminals are better informed than the government about losses for society. Legal policy implications are discussed.

The law firm as an investment bank in class actions

Abstract: Class action finance raises substantial principal agency problems between plaintiffs and lawyers, which limit the extent to which the class action can be used as an instrument to overcome market failure.

The law and economics of class actions

Abstract: More than four decades ago in The Logic of Collective Action, Olson (1965) provided the evidence that in specific circumstances the uncoordinated action of individuals can be less efficient than coordinated action. He was essentially targeting public goods. Nonetheless, this attitude sometimes extends to different goods even though a large number of individuals have a common interest. The Olson contribution was therefore a meaningful explanation for the formation of groups and, as a by-product, for the emergence of specific institutions devoted to making coordination possible. However, co-operation and organization can not only better serve the private interest of individuals but can be ‘‘the most powerful tools human reason can employ’’ for expressing human liberty (Von Hayek 1960, p. 37) in a wide number of settings, from the market to the political and government systems where other means are ineffective. An important question is thus whether the previous reasoning equally applies to the judiciary: certainly this is an important topic for law and economics research. Generally speaking, in a number of cases legal actions can be brought collectively and imply some coordination, such as for criminal lawsuits involving a number of victims or for litigations fostered by a public company, involving, albeit indirectly, all the investors. However, this only concerns limited situations.

Coase’s world and Coase’s blackboard

Abstract: In this contribution I focus on a particular characteristic of Ronald Coase’s work, as exhibited in “The Problem of Social Cost”: his ability to force upon his audience a clearer grasp of reality than they previously held. More specifically, I aim to consider to what extent the “blackboard economics” that Coase himself derided have been avoided in a Coasean world, taking that expression to refer in some sense to a world where Coasean insights can flourish, and as such to be a world not simply of Coase’s own making but a world that has been developed by others in applying the Coase Theorem. My strategy is to interrogate the nature of a Coasean world through developing a framework that can look more closely at different approaches to theoretical modelling, the different worlds involved in these models, and the different positive and normative applications that can be derived from them. I shall further consider whether the understanding of the law that inhabits a Coasean world reflects a “real-world” legal environment. Finally, I shall seek to assess the impact of Coase’s work on our understanding of the relationship between law and economics, in our world.