Showing papers in "The Journal of Law and Economics in 2003"
TL;DR: The authors examine whether founding families seek to reduce firm-specific risk by influencing the firm's diversification and capital structure decisions, and find that family firms actually experience less diversification than, and use similar levels of debt as, nonfamily firms.
Abstract: Anecdotal accounts imply that founding families routinely engage in opportunistic activities that exploit minority shareholders. We gauge the severity of these moral hazard conflicts by examining whether founding families—as large, undiversified blockholders—seek to reduce firm‐specific risk by influencing the firm’s diversification and capital structure decisions. Surprisingly, we find that family firms actually experience less diversification than, and use similar levels of debt as, nonfamily firms. Consistent with these findings, we also find that direct measures of equity risk are not related to founding‐family ownership, which suggests that family holdings are not limited to low‐risk businesses or industries. Although founding‐family ownership and influence are prevalent and significant in U.S. industrial firms, the results do not support the hypothesis that continued founding‐family ownership in public firms leads to minority‐shareholder wealth expropriation. Instead, our results show that ...
647 citations
TL;DR: In this article, the authors investigate the role of venture capital in a sample of 1,116 firms' initial public offerings and find that firms backed by venture capital have fewer insider and instrumental directors and more independent outsiders.
Abstract: This paper describes board size and composition and investigates the role of venture capital in a sample of 1,116 firms' initial public offerings. First, firms backed by venture capital have fewer insider and instrumental directors and more independent outsiders. Second, we consider board composition as the outcome of a bargain between the CEO and outside shareholders. Representation of independent outsiders on the board decreases with the power of the CEO—tenure and voting control—and increases with the power of outside investors—venture capital backing and venture firm reputation. Third, within the sample of firms financed by venture capital and also consistent with a bargaining model, the probability that a founder remains as CEO is decreasing in venture firm reputation. Finally, we examine the influence of venture capital backing and board structure on firm outcomes in the 10 years after the initial public offering.
471 citations
TL;DR: In this paper, the authors studied the impact of a crackdown on corruption in the public hospitals of the city of Buenos Aires, Argentina, during 1996-97 and found that the wage elasticity of input prices exceeds.20.
Abstract: We study the prices paid for basic inputs during a crackdown on corruption in the public hospitals of the city of Buenos Aires, Argentina, during 1996–97. We find a well‐defined, negative effect on the measures used to capture corruption. Prices paid by hospitals for basic, homogeneous inputs decrease by 15 percent during the first 9 months of the crackdown. After this period prices increase, but they are still 10 percent lower than those prevailing before the crackdown. Relative to the precrackdown period, higher wages play no role in inducing lower input prices when audit intensity can be expected to be maximal (during the first phase of the crackdown) but have a negative and well‐defined effect when audit intensity takes intermediate levels (the last phase of the crackdown). Controlling for fixed effects, we find that the wage elasticity of input prices exceeds .20. These results are consistent with the standard model of bribes of Gary Becker and George Stigler.
380 citations
TL;DR: The authors show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore that the probability of owning a business increases as the exemption level increases.
Abstract: The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of noncorporate firms are personal liabilities of the firms’ owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner’s personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore that the probability of owning a business increases as the exemption level increases. We test this prediction and find that the probability of households owning businesses is 35 percent higher if they live in states with unlimited rather than low exemptions.
251 citations
TL;DR: The authors empirically investigated the determinants of firms' decisions where to incorporate and found that states that offer stronger antitakeover protections are substantially more successful both in retaining in-state firms and in attracting out-of-state incorporations.
Abstract: This paper empirically investigates the determinants of firms’ decisions where to incorporate. We find that states that offer stronger antitakeover protections are substantially more successful both in retaining in‐state firms and in attracting out‐of‐state incorporations. We estimate that, compared with adopting no antitakeover statutes, adopting all standard antitakeover statutes enabled the adopting states to more than double the percentage of local firms that incorporated in state (from 23 to 49 percent). Indeed, we find no evidence that the incorporation market has even penalized the three states that passed antitakeover statutes, which are widely viewed as detrimental to shareholders. We also find that there is commonly a big difference between a state’s ability to attract incorporations from firms located in and out of the state, and we investigate several possible explanations for this home‐state advantage.
217 citations
TL;DR: This article examined the extent to which landowners have preemptively destroyed habitat for the endangered red-cockaded woodpeckers (RCWs) in the forests of North Carolina in order to avoid potential land-use regulations prescribed under the Endangered Species Act (ESA).
Abstract: This paper examines the extent to which landowners have preemptively destroyed habitat for the endangered red-cockaded woodpeckers (RCWs) in the forests of North Carolina in order to avoid potential land-use regulations prescribed under the Endangered Species Act (ESA). Under the ESA, it is illegal to kill an endangered species and it is also illegal to damage its habitat. By preventing the establishment of an old-growth pine stand, landowners can ensure that RCWs do not inhabit their land and avoid ESA regulations that limit or prohibit timber harvest activity. Data from 1984–90 on over 1,000 individual forest plots are used to test predictions about the probability of harvest and the age of timber when it is harvested. We find that increases in the proximity of a plot to RCWs increases the probability that the plot will be harvested and decreases the age at which the forest is harvested.
147 citations
TL;DR: In this paper, the authors provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare, and demonstrate the similarity of the political responses to revenue shocks, spending shocks, changes in tax efficiency, and changes in spending program efficiency.
Abstract: We provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare. An improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending. We demonstrate the similarity of the political responses to revenue shocks, spending shocks, changes in tax efficiency, and changes in spending program efficiency. Empirical analysis of oil shocks, intergovernmental grants, and other autonomous changes in taxes or spending indicates that cause and effect is not only from spending to tax structures.
146 citations
TL;DR: In this article, the authors investigated the impact of the execution rate, commutation and removal rates, homicide arrest rate, sentencing rate, imprisonment rate, and prison death rate on the rate of homicide.
Abstract: This paper merges a state‐level panel data set that includes crime and deterrence measures and state characteristics with information on all death sentences handed out in the United States between 1977 and 1997. Because the exact month and year of each execution and removal from death row can be identified, they are matched with state‐level criminal activity in the relevant time frame. Controlling for a variety of state characteristics, the paper investigates the impact of the execution rate, commutation and removal rates, homicide arrest rate, sentencing rate, imprisonment rate, and prison death rate on the rate of homicide. The results show that each additional execution decreases homicides by about five, and each additional commutation increases homicides by the same amount, while an additional removal from death row generates one additional murder. Executions, commutations, and removals have no impact on robberies, burglaries, assaults, or motor‐vehicle thefts.
133 citations
TL;DR: The authors proposed a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory, which predicts a pattern of increasing prices and decreasing promotional activities over a drug's life cycle.
Abstract: Branded pharmaceutical firms use price and promotional strategy to manage public knowledge about their drugs. We propose a dynamic theory of pharmaceutical pricing and conduct an exploratory empirical analysis inspired by the theory. Our theory predicts a pattern of increasing prices and decreasing promotional activities over a drug’s life cycle. Prices are kept low and advertising levels high early in the life cycle in order to build public knowledge about the drug. As knowledge grows, prices rise and advertising falls. If the management of this stock is important enough, this tendency of prices to rise can overwhelm the price‐decreasing effect of entry by generic competitors late in the drug life cycle. We argue that our theory of price dynamics explains empirical regularities in this industry.
82 citations
TL;DR: In this article, the authors study the case of a monopolist who sells tickets to consumers who learn new information about their demands over time, and show that rationing and intertemporal sales are never optimal.
Abstract: This paper studies the case of a monopolist who sells tickets to consumers who learn new information about their demands over time. The monopolist can sell early to uninformed consumers and/or close to the event date to informed ones, or it can ration tickets and allow ticket holders to resell. I show that rationing and intertemporal sales are never optimal. More surprising, the monopolist cannot do strictly better by allowing resale. I discuss the implications of the model for the pricing practices observed in ticket markets.
79 citations
TL;DR: In this paper, the authors focus on the length of time it takes environmental agencies to process and issue new source construction permits and new industrial discharge permits pursuant to Clean Air Act regulations and find that plants with fewer instances of noncompliance receive permits for major projects more quickly.
Abstract: Studies have shown that despite infrequent inspections and low penalties for statutory violations, a large fraction of firms comply with environmental restrictions. What then motivates compliance? I investigate this question by focusing on the length of time it takes environmental agencies to process and issue new source construction permits pursuant to Clean Air Act regulations and new industrial discharge permits pursuant to Clean Water Act regulations. I find that plants (or firms) with fewer instances of noncompliance receive permits for major projects more quickly. In addition, I find that permit delays are sensitive to economic conditions as well, such as local area unemployment. As far as voluntary pollution control behavior is concerned, I find that regulators that issue permits for plant modifications focus primarily on statutory compliance, but when permitting new plant construction, where there is no plant compliance history to go on, voluntary pollutant releases do matter.
TL;DR: This paper employed an event history analysis to analyze public interest, public choice, and ideological explanations for the enactment of blue-sky laws between 1911 and 1931, and found that the decision to adopt a blue sky law was heavily influenced by the strength of progressive lobbies.
Abstract: Between 1911 and 1931, 47 of the 48 states adopted state securities, or “blue‐sky,” laws. This paper employs an event history analysis to analyze public interest, public choice, and ideological explanations for the enactment of blue‐sky laws. The data suggest that the decision to adopt a blue‐sky law was heavily influenced by the strength of progressive lobbies. However, the type of law adopted was more strongly influenced by the prevalence of small banks that faced competition for depositors’ funds from securities salesmen. I also provide evidence that more stringent blue‐sky laws increased small‐bank profits.
TL;DR: In this article, an economic analysis of the search warrant process predicts an increase in crime rates after the Supreme Court forced states to adopt the exclusionary rule as police officers substitute away from searches toward alternatives they consider less effective.
Abstract: In 1961, in its Mapp v. Ohio ruling, the Supreme Court required every state to exclude from criminal trials evidence obtained in violation of the Fourth Amendment. This is the “exclusionary rule.” At the time the Supreme Court issued its ruling, 24 states allowed ill‐gotten evidence in their criminal trials, and 24 excluded it. An economic analysis of the search warrant process predicts an increase in crime rates after the Supreme Court forced states to adopt the exclusionary rule as police officers substitute away from searches toward alternatives they consider less effective. Our empirical analysis supports this theoretical prediction. We find a statistically and economically significant increase in crimes followed the Supreme Court’s imposition of the exclusionary rule, with suburban cities bearing the brunt of the Supreme Court's decision.
TL;DR: The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below $5.
Abstract: The Penny Stock Reform Act of 1990 (PSRA) was an attempt to curb fraudulent security issues by placing severe restrictions on initial public offerings that were priced below $5. The regulation had the cosmetic effect of reducing the number of initial public offerings priced below $5 but had no substantive impact on issuer quality. Delisting risk, which is a measure of issuer quality, did not decline significantly in the post‐PSRA period. Instead, abnormal returns earned by a portfolio of nonpenny stocks declined significantly in the post‐PSRA period. We present evidence that attributes the decline in abnormal returns to the migration of speculative issuers into the nonpenny range.
TL;DR: This article examined the role of managers' political campaign contributions in relation to their firms' tax benefits and found that firms' political action committee contributions and individual managers' campaign contributions are both positively associated with firm tax benefits.
Abstract: This study examines the role of managers’ political campaign contributions in relation to their firms’ tax benefits. The study differs from extant public choice literature that has not examined the role of self‐interested agents within the firm. Using a major tax law change, we find that firms’ political action committee contributions and individual managers’ campaign contributions are both positively associated with firm tax benefits (rents) at stake. We also observe these contributions to be an increasing function of managers’ wealth effects through the existence of bonus plans that are based on after‐tax earnings and ownership of the firm’s stock. The policy implications are that firms’ own tax benefits, as well as its managers’ individual wealth‐enhancing effects, may influence campaign contributions.
TL;DR: In this paper, the effects of drug testing on highway safety were examined using a set of natural experiments created by the passage of a U.S. Department of Transportation drug-testing mandate and 13 state testing laws.
Abstract: This paper uses a set of “natural experiments,” created by the passage of a U.S. Department of Transportation drug‐testing mandate and 13 state testing laws, to examine the effects of testing truckers for illicit substances on highway safety. Since truckers do not bear the full costs of their driving and employers cannot contract on all aspects of their behavior, drug testing may be one means for companies to either screen or monitor employees and lower expected accident costs. Indeed, I find that testing led to a 9–10 percent reduction in truck accident fatalities. The social benefits of mandated testing appear to outweigh the costs of the program. However, the similarity between the effect of mandating testing and simply clarifying state law suggests that extending the right to perform drug tests may have been as effective at lower cost.
TL;DR: The honey program has operated for over 50 years, supporting the price of honey through a variety of mechanisms, and its effects were minor before the 1980s but then became important, with annual government expenditures near $100 million for several years as discussed by the authors.
Abstract: In his 1973 paper, Steven Cheung discredited the “fable of the bees” by demonstrating that markets for beekeeping services exist and function well. Although economists heeded Cheung’s lessons, policy makers did not. The honey program has operated for over 50 years, supporting the price of honey through a variety of mechanisms. Its effects were minor before the 1980s but then became important, with annual government expenditures near $100 million for several years. Reforms of the program in the late 1980s reduced its market effects and budget costs, returning it to its original role as a minor commodity program. Although the 1996 Farm Bill formally eliminated the honey program, it was reinstated in the 2002 Farm Bill. We measure the historical welfare effects of the program during its various incarnations, examine its frequently stated public interest rationale—the encouragement of honeybee pollination—and interpret its history in light of economic theories of regulation.
TL;DR: In this article, the authors used stock market data from an episode of regulatory threat in the credit card market to test the implications of these models using stock-market data from a stock market dataset.
Abstract: Models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation. I test the implications of these models using stock market data from an episode of regulatory threat in the credit card market. The data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers. Consistent with the regulatory threat hypothesis, price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat. This pattern exists not only for those issuers announcing cuts but also for their rivals, which suggests that the cuts reduced an industry‐wide threat of regulation. Factors that proxy for issuers’ exposure to and influence on the probability of regulation affect the size of these returns, which provides corroborative evidence in favor of the regulatory threat hypothesis.
TL;DR: This article found that states are approximately 25 percent more likely to conduct executions in gubernatorial election years than in other years, and that the overall effect of elections is largest in the South, where African-Americans are disproportionately executed more often than whites.
Abstract: We document the existence of a gubernatorial election cycle in state executions, which suggests that election‐year political considerations play a role in determining the timing of executions. Our analysis indicates that states are approximately 25 percent more likely to conduct executions in gubernatorial election years than in other years. We also find that elections have a larger effect on the probability that an African‐American defendant will be executed in a given year than on the probability that a white defendant will be executed and that the overall effect of elections is largest in the South.
TL;DR: In this article, the authors show that the minimum wage has little effect on rent, employment, output, and profits under plausible conditions, and they also show that it can reduce the size of the employment effect.
Abstract: In traditional models, a binding minimum wage creates a excess supply of low‐skilled workers for minimum‐wage jobs. Employment falls, and some jobs are reallocated from high‐ to low‐rent workers. This disequilibrium cannot persist. Competition to secure the property rights to now‐scarce jobs undoes most of the effects of the minimum wage. Workers who attach the highest value to the jobs are willing to work harder to keep them; marginal workers are squeezed out of the market as high‐rent workers ratchet up effort level. This process erodes the rent conferred by the minimum wage but also increases the value of marginal product, which reduces the size of the employment effect. The minimum wage confers more money income on low‐skilled workers and creates some distortion in the optimum combination of wage rate and effort level. Under plausible conditions, the minimum wage has little effect on rent, employment, output, and profits.
TL;DR: This paper found that the elasticity of prison admissions with respect to crime is approximately 1, in accord with the mechanical theory, which has important implications for understanding trends in the U.S. prison population.
Abstract: This paper studies the �mechanical theory� of crime and incarceration—�the notion that changes in imprisonment are partially determined by changes in crime rates. Previous studies found scant evidence supporting the mechanical theory. These studies, however, failed to properly control for simultaneity between incarceration rates and crime rates. While more crime may lead to larger prison populations, rising incarceration rates may deter crime. To address this bias, abortion rates in the 1970s are used as an instrument for crime in later decades. Abortion rates in the 1970s are correlated with crime in the 1990s but are unlikely to be otherwise related to incarceration or prison admissions rates in the 1990s. The instrumental variables approach finds that the estimated elasticity of prison admissions with respect to crime is approximately 1, in accord with the mechanical theory. This finding has important implications for understanding trends in the U.S. prison population.
TL;DR: In this article, a structural model of entry and fiscal policy is presented, which shows that taxation of variable production costs can increase product prices, lower competition, and reduce the availability of new products in small markets.
Abstract: A structural model of entry and fiscal policy is presented. It shows that taxation of variable production costs can increase product prices, lower competition, and reduce the availability of new products in small markets. The model’s test is based on a unique nationwide fiscal experiment. We study the effects of the 1869 Stamped Paper Tax Reform Act on the market for daily newspapers in the Netherlands. The econometric analysis uses data on when and where the newspapers existed and were introduced together with demographic census data from 1859 and 1869. The results confirm the model’s predictions and show how taxation affects strategic business location decisions.
TL;DR: In this paper, an econometric model that allows the nature of the oligopoly interaction to be determined by the data is used to estimate residual demand elasticities for the switched inter-LATA (local access and transport area) services of AT&T, MCI, and Sprint.
Abstract: Using an econometric model that allows the nature of the oligopoly interaction to be determined by the data, we estimate residual demand elasticities for the switched inter‐LATA (local access and transport area) services of AT&T, MCI, and Sprint. For the 9‐year period from the third quarter of 1989 to the first quarter of 1998, these estimates fall in the relatively inelastic −1.5 to −1.9 range. Statistical tests of the several elasticity relationships decisively reject hypotheses of perfect competition and a Cournot interaction but do not reject the hypothesis that the market functioned as a coordinated oligopoly.