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

Inequality and Violent Crime

Abstract: We investigate the robustness and causality of the link between income inequality and violent crime across countries. First, we study the correlation between the Gini index and homicide and robbery rates within and between countries. Second, we examine the partial correlation by considering other crime determinants. Third, we control for the endogeneity of inequality by isolating its exogenous impact on these crime rates. Fourth, we control for measurement error in crime rates by modeling it as both unobserved country effects and random noise. Finally, we examine the robustness of this partial correlation to alternative measures of inequality. The panel data consist of nonoverlapping 5‐year averages for 39 countries during 1965–95 for homicides and 37 countries during 1970–94 for robberies. Crime rates and inequality are positively correlated within countries and, particularly, between countries, and this correlation reflects causation from inequality to crime rates, even after controlling for ot...

Evidence on Learning and Network Externalities in the Diffusion of Home Computers

Abstract: In this paper we examine the importance of local spillovers—such as network externalities and learning from others—in the diffusion of home computers. We use data on 110,000 U.S. households in 1997. Controlling for many individual characteristics, we find that people are more likely to buy their first home computer in areas where a high fraction of households already own computers or when a large share of their friends and family own computers. Further results suggest that these patterns are unlikely to be explained by common unobserved traits or by area features. When looked at in more detail, the spillovers appear to come from experienced and intensive computer users. They are not associated with the use of any particular type of software but do seem to be highly tied to the use of e‐mail and the Internet, consistent with computers being part of an information or communication network.

Managerial Incentives in Nonprofit Organizations: Evidence from Hospitals*

Abstract: This paper examines the incentives of chief executive officers (CEOs) in a large sample of nonprofit hospitals. The evidence indicates that both turnover and compensation of these CEOs are significantly related to financial performance (return on assets). We find no evidence that nonprofit hospitals provide explicit incentives for their CEOs to focus on altruistic activities. The turnover/performance relation appears stronger in nonprofit hospitals than in for‐profit hospitals and other for‐profit corporations (our data do not allow us to compare compensation incentives). Past research suggests that there is little distinction between the outputs and behaviors of private nonprofit and for‐profit hospitals. Consistent with these findings, our study suggests that managers face incentives to concentrate on financial performance in both types of organizations.

Were Compulsory Attendance and Child Labor Laws Effective? An Analysis from 1915 to 1939*

Abstract: Were compulsory attendance and child labor laws responsible for the incredible growth in secondary schooling from 1915 to 1939? Using 1960 census data, I find that legally requiring children to attend school for 1 more year, by increasing the age required for a work permit or lowering the entrance age, increased educational attainment by about 5 percent. The effect was similar for white males and females, but there was no effect for blacks. Continuation school laws that required working children to attend school on a part‐time basis were effective for white males only. These laws increased the education only of those in the lower percentiles of the education distribution, thereby decreasing education inequality, perhaps by as much as 15 percent. States with higher levels of wealth, higher percentage of immigrants, or lower percentage of blacks were more likely to pass stringent laws. The results also suggest that these laws were not endogenous.

Can Special Interests Buy Congressional Votes? Evidence from Financial Services Legislation*

Abstract: The challenge in the campaign contribution literature has been to overcome the simultaneous‐equation bias that is inherent in the vote‐contribution relationship. This paper proposes a new method to overcome this bias. It examines behavior at different points of time and relates it to contributions at different points of time. This method is applied to legislators’ voting decisions on financial services regulation. Analyzing this type of legislation is of particular interest because it allows an analysis of the net influence of competing interest groups. Consistent with the proposed model’s predictions, I find evidence that changes in contribution levels determine changes in roll call voting behavior, that contributions from competing groups are partially offsetting, and that junior legislators are more responsive to changes in contribution levels than are senior legislators.

Political and economic determinants of the likelihood of privatizing argentine public banks

Abstract: This paper discusses the political economy of bank privatization in Argentina following institutional changes related to the implementation of the Convertibility Plan and to the Tequila Crisis. The empirical results strongly support the hypothesis that political incentives affect the likelihood of privatization. We find (1) poorly performing banks were more likely to be privatized; (2) overstaffing tended to reduce the probability of privatization; (3) large banks were less likely to be privatized; and (4) higher levels of provincial unemployment and higher shares of public employees reduced the probability of privatization. Although the hypotheses were tested for a specific industry in a specific country, which makes it possible to control for enterprise performance and institutional characteristics, it seems reasonable that similar results might hold in other industries and countries.

Insurance Fraud and Optimal Claims Settlement Strategies

Abstract: We examine the optimal claims settlement strategy for a liability insurer when claimants can permanently misrepresent their losses by engaging in costly claims falsification. In this environment, claims auditing is not a possible deterrent to fraud, and the settlement strategy consists of an indemnification profile that relates the insurance payment to the claimed amount of loss. The optimal indemnification profile is shown to involve systematic underpayment of claims at the margin as a means to deter loss exaggeration, with the extent of underpayment limited by expected litigation costs and potential bad‐faith claims. The key testable implication of the theory is that the extent of underpayment should be greater for classes of claims for which loss exaggeration is easier. Empirical analysis of insurance settlements for bodily injury liability in automobile accidents confirms this prediction. This suggests that liability insurers optimally choose claims payment strategies to lessen a claimant's i...

Direct‐to‐Consumer Advertising and the Demand for Cholesterol‐Reducing Drugs*

Abstract: In August 1997, the Food and Drug Administration (FDA) reinterpreted its advertising regulations to ease limits on the use of broadcast media when advertising prescription drugs directly to consumers. We estimate the effect of direct‐to‐consumer advertising on demand, using 1995–2000 data from the market for the statin class of cholesterol‐reducing drugs. We find no statistically significant effect from any form of advertising and promotion on new statin prescriptions or renewals and no evidence of adverse market effects from advertising or the FDA policy change. We did find evidence, however, that television advertising increased the proportion of cholesterol patients who had been successfully treated, which suggests that advertising reinforces compliance with drug therapy.

How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market*

Abstract: Moral hazard exists in expert‐service markets because sellers have an incentive to shade their reports of the buyer's condition to increase the short‐run demand for their services. The California vehicle emission inspection market offers a rare opportunity to examine how reputational incentives work in such a market. I show that consumers are 30 percent more likely to return to a firm at which they previously passed than to one at which they previously failed and that demand is sensitive to a firm's failure rate across all consumers. These and other results suggest that demand incentives are strong in this market because consumers believe that firms differ greatly in their consumer friendliness and are skeptical even about those they choose. Weak demand incentives in other expert‐service markets are not a direct consequence of moral hazard, but rather of its interaction with switching costs and consumers' belief that firms are relatively homogeneous.

Deregulating Direct‐to‐Consumer Marketing of Prescription Drugs: Effects on Prescription and Over‐the‐Counter Product Sales*

Abstract: This paper examines the impact and interrelationships between direct‐to‐consumer (DTC) and physician‐oriented marketing on the sales composition of the prescription (Rx) and over‐the‐counter (OTC) versions of antiulcer and heartburn medications. To understand better the implications for competition of the 1997 Food and Drug Administration’s policies regarding DTC marketing, as well as recent Rx‐to‐OTC switch approvals, we also examine the relationship between order‐of‐entry effects and marketing intensities. We find spillover effects of marketing for Rx drugs on same‐brand OTC versions of the drugs. We also find that the ratio of cumulative marketing intensity (cumulative marketing efforts divided by cumulative sales) in the OTC segment increases monotonically with order of entry. Our regression results show that various marketing demand elasticities depend on order of entry. Our findings document the importance of nonprice competition in the OTC drug market and suggest that the recent deregulati...

A Market‐Based Environmental Policy Experiment in Chile*

Abstract: We evaluate the performance of an environmental market in a less developed country on the basis of the experiences of the particulate matter control program of Santiago, Chile. We find that grandfathering the permits has created economic incentives for incumbent sources to more readily declare their (historic) emissions in order to claim any permits. In addition, the market has not fully developed because of transaction costs, regulatory uncertainty, and incomplete enforcement. Nonetheless, it has provided sources with the flexibility to adapt to new market conditions. Our analysis of this particular experience indicates that market‐based policies can provide important advantages over traditional command‐and‐control policies even under limited institutional capabilities.

The Effects of Civil Gang Injunctions on Reported Violent Crime: Evidence from Los Angeles County*

Abstract: Several cities have recently adopted civil injunctions as a means to reduce gang violence. To evaluate the effectiveness of such injunctions, I develop an extensive database of neighborhood‐level reported crime counts from four police jurisdictions within Los Angeles County. I construct two different comparison samples of neighborhoods not covered by injunctions to control for underlying trends that could cause one to overstate the injunctions' effects. The analysis indicates that, in the first year after the injunctions are imposed, they lead the level of violent crime to decrease by 5–10 percent.

The Dual Effects of Intellectual Property Regulations: Within‐ and Between‐Patent Competition in the U.S. Pharmaceuticals Industry*

Abstract: A patent protects an innovator only from others who produce the same product, but it does not protect him from others who produce better products under new patents. Previous work has emphasized that intellectual property regulations stimulate research and development by protecting innovative returns from imitators of the same product, but the effects of these regulations on between‐patent competition by new patents has been ignored. We attempt to estimate the relative effect of between‐patent and within‐patent competition on innovative returns of research‐based pharmaceutical companies. We estimate that between‐patent competition, most of which occurs while a drug is under patent, costs the innovator at least as much as within‐patent competition, which cannot occur until a drug is off patent. The reduction in the present discounted value of the innovator’s return from between‐patent competition appears to be at least as large as the reduction from competition within patents and may be much larger.

Police, Prosecutors, Criminals, and Determinate Sentencing: The Truth about Truth‐in‐Sentencing Laws*

Abstract: This study explores the impact of truth‐in‐sentencing (TIS) legislation on police, prosecutors, and criminals. Truth‐in‐sentencing laws are determinate‐sentencing laws that require violent offenders to serve at least 85 percent of their prison sentences. The standard economic model of crime suggests that TIS laws will deter violent offenders but also reduce probabilities of arrest and conviction. However, I explain that if states share the goals of TIS legislation, police and prosecutors may increase these probabilities. My theoretical model also predicts that the legislation will cause more trials and impose higher maximum prison sentences. Using a county‐level data set, empirical results confirm that TIS laws deter violent offenders, increase the probability of arrest, and increase maximum imposed prison sentences. Truth‐in‐sentencing laws decrease murders by 16 percent, aggravated assaults by 12 percent, robberies by 24 percent, rapes by 12 percent, and larcenies by 3 percent. However, offende...

Health Insurance and the Growth in Pharmaceutical Expenditures

Abstract: This paper examines the contribution of insurance coverage to the recent unprecedented growth in spending on pharmaceuticals. Trends in drug spending over time closely paralleled the growth in drug coverage. Most of the coverage growth reflects an increase in the number of people with coverage, 65 percent from 1987 to 1996, rather than increased depth of coverage. The direct moral hazard effect of this insurance growth accounts for between one‐fourth and one‐half of the increase in drug spending. Technological change contributed to these changes, because both the flow of new drugs increased the demand for insurance and information technologies enabled the development of pharmacy benefit management, which reduced the real price of drug coverage. It is plausible that insurance growth also stimulated drug promotion. The only obvious source of inefficiency is the tax subsidy, which may lead to excessive insurance and promotion. This applies to all health care, not just pharmaceuticals.

The effect of the big eight accounting firm mergers on the market for audit services

Abstract: The research assesses whether the two Big Eight mergers of 1989 were anticompetitive or efficiency enhancing. The study determines how a merger would affect the merged firm’s probability of winning an auction to supply audit services under four different merger theories. A data set of 1,978 firms over a 12‐year period is constructed to test these theories. The main conclusion of the analysis is that the Big Eight mergers of 1989 resulted in cost reductions that benefited relatively large audit buyers who switched auditors after the mergers. By combining the assets of the four constituent firms, the two merged firms were more successful in competing for large clients. This research adds to the small but growing literature on studies of actual mergers.

Pharmaceutical Policy Change and the Safety of New Drugs

Abstract: Policy reforms in the Food and Drug Administration (FDA) have led to substantial increases in the speed of new‐drug review. While data show that FDA review times for new drugs have fallen as much as 50 percent, other data show that several new drugs have been withdrawn from the market for safety reasons. This flurry of new‐drug withdrawals raises a question. Have increases in the speed of new‐drug review had an adverse effect on new‐drug safety? This analysis uses adverse drug reaction (ADR) data from the FDA’s Spontaneous Reporting System to examine this question. Specifically, ADR counts for newly approved drugs are estimated as a function of drug characteristics, patient characteristics, and regulatory factors (such as the speed of new‐drug review) using negative binomial regression analysis. The primary result is that reductions in new‐drug review times are associated with increases in both ADRs requiring hospitalization and ADRs resulting in death.

The Effect of State Funeral Regulations on Cremation Rates: Testing for Demand Inducement in Funeral Markets*

Abstract: This article presents evidence that state funeral regulations affect the choice of whether to cremate or bury dead bodies. States that require either funeral directors to be embalmers or funeral homes to have embalming preparation rooms have lower cremation rates, holding other factors such as income, age, educational attainment, nativity, religious adherence, race, and region constant. These embalming regulations reduce cremation rates by roughly 16 percent, which increases the amount spent on funerals by 2.6 percent. The article also presents evidence that funeral directors induce consumers to choose burial over cremation, which supports one of the fundamental premises underlying the Federal Trade Commission's Funeral Rule. However, the additional evidence that inducement is more prevalent in states with stringent funeral regulations suggests that repealing state regulations that impede competition might be more effective than the Funeral Rule in attacking the problem of demand inducement.

Title Systems and Land Values

Abstract: The Torrens (or registration) and the recording title systems apply different principles to resolve conflicting claims to land title. This paper develops a theoretical model of how expected title risk and transactions costs affect land value across the two systems and ultimately concludes that the Torrens system leads to higher property values, ceteris paribus. It also suggests that empirical studies of the title system–land value nexus need to control for self‐selection effects in the data. We use the simultaneous existence of two alternative title systems in Cook County, Illinois, as a natural experiment for comparing land values under each system. The estimates indicate that the Torrens system increases land value relative to the recording system when controlling for self‐selection effects.

Chief executive officer careers in regulated environments: evidence from electric and gas utilities

Abstract: We compare chief executive officers (CEOs) of electric and gas utility firms with CEOs of unregulated firms. Utility CEOs tend to be older when appointed to office, have less‐prestigious educational backgrounds, and are more likely to have a legal background. Despite these differences, the evidence indicates that the likelihood of utility CEO turnover is at least as sensitive to stock performance as the likelihood of turnover among CEOs of unregulated firms. We find no convincing evidence that utility CEOs stay in office longer than their unregulated counterparts, although they are less likely to be overtly forced from office or replaced by an executive from outside the firm. Finally, the evidence suggests that regulatory expertise is valued in the selection of new utility CEOs.

Banks and Economic Growth: Implications from Japanese History

Abstract: Alexander Gerschenkron argued that banks facilitate growth in “backward” countries, and modern theorists sometimes similarly claim that banks can promote growth by reducing informational asymmetries and improving the allocation of funds. Japan has played a part in these debates. In early twentieth‐century Japan, firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that access through their affiliated banks. In fact, Japanese banks did not play the role attributed to them. Japan was not a bank‐centered economy; instead, firms relied on equity finance. It was not an economy where firms with access to banks outperformed their rivals; instead, such firms earned no advantage. And it was not a world in which the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more than the deposits those firms had made ...

Entry into regulated monopoly markets: the development of a competitive fringe in the local telephone industry

Abstract: Incumbent firms operating in today’s local telephone industry are beginning to face competition from new entrants. Using the dominant‐firm/competitive‐fringe framework and a recently constructed panel data set of local telephone markets, this paper provides an empirical analysis of the competitive transition underway in the U.S. local telephone industry. Of particular interest is the differential impact of economic regulation on the development of fringe competition in flocal telephone markets. Empirical results reveal that local telephone markets with price cap regulation have witnessed less net fringe entry and subsequently contain smaller competitive fringes during the time period studied. These findings imply that the widespread adoption of price cap regulation by state public utility commissions has contributed to the slow development of local telephone competition. To reconcile this surprising conclusion, a political economy explanation that details how state regulators have benefited from ...

Liability and organizational choice

Abstract: Scholars have long maintained that increases in liability encourage firms to contract out risky activities in order to take advantage of so‐called judgment‐proof strategies. These strategies allow entities to limit their liability through contractual arrangements with nearly insolvent firms. However, the use of judgment‐proof firms triggers countervailing effects: it provides opportunities to externalize liability through judgment‐proof firms, but the insolvency of these firms introduces distortion in care levels that can generate more liability costs. These costs may outweigh the benefits of externalizing liability, making contracting out suboptimal. A simple model of organizational decision making with judgment‐proof firms is developed and applied to the oil industry, where contracting out decreased in response to heightened liability following the Exxon Valdez oil spill.

Sorting, Quotas, and the Civil Rights Act of 1991: Who Hires When It’s Hard to Fire?*

Abstract: The Civil Rights Act of 1991 (CRA91) was enacted after a rancorous debate about whether it was a “quota” hiring bill or a necessary means of opening labor markets We analyze the effects of CRA91 on the composition of firms’ workforces We consider employer behavior when firms vary in their susceptibility to discrimination suits and when firms can reduce exposure to discrimination claims by employing more protected workers These forces lead to a sorting effect, which causes firms that are more susceptible to discrimination litigation to substitute away from protected workers, and a quota effect, which causes firms with fewer pre‐CRA91 protected workers to substitute toward these workers Using data from various sources, we find evidence consistent with CRA91 having had a sorting effect We find no evidence that CRA91 led to widespread quota hiring and no evidence that CRA91 helped integrate industries that had employed relatively few protected workers

The Market for New Handguns: An Empirical Investigation*

Abstract: Annual data from 1961–94 are used to estimate a supply and demand model for the new handgun market. The influence of price, income, expenditures on police protection, the violent crime rate, the Gun Control Act of 1968, and the Brady Handgun Violence Prevention Act of 1993 on the number of new handguns per capita is explored. The demand for handguns is elastic; a 1 percent increase in the price of handguns lowers the quantity demanded by 2–3 percent. Further, the demand for handguns is sensitive to the price of other firearms, such as shotguns, to per capita expenditures on law enforcement, and to the lagged violent crime rate. The demand for new handguns increased in the period preceding implementation of the Gun Control Act and the Brady Act. Finally, implementation of the Gun Control Act of 1968 does not appear to have significantly impacted the supply of new handguns.

The Regulation of Medical Innovation and Pharmaceutical Markets

Abstract: This issue is devoted to papers presented at the conference The Regulation of Medical Innovation and Pharmaceutical Markets held at the University of Chicago on April 20–21, 2001. The conference brought together many of the leading economic experts on the U.S. pharmaceutical industry to discuss current policy issues facing not only the U.S. pharmaceutical industry but also the industry internationally. The policy focus of the conference was motivated by the fact that medical innovation and pharmaceutical markets worldwide have long been subject to substantial public intervention in terms both of regulation and of fiscal subsidies and taxes. Areas under public control include, among others, intellectual property, product safety and effectiveness, production processes, and pricing. In addition, several recent regulations and fiscal measures have been advocated that are bound to have a profound effect on the health care industry in general and medical innovation and pharmaceuticals in particular. For example, proposals to expand Medicare to include prescription drug coverage have been put forward as a solution to the problem of many of our nation’s elderly being unable to afford necessary medications. Intellectual property regulations to cover research tools such as genetic information have also been proposed. Many proposals have already altered the degree by which drug companies can advertise directly to consumers. Several state govern-