Showing papers in "The Journal of Law and Economics in 2013"
TL;DR: The negative relationship between legalization and alcohol-related traffic fatalities does not necessarily imply that driving under the influence of marijuana is safer than driving underThe influence of alcohol.
Abstract: To date, 19 states have passed medical marijuana laws, yet very little is known about their effects. The current study examines the relationship between the legalization of medical marijuana and traffic fatalities, the leading cause of death among Americans ages 5–34. The first full year after coming into effect, legalization is associated with an 8–11 percent decrease in traffic fatalities. The impact of legalization on traffic fatalities involving alcohol is larger and estimated with more precision than its impact on traffic fatalities that do not involve alcohol. Legalization is also associated with sharp decreases in the price of marijuana and alcohol consumption, which suggests that marijuana and alcohol are substitutes. Because alternative mechanisms cannot be ruled out, the negative relationship between legalization and alcohol-related traffic fatalities does not necessarily imply that driving under the influence of marijuana is safer than driving under the influence of alcohol.
388 citations
TL;DR: This article found that more stringent dismissal laws foster innovation, particularly in innovation-intensive industries, but other forms of labor laws that do not affect dismissal of employees do not have this bright side and found support for these predictions in empirical tests that exploit country-level changes in dismissal laws in the United States, the United Kingdom, France, and Germany.
Abstract: When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging employees and thereby limit employers’ ability to hold up innovating employees after an innovation is successful. Therefore, dismissal laws can enhance employees’ innovative efforts and encourage firms to invest in risky but potentially groundbreaking projects. Other forms of labor laws that do not affect dismissal of employees do not have this bright side. We find support for these predictions in empirical tests that exploit country-level changes in dismissal laws in the United States, the United Kingdom, France, and Germany: more stringent dismissal laws foster innovation, particularly in innovation-intensive industries, but other labor laws do not.
207 citations
TL;DR: In this article, a simple model was developed to relate the optimal leniency policy (the carrot) to the effectiveness of investigations, and it was shown that it is always desirable to offer some leniency before an investigation is launched; it is also optimal to offer leniency once an investigation was underway when investigations are unlikely to succeed in uncovering cartels, absent self-reporting.
Abstract: Leniency programs contribute to destabilizing collusion but can also be abused and generate perverse effects. This paper develops a simple model capturing this trade-off, which we use to relate the optimal leniency policy (the carrot) to the effectiveness of investigations (the stick). We show that it is always desirable to offer some leniency before an investigation is launched; it is also optimal to offer some leniency once an investigation is underway when investigations are unlikely to succeed in uncovering cartels, absent self-reporting. Our analysis also confirms the usefulness of restricting leniency to the first informant only; in contrast, it does not support prohibiting leniency for repeat offenders.
115 citations
TL;DR: In this paper, the authors propose a simple theory of predatory pricing based on incumbency advantages, scale economies, and sequential buyers, where the predator needs a critical scale to be successful and is ready to make losses on earlier buyers to deprive the prey of the scale it needs, thus making monopoly profits on later buyers.
Abstract: We propose a simple theory of predatory pricing based on incumbency advantages, scale economies, and sequential buyers (or markets). The prey needs a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases in which scale economies exist because of demand externalities or two-sided market effects and in which markets are characterized by common costs. Conditions under which predation may (or may not) take place in actual cases are also discussed.
90 citations
TL;DR: In this paper, the authors analyzed the development of occupational regulation of massage therapists in the United States as well as the effects of state licensing and certification on their earnings and numbers, and found that massage therapists working in states with licensing receive an earnings premium of as much as 16.2 percent.
Abstract: In this paper, we analyze the development of occupational regulation of massage therapists in the United States as well as the effects of state licensing and certification on their earnings and numbers. Our results suggest that massage therapists working in states with licensing receive an earnings premium of as much as 16.2 percent. We also find some evidence that licensing seems to reduce the number of massage therapists. We find less convincing evidence that certification has had similar effects. We argue that, taken together, our results suggest that licensing restricts entry at the expense of consumers and that its effects are less likely to be explained by other competing factors.
69 citations
TL;DR: In this article, a comprehensive sample of U.S. mergers and acquisitions (M&A) bids over 1990-2008 was used to find that top-market-share law firms are associated with a number of important bid outcomes and characteristics.
Abstract: Using a comprehensive sample of U.S. mergers and acquisitions (M&A) bids over 1990–2008, we document that top-market-share law firms are associated with a number of important bid outcomes and characteristics. Top bidder law firms are associated with significantly higher offer completion rates. In contrast, top target law firms are associated with significantly higher offer withdrawal rates. Top bidder and target law firms are both associated with significantly higher takeover premia. These associations are significant even after controlling for selection bias and major offer, bidder, and investment bank adviser characteristics. Our interpretation is that top bidder law firms have stronger incentives and abilities to facilitate deal completions, while top target law firms have stronger incentives and abilities to help realize higher takeover premia, consistent with their clients’ objectives. Our findings suggest that law firm market share is an important omitted variable in current economic models ...
69 citations
TL;DR: In this article, the effect of children's legal status on the integration of immigrant parents was studied and it was found that foreign-born parents are most likely to interact with the local community and use the German language if their children are entitled to German citizenship at birth.
Abstract: The integration of immigrants is the subject of ongoing public debate, and devising measures to enable the assimilation of newcomers ranks high on the political agendas of many countries. This paper focuses on the legal institution of citizenship and analyzes the consequences of birthright citizenship introduced in Germany. We use the exogenous variation provided by the 1999 reform of the German nationality law to study the effect of children’s legal status on the integration of immigrant parents. We find that foreign-born parents are most likely to interact with the local community and use the German language if their children are entitled to German citizenship at birth.
56 citations
TL;DR: In this paper, the authors compare the policy choices of bureaucrat city treasurers and politician cities treasurers, who are selected and held accountable in very different ways, and demonstrate that having appointive treasurers reduces a city's cost of borrowing by 19-31 percent.
Abstract: This paper investigates whether the method of selecting public officials affects policy making. I compare the policy choices of bureaucrat city treasurers and politician city treasurers, who are selected and held accountable in very different ways. The analysis draws on rich data from California to examine whether cities with appointed or elected city treasurers pay lower costs to borrow. The results demonstrate that having appointive treasurers reduces a city’s cost of borrowing by 19–31 percent. Holding officials directly accountable to voters can result in lower levels of performance in complex policy areas.
48 citations
TL;DR: In this paper, the authors investigated the factors that have shaped the evolution of property rights institutions using a regression discontinuity design and found that divergent state laws of Ghana and Cote d'Ivoire have had little effect on de facto property rights institution.
Abstract: This paper investigates the factors that have shaped the evolution of property rights institutions. Using a regression discontinuity design, I show that the divergent state laws of Ghana and Cote d’Ivoire have had little effect on de facto property rights institutions. In contrast, the data show that these states’ laws and policies have had large impacts on other economic outcomes. Furthermore, I show that part of the substantial within-country variation in property rights institutions is explained by economic factors. Areas that are more suitable for growing cocoa have a greater prevalence of land transfer rights. My findings highlight the importance of nonstate sources of norms and show that these norms do, to some extent, evolve to accommodate the changing needs of society.
47 citations
TL;DR: The authors used a search-matching model to estimate the extent of discrimination in the labor market and found that differential treatment accounts for at least one-third of the black-white wage gap.
Abstract: The extent to which discrimination can explain racial wage gaps is one of the most divisive issues in the social sciences. Using a newly available data set, this paper develops a simple empirical test that, under plausible (but not innocuous) conditions, provides a lower bound on the extent of discrimination in the labor market. Taken at face value, our estimates imply that differential treatment accounts for at least one-third of the black-white wage gap. We argue that the patterns in our data are most naturally rationalized through a search-matching model in which employers statistically discriminate on the basis of race when hiring unemployed workers but learn about their marginal product over time.
47 citations
TL;DR: This article found that better-educated people are more likely to report official misconduct and that more frequent complaints encourage better behavior from officials, and that citizens' complaints might explain the link between education and the quality of government.
Abstract: Better-educated countries have better governments, an empirical regularity that holds in both dictatorships and democracies. Possible reasons for this fact are that educated people are more likely to complain about misconduct by government officials and that more frequent complaints encourage better behavior from officials. Newly assembled individual-level survey data from the World Justice Project show that, within countries, better-educated people are more likely to report official misconduct. The results are confirmed using other survey data on reporting crime and corruption. Citizens’ complaints might thus be an operative mechanism that explains the link between education and the quality of government.
TL;DR: The authors argue that profit-maximizing media help to overcome the rational ignorance problem highlighted by Anthony Downs and argue that media are able to inform passive voters about regulation and other public policy issues, acting as a (partial) counterbalance to small but well-organized groups.
Abstract: We argue that profit-maximizing media help to overcome the rational ignorance problem highlighted by Anthony Downs. By collecting news and combining it with entertainment, media are able to inform passive voters about regulation and other public policy issues, acting as a (partial) counterbalance to small but well-organized groups. To show the impact this information has on regulation, we document the effect muckraking magazines had on the voting patterns of U.S. representatives and senators on regulatory issues in the early part of the twentieth century. We also discuss the conditions under which media can serve to counterbalance special interests.
TL;DR: In this article, the authors examine the determinants of merging firms' choice of a common or separate mergers and acquisitions adviser and the consequences of this choice on several deal outcomes.
Abstract: We examine the determinants of merging firms’ choice of a common or separate mergers and acquisitions adviser and the consequences of this choice on several deal outcomes. In a large sample of acquisitions, common advisers appear to be chosen in economically sensible ways. After controlling for other variables and accounting for endogeneity, we find that deals with common advisers take longer to complete and provide lower premiums to targets. We find some evidence of lower target valuations and higher bidder returns in such deals. While there is no significant difference in deals’ overall quality, our evidence showing that deals with common advisers are somewhat better for acquirers than for targets favors the conflict-of-interest hypothesis over the deal improvement hypothesis. We find no evidence that merging firms avoided sharing advisers during the 1980s but strong and growing evidence of such avoidance over the following 2 decades.
TL;DR: In this paper, the authors use the Business Roundtable's challenge to the SEC's 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access and find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the rule.
Abstract: We use the Business Roundtable’s challenge to the Securities and Exchange Commission’s (SEC’s) 2010 proxy access rule as a natural experiment to measure the value of shareholder proxy access. We find that firms that would have been most vulnerable to proxy access, as measured by institutional ownership and activist institutional ownership, lost value on October 4, 2010, when the SEC unexpectedly announced that it would delay implementation of the rule in response to the Business Roundtable’s challenge. We examine intraday returns and find that the loss of value occurred just after the SEC’s announcement on October 4. We find similar results for July 22, 2011, when the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the Business Roundtable. These findings are consistent with the view that financial markets placed a positive value on shareholder access, as implemented in the SEC’s 2010 rule.
TL;DR: In this paper, the authors analyze a policy experiment in an Alaskan commercial fishery that assigned a portion of an overall catch quota to a voluntary co-op, with the remainder exploited competitively by those choosing to fish independently.
Abstract: We analyze a policy experiment in an Alaskan commercial fishery that assigned a portion of an overall catch quota to a voluntary co-op, with the remainder exploited competitively by those choosing to fish independently. Unlike the individual quota system advocated by many economists, the policy encouraged coordinated fishing and did not require a detailed assignment of rights. We model the decision to join and behavior under cooperative and independent fishing. The data confirm our key predictions: the co-op attracted the least skilled fishermen, consolidated and coordinated effort among its most efficient members, and provided shared infrastructure. We estimate that resulting gains in rent were at least 33 percent. Some independents were disadvantaged by the co-op’s formation, however, which prompted them to oppose it in court. We analyze the source of their disadvantage and provide guidance for designing fishery reform that leads to Pareto improvements, enabling reform without losers.
TL;DR: In this article, the authors analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers and conclude that investment banks produce information not previously available to market participants through the rendering of target-side fairness opinions.
Abstract: We analyze a direct product of the investment banking process: target firm valuations disclosed in the fairness opinions of negotiated mergers. On average, acquirer advisers exhibit positive valuation errors that are significantly greater than those of target advisers. Top-tier advisers produce more accurate valuations than lower tier advisers, but we find no relation between valuation accuracy and the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of target-sought fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that investment banks produce information not previously available to market participants through the rendering of target-side fairness opinions.
TL;DR: This article examined how international politics affects trade in the absence of empires or wars and showed that deterioration of relations between the United States and another country, measured by divergence in their United Nations General Assembly voting patterns, reduced U.S. imports from that country during 1962-2000.
Abstract: This paper examines how international politics affects trade in the absence of empires or wars. We first show that deterioration of relations between the United States and another country, measured by divergence in their United Nations General Assembly voting patterns, reduced U.S. imports from that country during 1962–2000. Though statistically significant, the magnitude of the effect of political distance on trade is small. Indeed, we show that except for petroleum and some chemical products, U.S. imports are not affected by international politics. American firms, however, diversify their oil imports significantly away from political opponents of the United States. Oil trade is often associated with backward vertical foreign direct investment that is subject to the expropriation risk. In contrast to the usual claim that oil is a strategic commodity, we provide suggestive evidence that trade in products when rents are appropriable is more likely to be affected by international politics.
TL;DR: The authors found that longer recommended sentences are associated with higher rates of recidivism, conditional on actual punishment, suggesting that large discrepancies between the “bark” and “bite” of the criminal justice system may make incarceration less effective at reducing crime.
Abstract: No consensus has emerged about how, or even if, incarceration affects the behavior of convicted offenders. One unexplored mechanism involves the possibility that the disutility of punishment is affected by both the actual punishment an offender receives and the sentence that he thinks could have been given, a psychological effect known as framing. We test for framing effects in punishment by exploiting a legal change in Maryland that altered recommended, but not actual, sentences for a subset of offenders. Using an individual-level data set of convictions, incarceration, and arrests, we find that longer recommended sentences are associated with higher rates of recidivism, conditional on actual punishment. Our results suggest that large discrepancies between the “bark” and “bite” of the criminal justice system may make incarceration less effective at reducing crime.
TL;DR: This article analyzed a data set of ancient Greek political regime types and reviewed the history of the best-known Archaic period tyrants in order to explore why a transitory narrowing of power can set the stage for democratization.
Abstract: Considerable scholarly work has examined the transition to democracy. In this paper, we investigate a path to democracy that is very different from that typically described. During the Archaic period (800–500 BCE), many Greek poleis (city-states) replaced aristocracies with a more narrow governing institution—an autocrat known as the tyrant. Yet as classical scholars have noted, many of the poleis where tyrants reigned in the Archaic period became among the broadest democracies in the subsequent Classical period (500–323 BCE). We analyze a data set of ancient Greek political regime types and review the history of the best-known Archaic period tyrants in order to explore why a transitory narrowing of power—Greek tyranny was a transitory institution—can set the stage for democratization. We briefly consider other historical and modern examples. Our paper shows why an understanding of progress toward democracy requires recognizing the potential importance of nonmonotonic transition paths.
TL;DR: In this paper, the authors explore the differences between policies prohibiting false claims about product quality and policies requiring adequate prior testing to substantiate specific claims of quality and show that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone.
Abstract: This paper explores the differences between policies prohibiting false claims about product quality and policies requiring adequate prior testing to substantiate specific claims of quality. It develops a model in which firms have private information about their type—represented by their probability of having a high-quality product—and can acquire additional private information about their product quality through costly testing and learning. Penalties for false claims and for unsubstantiated claims create an opportunity for firms to credibly reveal their information and for signaling to emerge in equilibrium. I show that the two kinds of penalties affect the possibility of signaling in different ways and that the mandatory substantiation requirement in many circumstances improves buyer information and social welfare beyond what is achieved by a ban on false claims alone.
TL;DR: In this article, the authors used newly constructed measures of preventable medical complications and state tort reforms in the United States between 1994 and 2007 to find evidence that higher liability pressure deters preventable complications associated with four specific obstetric and gynecologic procedures.
Abstract: An important objective of medical liability law is to deter medical errors by punishing negligent mistakes. However, relatively little evidence exists on the deterrence effect. Using newly constructed measures of preventable medical complications and state tort reforms in the United States between 1994 and 2007, I find evidence that higher liability pressure deters preventable medical complications associated with four specific obstetric and gynecologic procedures. The results also show that the effects of tort reforms vary according to the specific reform in question. While joint and several liability reform (which increases doctor accountability) appears to decrease preventable medical complications, collateral source rule reform and caps on punitive damages appear to increase these complications. Opponents of tort reform often argue that tort reforms may adversely affect patient safety, and the results of this paper suggest that such a concern is legitimate.
TL;DR: In this article, the authors estimate the impact of a compulsory waiting period on the divorce rate in South Korea and find that the cooling-off policy significantly decreases divorce rate, whereas there is no significant effect on divorce filing rate.
Abstract: A mandated waiting period between a divorce filing and the issuance of the divorce decree has been adopted in many countries to reduce impetuous divorces and encourage reconciliation. In this paper, I estimate the impact of a compulsory waiting period on the divorce rate. Since 2004, South Korean local courts had been voluntarily adopting the cooling-off policy, and later it became a national law. To evaluate the impact of the policy, I exploit variation in the timing of the policy adoption across local courts. I find that the cooling-off policy significantly decreases the divorce rate, whereas there is no significant effect on the divorce filing rate.
TL;DR: In this paper, the authors propose an activity-generating theory of regulation, which states that when social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information.
Abstract: We propose an activity-generating theory of regulation. When courts make errors, tort litigation becomes unpredictable and as such imposes risk on firms, thereby discouraging entry, innovation, and other socially desirable activity. When social returns to activity are higher than private returns, it may pay the society to generate some information ex ante about how risky firms are and to impose safety standards based on that information. In some situations, compliance with such standards should entirely preempt tort liability; in others, it should merely reduce penalties. By reducing litigation risk, this type of regulation can raise welfare.
TL;DR: The authors found that whites' friendships with black students were no more diverse in college than in high school, despite the fact that the colleges that blacks attend have substantially smaller black populations than high schools.
Abstract: This paper examines sorting into interracial friendships at selective universities. We show significant friendship segregation, particularly for blacks. Indeed, blacks’ friendships are no more diverse in college than in high school, despite the fact that the colleges that blacks attend have substantially smaller black populations. We demonstrate that the segregation patterns occur in part because affirmative action results in large differences in the academic backgrounds of students of different races, with students preferring to form friendships with those of similar academic backgrounds. Within a school, stronger academic backgrounds make whites’ friendships with blacks less likely and friendships with Asians more likely. These results suggest that affirmative action admission policies at selective universities, which drive a wedge between the academic characteristics of different racial groups, may result in increased within-school segregation.
TL;DR: In this article, the authors model the local tax mix determination process in the presence of statewide fiscal limitations and show how excess sensitivity of local public spending to grants arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending.
Abstract: This paper models the local tax mix determination process in the presence of statewide fiscal limitations—the decentralized government finance archetype—and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed “flypaper effect”) arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.
TL;DR: In this paper, the effect of a possible third-party resolution on negotiation behavior was studied in an economic bargaining experiment, where the bargaining phase is preceded by a production phase that allows for different fairness principles to guide the division of the total production value.
Abstract: The effect of a possible third-party resolution on negotiation behavior is studied in an economic bargaining experiment. The bargaining phase is preceded by a production phase that allows for different fairness principles to guide the division of the total production value. The experimental results show that a possible third-party resolution lowers the dispute costs by reducing the number of rounds of alternating offers. In the presence of a third party, negotiators make first offers that are more strongly related to their production, which reduces the number of bargaining rounds. The production phase has an effect on the distributional property of the agreements. In negotiations in which third-party resolution is an option, the negotiation outcome shifts toward a more unequal outcome, more in line with each person’s contribution.
TL;DR: In this paper, the authors empirically examined the effects of network unbundling on retail prices in U.S. local telephone markets and found that regulators responded rationally to competition by rebalancing prices to reduce cross subsidies.
Abstract: This paper empirically examines the effects of network unbundling on retail prices in U.S. local telephone markets. Panel data for 7,604 wire centers in 43 states from 1996 to 2002 are used to estimate the price effects from the unbundling and entry-promoting conditions of the Telecommunications Act. Results show that Section 271 led to the rebalancing of prices between customer groups in which residential prices increased and the prices paid by small businesses decreased. There is some rebalancing of prices between urban and rural regions, with business prices decreasing by a larger amount in urban regions. Our results from all markets indicate that regulators responded rationally to competition by rebalancing prices to reduce cross subsidies.
TL;DR: In this paper, the benefits of partial wealth insurance or the cost of supply-side credit constraints are predominant for the elderly in bankruptcy filing, and the authors find that an increase in a state's homestead exemption increases the elderly's home equity and business ownership; however, the credit constraint is dominant in unlimited-exemption states, which decreases home and business owners.
Abstract: The elderly are the population most likely to file for bankruptcy, with filings increasing by 150 percent from 1991 to 2007. This is likely because they live with relatively flat incomes and high medical expenses, and their retirement and housing assets are typically exempt from bankruptcy filings. In addition, nine states adopted higher asset exemptions specifically for the elderly. Using the Health and Retirement Study and recent state-by-time variation in homestead exemptions, we are the first to test whether the benefits of partial wealth insurance or the cost of supply-side credit constraints are predominant for the elderly. Using pooled cross-sectional analysis, we find that an increase in a state’s homestead exemption increases the elderly’s home equity and business ownership; however, the credit constraint is dominant in unlimited-exemption states, which decreases home and business ownership. Panel analysis reveals that an increase in the homestead exemption positively affects home ownersh...
TL;DR: In this paper, the optimal use of self-reporting schemes when the authority cannot commit to an ex post investigation effort was analyzed, and it was shown that this leads to a negative relationship between selfreporting incentives and investigation effort.
Abstract: Self-reporting schemes have become a substantial part of law enforcement. This paper analyzes the optimal use of such schemes when the authority cannot commit to an ex post investigation effort. I show that this leads to a negative relationship between self-reporting incentives and investigation effort. Three main conclusions arise. First, violators self-report with a probability of 1 if and only if full amnesty is offered. Second, self-reporting schemes are not efficient when the level of harm of the act is high. Finally, authorities can increase the incentives to self-report when they convict without hard evidence. However, a hard-evidence standard provides more deterrence and is weakly welfare superior.