Showing papers in "Journal of Law Economics & Organization in 2010"
TL;DR: The authors used a data set of state high court opinions to construct measures for three aspects of judicial performance: effort, skill, and independence, and found that elected judges focus on providing service to the voters, whereas appointed judges care more about their long-term legacy as creators of precedent.
Abstract: Conventional wisdom holds that appointed judges are superior to elected judges because appointed judges are less vulnerable to political pressure. However, there is little empirical evidence for this view. Using a data set of state high court opinions, we construct measures for three aspects of judicial performance: effort, skill, and independence. The measures permit a test of the relationship between performance and the four primary methods of state high court judge selection: partisan election, non-partisan election, merit plan, and appointment. Appointed judges write higher quality opinions than elected judges do, but elected judges write more opinions, and the evidence suggests that the large quantity difference makes up for the small quality difference. In addition, elected judges are not less independent than appointed judges. The results suggest that elected judges focus on providing service to the voters, whereas appointed judges care more about their long-term legacy as creators of precedent. If the state has a problem with judicial impartiality, it is largely one the state brought upon itself by continuing the practice of popularly electing judges. Justice O’Connor, concurring in Republican Party of Minn. v. White, 536 U.S. 765, 792 (2002).
139 citations
TL;DR: In this article, the authors exploit variation in the timing of consolidation across states to estimate the effects of changing school and district size on student outcomes using data from the Public-Use Micro-Sample of the 1980 US census.
Abstract: Between 1930 and 1970, average school size in the United States increased from 87 to 440 students and average district size increased from 170 to 2300 students, as over 120,000 schools and 100,000 districts were eliminated through consolidation. We exploit variation in the timing of consolidation across states to estimate the effects of changing school and district size on student outcomes using data from the Public-Use Micro-Sample of the 1980 US census. Students educated in states with smaller schools obtained higher returns to education and completed more years of schooling. Reduced form estimates confirm that students from states with larger schools earned significantly lower wages later in life. Although larger districts were associated with modestly higher returns to education and increased educational attainment in most specifications, any gains from the consolidation of districts were far outweighed by the harmful effects of larger schools. (JEL I2, H7, H4) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
81 citations
TL;DR: In this paper, the La Nuestra Familia gang's internal governance institutions are investigated by examining the law, economics, and organization of the gang, showing that the gang needs to provide a credible commitment for member safety to potential entrants and a means of preventing predation and misconduct within the gang.
Abstract: This paper investigates the internal governance institutions of criminal enterprise by examining the law, economics, and organization of the La Nuestra Familia prison gang. To organize effectively within the confines of penitentiaries, the gang needs to provide a credible commitment for member safety to potential entrants and a means of preventing predation and misconduct within the gang. I analyze the governance structure outlined in the gang's written constitution and show how it solves the collective action problems associated with multilevel criminal enterprises. (JEL D23, K42, L23, P16) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
81 citations
TL;DR: In this paper, the authors argue that certain budgetary rules, by limiting the ability of subnational governments to respond to voter demands for increased spending, may systematically force lawmakers to under-provide public goods.
Abstract: Researchers have struggled to understand why federal block grants, contrary to economic theory, have a large stimulative effect on the spending of state and local governments. This article proposes and tests an institutional explanation for this effect. We argue that certain budgetary rules, by limiting the ability of subnational governments to respond to voter demands for increased spending, may systematically force lawmakers to under-provide public goods. When this occurs, governments are likely to treat grant revenue as a supplement to total expenditures and not return this money to voters in the form of a tax cut as suggested by existing theory. To evaluate our hypothesis, we use data on the Community Development Block Grant program and municipal tax and expenditure limitations. Results show that restrictive fiscal institutions significantly increase the stimulative power of federal grant revenue. (JEL H7, H4, R5) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
56 citations
TL;DR: It appears that centers in areas with multiple competitors manipulated the waiting list to ensure that the sickest patients received a liver, rather than the intended prioritization of the Sickest patients first.
Abstract: The liver transplant waiting list is designed to allocate livers to the sickest patients first. Before March 1, 2002, livers were allocated to patients based on objective clinical indicators and subjective factors. In particular, a center placing a prospective transplant recipient in the intensive care unit (ICU) leads to a higher position on the liver transplant waiting list. After March 1, 2002, a policy reform mandated that priority on the liver transplant waiting list no longer be influenced by whether the patient was in the ICU. I show that after the reform, ICU usage declined most precipitously in areas with multiple transplant centers. I find no evidence that pervasive manipulation in the most crowded liver transplant markets distorted the allocation of livers away from the intended prioritization of the sickest patients first. It appears that centers in areas with multiple competitors manipulated the waiting list to ensure that the sickest patients received a liver. The Author 2010. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
56 citations
TL;DR: In this article, the authors proposed a model in which two parties select the internal organization that helps them win the election, and identified four effects depending on whether politicians are opportunistic or partisan.
Abstract: We propose a model in which two parties select the internal organization that helps them win the election. Party choices provide incentives to the politicians who represent them. Depending on whether politicians are opportunistic or partisan, we identify four effects. First, a selection effect: intraparty competition gives parties more candidates to choose from. Second, an incentive effect: intraparty competition adds a hurdle and impacts on candidates' incentives. Third, a trust effect: because of the incentive effect, intraparty competition is a signal to uninformed voters. Finally, with partisan preferences, an ideology effect appears. Ideology is a public good in a competitive party and induces free riding. Intraparty competition is valuable when voters are badly informed or intraparty competition is weak. These results rationalize the introduction of direct primaries in the United States, the organizational changes in Western European parties since 1960, and the organizational differences between centrist and extreme parties.
39 citations
TL;DR: In this paper, the authors studied the allocation of control when there is disagreement about the right course of action, and they showed that more disagreement increases the value that players attach to control, and that people then value control rights since they believe that their decisions are better than those of others.
Abstract: This article studies the allocation of control when there is disagreement—in the sense of differing priors—about the right course of action. People then value control rights since they believe that their decisions are better than those of others. More disagreement (due to, e.g., fundamental uncertainty) increases the value that players attach to control. The article shows that all income and control of a project should then be concentrated in one hand: income rights should go more to people with more control since such people value income higher (because they have a higher opinion of the decisions made); control rights should go more to people with more income since they care more (and believe that they make better decisions). Different projects may be optimally ‘‘owned’’ by different people. Furthermore—with residual income exogenously allocated—complementary decisions should be more co-located, whereas substitute decisions should be more distributed. Confident people with a lot at stake should—in a wide range of settings—get more control. (JEL D7, D8, L2, M1)
38 citations
TL;DR: In this article, the authors explore three models that illustrate various ways in which aftermarket monopolization can reduce inefficiencies and thus increase social welfare and frequently also consumer welfare and show that efficiency enhancing aftermarket monopoly may be much more common than previous literature suggests.
Abstract: Consider a durable goods producer that has the option of monopolizing an aftermarket such as repair for its own product. An important question is whether such monopolization reduces welfare? We show that the answer to this question is frequently no. In particular, we explore three models that illustrate various ways in which aftermarket monopolization can reduce inefficiencies and thus increase social welfare and frequently also consumer welfare. Our article shows that efficiency enhancing aftermarket monopolization may be much more common than previous literature suggests. (JEL K21, L12, L49) The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
33 citations
TL;DR: A unique instrument is constructed using past and current values of state political composition and other factors to find no evidence that caps on noneconomic damages are associated with a reduction in medical malpractice positive payment claim frequency.
Abstract: Medical malpractice has received much attention in the media with highly publicized jury awards and reported consequences of excessive litigation. Health care and medical malpractice remain a prominent issue, especially in the current political climate. Policy endogeneity, however, plagues most analyses of various federal, state, or local policies. In this article, I analyze the effect of noneconomic damage caps on the frequency of positive payment medical malpractice claims, recognizing that these laws are likely endogenous. I construct a unique instrument using past and current values of state political composition and other factors. In contrast to previous literature, I find no evidence that caps on noneconomic damages are associated with a reduction in medical malpractice positive payment claim frequency.
29 citations
TL;DR: In this paper, the authors present a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal, by observing that not only does the principal have to be informed to give an order but also the worker must be willing to follow the order.
Abstract: This article presents a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal. We extend the concept of real authority by observing that not only does the principal have to be informed to give an order but also the worker must be willing to follow the order. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. We explore the implications of this insight for hiring policies and managerial styles. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
27 citations
TL;DR: In this paper, the authors analyze an agency relationship with moral hazard where a principal relies on a supervisor to obtain verifiable information about an agent's output, and derive the opportunism-proof contracts that protect the organization against both individual and group opportunism.
Abstract: This article characterizes the incentive contracts that optimally immunize an organization against the opportunistic activities of its members. We analyze an agency relationship with moral hazard where a principal relies on a supervisor to obtain verifiable information about an agent's output. The supervisor's discretion allows him to engage in two types of individual opportunism, namely abuse of power and abuse of authority, as well as two types of group opportunism, namely collusion with the agent and collusion with the principal. Individual opportunism occurs when the supervisor asks a tribute to reveal information, whereas group opportunism occurs when the supervisor receives a bribe to conceal information. We find that the effective, and hence most noxious, form of opportunism is individual opportunism and derive the opportunism-proof contracts, that is, the optimal contracts that protect the organization against both individual and group opportunism. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: Although a punishment can be applied only once, the threat to punish can be repeated several times as mentioned in this paper, which is referred to as the "multiplication effect" in economics and law.
Abstract: Although a punishment can be applied only once, the threat to punish can be repeated several times. This is possible because when parties comply, the punishment is not applied and can thus be used to support a new threat. We refer to this feature of sticks as the "multiplication effect." The same is not possible with promises to reward since carrots are used up every time a party complies; hence, at each round a new reward is needed. We show that the multiplication effect of sticks has pervasive consequences in economics and law and provides a unified explanation for seemingly unrelated phenomena such as comparative negligence, legal aid, the dynamics of riots and revolutions, the use of property rules, the commons problem, and the most-favored-nation clause in settlement negotiations. (JEL K14, K42)
TL;DR: In this paper, the authors analyzed the behavior of three objective measures of corruption: absolute corruption incidence, relative corruption incidence and corruption rents, and showed that the behaviour of all three measures can vary substantially when the type of equilibrium changes.
Abstract: In this article, we analyze the behavior of three objective measures of corruption: absolute corruption incidence, relative corruption incidence, and corruption rents. We present a theoretical model of bribery and investment in which these measures of corruption are defined and compared. We then study the changes that arise when key parameters of the model change and show that, under identical circumstances, the behavior of any particular corruption measure can differ completely from the behavior of the other measures. Furthermore, in our model high and low corruption lead to two types of equilibria. We show that the behavior of all three measures can vary substantially when the type of equilibrium changes. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: In this paper, the authors study a simple principal-agent model with risk neutrality and limited liability and assume costly, non-automatic enforcement and private information by the principal, and show that the form of the contract systematically affects the likelihood of proceeding to court.
Abstract: Legal enforcement of contracts is expensive and therefore parties will typically negotiate to avoid these costs. However, if negotiation takes place under asymmetric information, enforcement will occur in some states. We study a simple principal-agent model with risk neutrality and limited liability and assume costly, nonautomatic enforcement and private information by the principal. We show that the form of the contract systematically affects the likelihood of proceeding to court. In order to reduce the probability of enforcement, an optimal incentive contract must be one step. In addition, the principal may leave the agent with some surplus and effort will typically deviate from the productively efficient level. (JEL D82, D86, K40) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: In this article, the authors provided the first formal analysis of this form of indemnification and found the circumstances under which the government should additionally sanction employees to be quite limited and the circumstances for the government to ban indemnification of these sanctions to be more limited still.
Abstract: Policymakers have questioned whether firms should be allowed to indemnify their employees for personal sanctions for corporate crimes This article provides the first formal analysis of this form of indemnification Targeting employees with unindemnifiable sanctions carries the social cost of exposing employees of law-abiding firms to the risk of mistaken government prosecution Deterrence is typically achieved more efficiently by sanctioning the firm alone We find the circumstances under which the government should additionally sanction employees to be quite limited and the circumstances under which the government should ban indemnification of these sanctions to be more limited still One circumstance is when an unindemnifiable employee sanction provides prosecutors with leverage to adjust the employee's sanction in exchange for his cooperation against the firm (JEL K22, D82, L20) The Author 2009 Published by Oxford University Press on behalf of Yale University All rights reserved For permissions, please email: journalspermissions@oxfordjournalsorg, Oxford University Press
TL;DR: In this paper, a decision-theoretic model of dynamic product approval by an uncertain regulator is proposed, which predicts early entrant protection even when later entrants offer quality improvements over market incumbents.
Abstract: Early entrant protection in approval regulation exists when the first incumbents in an exclusive market niche receive more favorable regulatory treatment than later entrants. We show theoretically and empirically that this pattern can prevail for two reasons: regulatory capture and consumer co-optation. We consider a decision-theoretic model of dynamic product approval by an uncertain regulator. The model predicts early entrant protection even when later entrants offer quality improvements over market incumbents. We then test the model using duration analyses of NDA approval times for 1,629 new molecular entities submitted to the U.S. Food and Drug Administration (FDA) from 1950 to 2000. FDA approval times are shown to be increasing in order of market entry for the entire period studied, and across numerous sub-samples. A standard-deviation rise in the log of order of entry is associated with a 3.5-month increase in expected FDA approval time. The entryorder gradient appears to be heavily influenced by disease-level variables but not by firmlevel effects, supporting a consumer cooptation explanation and disfavoring capture and producer rent-seeking accounts. In addition, we present modest evidence that the entryorder gradient is conditioned upon factors affecting the pipeline value of the regulatory problem, suggesting that FDA regulatory decisions may anticipate the pipeline of future drugs for any given disease.
TL;DR: In this paper, the authors consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal.
Abstract: We consider a double-sided moral hazard problem where each party can renege on the signed contract since there does not exist any verifiable performance signal. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties the pure threat of using the legal system may suffice to make the principal implement first-best effort. As is shown in the paper, this .finding is rather robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse.
TL;DR: In this paper, the authors argue that the law should sometimes encourage offenders to incur costs to avoid punishment and that punishing avoidance should discourage avoidance as little as possible or even encourage avoidance.
Abstract: This article argues that the law should sometimes encourage offenders to incur costs to avoid punishment. Avoidance, such as concealment of evidence, perjury, or obstruction of justice, is generally deemed socially undesirable because it wastes resources and reduces deterrence. However, since avoidance is also costly to offenders, it may substitute for socially costlier punishments such as imprisonment and therefore be socially desirable. This, however, does not imply that punishing avoidance is socially undesirable. Rather, punishing avoidance should discourage avoidance as little as possible or even encourage avoidance. This article also questions the argument that sanctions should generally not be maximal if avoidance is present. It shows that this argument holds only if punishment takes the sole form of fines. If punishment takes the sole form of imprisonment, then imprisonment should nevertheless be maximal. This is another manifestation of the social desirability of punishment avoidance. (JEL K14, K42) The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: In this paper, it was shown that the welfare loss from the chilling of legitimate activity can outweigh the gains from litigation cost savings, even if there are no restrictions on the damage rule.
Abstract: In this article, we ask the basic question: Is it necessarily the case that allowing or promoting settlement of lawsuits enhances social welfare? Our answer is not necessarily; there are circumstances where actually prohibiting settlement generates more social welfare than allowing it. Settlement can lower social welfare because it reduces the accuracy of legal outcomes. Reducing this accuracy reduces the ability of the law to deter harmful activity without chilling legitimate activity that might be mistaken for harmful activity. In some circumstances, the welfare loss from the chilling of legitimate activity can outweigh the gains from litigation cost savings, even if there are no restrictions on the damage rule. (JEL K00, K41, D82, C78) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: The Fifth Amendment guarantees criminal defendants the right to silence, blocking the court from drawing adverse inferences from the defendant's silence as discussed by the authors, and the conditions under which extending such protection to civil defendants might increase (or decrease) social welfare.
Abstract: The Fifth Amendment guarantees criminal defendants the right to silence, blocking the court from drawing adverse inferences from the defendant's silence. This article investigates the conditions under which extending such protection to civil defendants might increase (or decrease) social welfare. If discovery is imperfect, then defendants who acquire information about the dangerousness of their actions may hide this evidence at trial if it is bad. This tends to make the private benefit from acquiring such information exceed the social benefit. Furthermore, the private benefit from acquiring this information is greater when the court will infer the information is bad if the defendant does not present it. Thus, there are situations in which a right to silence may be necessary to prevent a defendant from acquiring information for which the social costs exceed the social benefit. On the other hand, if it is hard to hide damaging information and the release of damaging information tends to induce lawsuits, then a right to silence may dampen already insufficient incentives to acquire information. (JEL K40, K41) The Author 2008. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
TL;DR: In this paper, the authors explore how the incentives of a plaintiff, when considering filing suit and bargaining over settlement, differ between suits associated with stand-alone torts cases and suits involving mass torts.
Abstract: We explore how the incentives of a plaintiff, when considering filing suit and bargaining over settlement, differ between suits associated with stand-alone torts cases and suits involving mass torts. We contrast ‘‘individual-based liability determination’’ (IBLD), wherein a clear description of the mechanism by which a defendant’s actions translate into a plaintiff’s harm is available, with ‘‘population-based liability determination’’ (PBLD), wherein cases rely on the prevalence of harm in the population to persuade a judge or jury to draw an inference of causation or fault. PBLD creates a ‘‘rational optimism effect’’ on the plaintiff’s part that is inherent in many mass tort settings. This effect creates incentives for higher settlement demands and results in greater interim expected payoffs forplaintiffsand,thus,anincreasedpropensitytofilesuit.Consequently,defendants in PBLD cases face increased ex ante expected costs compared with the IBLD regime, thereby increasing incentives to take care. (JEL K13, K41, D82)
TL;DR: In this paper, the authors analyzed optimal negligence standards when only one of two parties will be informed of the standards and showed that the optimal policy for the court depends on who acts first and on who the injurer is.
Abstract: This article analyzes optimal negligence standards when only one of two (future) parties will be informed of the standards. When the informed party is the injurer and acts first, the simple negligence rule is optimal, and under certain conditions, the first best standard of due care is optimal. The informed party will have an incentive to comply with the standard due to the discontinuity of the negligence rule, whereas the uninformed party may infer this and hence also take appropriate precautions. In general, the optimal policy for the court depends on who acts first and on who the injurer is. Thus, optimal rules are contributory negligence when the informed party is the victim and acts first, no liability when the uninformed party is the injurer and acts first, and strict liability without contributory negligence when the uninformed party is the victim and acts first. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.