Law JournalFeeds » American Law and Economics Review

Church and State: An Economic Analysis

admin — Tue, 01 Nov 2011 01:54:23 +0000

What purpose is served by a government’s protection of religious liberty? Many have been suggested, the most prominent of which center on the protection of freedom of belief and expression. However, since every regulation potentially interferes with religious freedom, it is useful to consider more concrete purposes that could suggest limits on the degree to which religious liberty should be protected. This article focuses on the concrete economic consequences of state regulation of religion. We examine the effects of state regulation on corruption, economic growth, and inequality. The results suggest that laws and practices burdening religion enhance corruption. Laws burdening religion reduce economic growth and are positively associated with inequality.

Editorial Board

admin — Tue, 01 Nov 2011 01:54:23 +0000

The Myths and Realities of Correctional Severity: Evidence from the National Corrections Reporting Program on Sentencing Practices

admin — Tue, 01 Nov 2011 01:54:23 +0000

The forces driving U.S. prison growth are poorly understood. This article examines one factor that has received insufficient attention: changes in time served. It demonstrates that time served has not risen dramatically in recent years, even declining in some jurisdictions. It also shows that time served is fairly short: median release times are approximately one to two years. Thus, admissions practices, not longer sentences, appear to drive prison growth. This article also examines whether time served varies across different types of inmates. Young, Hispanic, and violent offenders appear to serve longer sentences; race and sex appear to be of minor importance.

Subscription

admin — Tue, 01 Nov 2011 01:54:23 +0000

A New Capital Regulation for Large Financial Institutions

admin — Tue, 01 Nov 2011 01:54:23 +0000

We design a new capital requirement for large financial institutions (LFIs) that are “too big to fail.” Our mechanism mimics the operation of margin accounts. To ensure LFIs do not default on systemically relevant obligations, we require that they maintain a cushion of equity and junior long-term debt sufficiently great that the credit default swap (CDS) price on the long-term debt stays below a threshold level. If the CDS price moves above the threshold, either LFIs issue equity to bring it down or the regulator intervenes. This mechanism ensures that LFIs are always solvent, while preserving some of the benefits of debt.

Cover

admin — Tue, 01 Nov 2011 01:54:23 +0000

Retail Gasoline Price Ceilings and Regulatory Capture: Evidence from Canada

admin — Tue, 01 Nov 2011 01:54:23 +0000

We evaluate the efficacy of price ceiling legislation by employing weekly data on retail gasoline prices for eight cities in Eastern Canada between 1999 and 2007. The use of these data allows us to pool “treatment” cities in the Atlantic provinces with “control” cities in Ontario and Quebec. Ordinary least squares and instrumental variables estimates demonstrate that the enactment of such regulation is significantly correlated with higher prices. A potential explanation for these results is that price ceilings act as “focal points” enabling firms to set higher prices, thus suggesting the possibility of regulatory capture.

Vicarious Liability for Bad Corporate Governance: Are We Wrong about 10b-5?

admin — Tue, 01 Nov 2011 01:54:23 +0000

I formulate a rational expectations signaling model of vicarious liability for securities fraud, particularly the much criticized “fraud-on-the-market” private class action arising under Rule 10b-5. I show that fraudulent misreporting by managers occurs in the absence of managerial moral hazard—that is, where managers simply maximize shareholder payoffs—and that vicarious liability can serve as an appropriate deterrent, creating separating equilibrium. I then show that the particular remedy under Rule 10b-5 can perfectly deter fraud and perfectly compensate purchasers, and that Rule 10b-5 class actions may function better than critics claim.

The Impact of Right-to-Carry Laws and the NRC Report: Lessons for the Empirical Evaluation of Law and Policy

admin — Tue, 01 Nov 2011 01:54:24 +0000

For over a decade, there has been a spirited academic debate over the impact on crime of laws that grant citizens the presumptive right to carry concealed handguns in public—so-called right-to-carry (RTC) laws. In 2005, the National Research Council (NRC) offered a critical evaluation of the “more guns, less crime” hypothesis using county-level crime data for the period 1977–2000. Seventeen of the eighteen NRC panel members essentially concluded that the existing research was inadequate to conclude that RTC laws increased or decreased crime. The final member of the panel, though, concluded that the NRC’s panel data regressions supported the conclusion that RTC laws decreased murder. We evaluate the NRC evidence and show that, unfortunately, the regression estimates presented in the report appear to be incorrect. We improve and expand on the report’s county data analysis by analyzing an additional six years of county data as well as state panel data for the period 1977–2006. While we have considerable sympathy with the NRC’s majority view about the difficulty of drawing conclusions from simple panel data models, we disagree with the NRC report’s judgment that cluster adjustments to correct for serial correlation are not needed. Our randomization tests show that without such adjustments, the Type 1 error soars to 40–70%. In addition, the conclusion of the dissenting panel member that RTC laws reduce murder has no statistical support. Finally, our article highlights some important questions to consider when using panel data methods to resolve questions of law and policy effectiveness. Although we agree with the NRC’s cautious conclusion regarding the effects of RTC laws, we buttress this conclusion by showing how sensitive the estimated impact of RTC laws is to different data periods, the use of state versus county data, particular specifications, and the decision to control for state trends. Overall, the most consistent, albeit not uniform, finding to emerge from both the state and the county panel data models conducted over the entire 1977–2006 period with and without state trends and using three different models is that aggravated assault rises when RTC laws are adopted. For every other crime category, there is little or no indication of any consistent RTC impact on crime. It will be worth exploring whether other methodological approaches and/or additional years of data will confirm the results of this panel data analysis.

Racial Enclaves and Density Zoning: The Institutionalized Segregation of Racial Minorities in the United States

admin — Thu, 23 Jun 2011 19:59:44 +0000

Previous research on segregation stresses things like urban form and racial preferences as primary causes. The author finds that an institutional force is more important: local land regulation. Using two datasets of land regulations for the largest U.S. metropolitan areas, the results indicate that anti-density regulations are responsible for large portions of the levels and changes in segregation from 1990 to 2000. A hypothetical switch in zoning regimes from the most exclusionary to the most liberal would reduce the equilibrium gap between the most and least segregated Metropolitan Statistical Areas by at least 35% for the ordinary least squares estimates.

Optimal Compensation for Regulatory Takings

admin — Thu, 23 Jun 2011 19:59:44 +0000

I develop a model in which there are two groups in society, one of which bears all the costs of a regulation that provides (potentially unequal) benefits to both groups. Absent compensation, a biased government will not choose the efficient level of regulation. If taxes are nondistorting, a compensation rule can be designed to achieve the first best outcome. The optimal rule always involves a positive degree of compensation regardless of the direction of the government bias. When taxes are distortionary, the first best outcome cannot be achieved, and the optimal level of compensation may be zero.

Institutional Investors and Proxy Voting on Compensation Plans: The Impact of the 2003 Mutual Fund Voting Disclosure Rule

admin — Thu, 23 Jun 2011 19:59:44 +0000

This article examines the impact on shareholder voting of the Securities and Exchange Commission (SEC)’s mutual fund voting disclosure rule, using a paired sample of management proposals on executive equity incentive compensation plans submitted before and after the rule change. In enacting the rule, the SEC intended to increase funds’ engagement in corporate governance. While voting support for management has decreased over time, we find no evidence that mutual funds’ support for management declined after the rule change, as expected by the SEC and advocates of disclosure. In fact, we find evidence of increased support for management by mutual funds after the change.

Cover

admin — Thu, 23 Jun 2011 19:59:43 +0000

Willingness to Pay, Death, Wealth, and Damages

admin — Thu, 23 Jun 2011 19:59:43 +0000

When people face risk of death, they overinvest in risk reduction: first, they discount their risk-reduction costs by the probability of death; second, they consider the consumption of their wealth as a benefit from risk reduction. From a social perspective, people’s wealth remains after their death. Therefore, discounting costs by the probability of death and taking into account the benefit of wealth consumption are socially inefficient. Moreover, even for the individual under risk of death, the investment in risk reduction is excessive. We discuss market mechanisms that could correct the inefficiencies; we argue that “willingness to pay” as a criterion for valuing life should radically change; and we show how the results of the economic analysis of tort law should be modified.

Prison Conditions and Recidivism

admin — Thu, 23 Jun 2011 19:59:43 +0000

The authors examine the impact of prison conditions on future criminal behavior. The take over is based on a unique dataset on the post-release behavior of about twenty thousand Italian former prison inmates. The authors use variation in prison assignment as a means of identifying the effects of prison overcrowding, deaths in prison, and degree of isolation on the probability of reoffending. They do not find compellingevidence of (specific) deterrent effects of experienced prison severity. The measures of prison severity do not reduce the probability of recidivism. Instead, all point estimates suggest that harsh prison conditions increase post-release criminal activity, though they are not always precisely estimated.

Subscription

admin — Thu, 23 Jun 2011 19:59:43 +0000

The Brady Rule May Hurt the Innocent

admin — Thu, 23 Jun 2011 19:59:43 +0000

Mandatory disclosure of evidence (the so-called Brady rule) is considered to be among the most important bulwarks against prosecutorial misconduct. While protecting the generality of defendants in the criminal process, we show that under certain reasonable assumptions this procedural mechanism may hurt innocent defendants by inducing prosecutors to adjust their behavior to their detriment. The main rationale for our thesis is that, if forced to reveal exculpatory information, the prosecutor might not look for that information in the first place, and in turn this could harm the innocent under certain reasonable conditions. We extensively discuss our results in the context of the economic literature on criminal procedure.

admin — Thu, 23 Jun 2011 19:59:43 +0000

Are Underground Markets Really More Violent? Evidence from Early 20th Century America

admin — Thu, 23 Jun 2011 19:59:43 +0000

The violent nature of illegal markets is one rationale for legalizing the sale of narcotics. High U.S. crime rates during the 1920s are regularly presented as evidence of the strong positive relationship between market illegality and violence. The author tests this theory by exploiting state-level variation in homicides and in the passage and repeal of temperance laws before and after Federal Prohibition. Support for the “wet” cause was positively associated with homicides in dry states. However, on average, murder rates did not increase when alcohol markets were criminalized. Observed crime trends during the early 20th century are primarily explained by demographic changes.

The Costs and Benefits of a Separation of Powers–An Incomplete Contracts Approach

admin — Thu, 23 Jun 2011 19:59:43 +0000

The separation of the legislative, executive, and judiciary powers is a key principle in most democratic constitutions. We analyze the costs and benefits of separating legislature and executive in an incomplete contracts model: the executive can decide to implement public projects. Under separation of powers, the legislature sets up a decision-making framework that leaves the executive with the residual decision-making rights. Separation of powers is the more beneficial, the larger the danger of extreme policy preferences of the residual political decision maker.

Editorial Board

admin — Thu, 23 Jun 2011 19:59:43 +0000

Government Takings: Determinants of Eminent Domain

admin — Thu, 23 Jun 2011 19:59:43 +0000

There is a well-documented link between institutions of secure property rights and economic development. The increasing use of eminent domain to transfer property from one private owner to another for private benefit, upheld in the Supreme Court’s controversial Kelo decision, undermines the security of property rights. While previous research examines the effect of eminent domain use, this paper explores which factors explain varying levels of eminent domain use for private benefit across states. The author finds that corruption, election of state Supreme Courts, federalism, and economic freedom are important determinants of eminent domain use for private benefit.

Bargaining in the Shadow of the Website: Disclosure’s Impact on Medical Malpractice Litigation

admin — Fri, 12 Nov 2010 20:08:44 +0000

This study investigates the significance of confidentiality and disclosure for medical malpractice litigation. Starting in the mid-1990s, seventeen states began posting information on a doctor’s specific history of medical malpractice claims on state-run websites. The laws creating these sites altered the level of confidentiality that would accompany litigation and settlement. Taking into account the varying disclosure requirements across the states, we examine the impact of the altered levels of confidentiality on litigant behavior. We find evidence of two, non-exclusive effects of disclosure. First, we find evidence that defendants value confidentiality and are no longer willing to pay a confidentiality premium when websites disclose settlement outcomes. Second, we find evidence that website disclosure changes the composition of claims.

Price Discrimination with Contract Terms: The Lost-Volume Problem

admin — Fri, 12 Nov 2010 20:08:44 +0000

The “lost-volume” problem in contract law poses a problem of contract design. A seller with market power who faces buyers with private valuations for the subject of sale solves the problem with a combination of a required positive down payment and a later transaction price above cost. This combination maximizes the surplus the seller can capture from the buyers, but the contract is inefficient: the positive down payment cuts off contracting and a price above cost induces breach by buyers who value the product above its cost. The lost-volume question, then, is whether a court should enforce the inefficient contract the seller prefers or should instead impose one of two mandatory rules: permitting the seller to recover full lost-profit damages or no damages at all. These mandatory rules produce inefficiencies of their own. This paper’s contribution is (a) to clarify the lost-volume problem; (b) to show that the three judicially implementable solutions cannot be Pareto-ranked abstractly: which outcome best turns on the distribution of buyer valuations in particular markets; (c) to show which value distributions likely would yield efficiency under each of the solutions; and (d) to argue, for second-order reasons, that courts should enforce the consensual contract rather than impose either mandatory rule.

Injunctions, Hold-Up, and Patent Royalties1: September 2010

admin — Fri, 12 Nov 2010 20:08:44 +0000

A simple model is developed to study royalty negotiations between a patent holder and a downstream firm whose product is more valuable if it includes a feature covered by the patent. The downstream firm must make specific investments to develop, design, and sell its product before patent validity and infringement will be determined. The hold-up component of the negotiated royalties is greatest for weak patents covering a minor feature of a product with a high margin between price and marginal cost. For weak patents, the hold-up component of negotiated royalties remains unchanged even if negotiations take place before the downstream firm designs its product. The analysis has implications for the use of injunctions in patent infringement cases.

Do Gun Buybacks Save Lives? Evidence from Panel Data

admin — Fri, 12 Nov 2010 20:08:44 +0000

In 1997, Australia implemented a gun buyback program that reduced the stock of firearms by around one-fifth (and nearly halved the number of gun-owning households). Using differences across states, we test whether the reduction in firearms availability affected homicide and suicide rates. We find that the buyback led to a drop in the firearm suicide rates of almost 80%, with no significant effect on non-firearm death rates. The effect on firearm homicides is of similar magnitude but is less precise. The results are robust to a variety of specification checks and to instrumenting the state-level buyback rate.

The Voting Behavior of Young Disenfranchised Felons: Would They Vote if They Could?

admin — Fri, 12 Nov 2010 20:08:44 +0000

This paper utilizes two nationally representative surveys to study the voting behavior of young adult criminals. We find significant differences in voter turnout and registration rates of criminals and noncriminals. According to the 1997 National Longitudinal Survey of Youth, just 26% of ever incarcerated individuals voted in the 2004 Presidential election; these individuals were thirty-one percentage points less likely to vote than nonincarcerated individuals. Regressions of voting on arrest and incarceration and a large set of observable characteristics indicate that analyses based on data sets excluding measures of criminal history will overestimate voter turnout rates by six to nineteen percentage points.

Judicial Independence and the Validity of Controverted Elections

admin — Fri, 12 Nov 2010 20:08:44 +0000

This article examines whether the judges of the French Constitutional Court demonstrated partisanship when ruling on the validity of the elections to the lower house of the French Parliament between 1958 and 2005. It uses a new dataset on the decisions of the Constitutional Court which takes into account the characteristics of the controverted parliamentary elections. The rulings of the Constitutional Court are found to be biased against far-right candidates. However, the judges are also found to display some form of independence vis-à-vis the government since they do not favor candidates from the ruling party when they render their decisions.

On the Receipt of the Ronald H. Coase Medal: Uncertainty, the Economic Crisis, and the Future of Law and Economics

admin — Fri, 12 Nov 2010 20:08:44 +0000

This paper discusses problems in economic analysis of law arising from the increased specialization of academic practitioners of this subfield of economics, which takes as its subject a uniquely fluid, contestable, and inveterately normative subject—namely, the law. As a result of the limited acquaintance of most economic analysts of law with macroeconomic theory (owing to their specialization in relevant fields of microeconomics), they have (with important exceptions, however) had trouble contributing to the understanding of the recent financial crisis. The crisis underscores the importance, across a range of issues including financial and antitrust law, of the economics of uncertainty (in the Knight-Keynes sense) and organization economics.

The Impact of Tort Reform on Private Health Insurance Coverage, February 2010

admin — Fri, 12 Nov 2010 20:08:44 +0000

This study evaluates tort reform’s impact on private health insurance coverage. Tort reform may reduce costly damage awards and defensive medicine. On the other hand, tort reform may increase health care costs by reducing doctors’ caretaking or increasing questionable treatments. Reducing health care costs should increase health insurance coverage rates, while cost increases should decrease coverage rates. We find that between 1981 and 2007 damage caps, collateral source reform, and joint-and-several liability reform increased health insurance coverage among price-sensitive groups between one-half and one percentage points each. We conclude that tort reform reduces health care costs, at least for price-sensitive groups.

The Coase Medal

admin — Fri, 12 Nov 2010 20:08:44 +0000

The board of the American Law and Economics Association decided 2 years ago to establish the Ronald H. Coase medal to be awarded bi-annually in recognition of major contributions to the field of law and economics. The American Law and Economics Review will publish each medal recipient’s lecture. The first medal recipient is Richard A. Posner, to whom the medal was presented by Lucian Bebchuk at the May 2010 meeting of the Association in Princeton, NJ. Lucian Bebchuk’s remarks at the presentation of the medal follow.

Influence and Deterrence: How Obstetricians Respond to Litigation against Themselves and Their Colleagues

admin — Thu, 08 Apr 2010 05:59:04 +0000

The willingness of individuals to engage in a harmful act may be influenced by direct personal experiences and the experiences of others, which can inform individuals about the likely consequences of their actions. In this paper, we examine how obstetricians respond to litigation. It is contended that obstetricians respond to increases in litigiousness by performing more cesarean sections. Using micro data, we examine whether physicians perform more cesareans after they or their colleagues have been contacted about a lawsuit. We observe very small, short-lived increases in cesarean section rates. It does not appear that the recent sharp rise in cesarean section rates is in direct response to litigation.

Strategic Statutory Interpretation by Administrative Agencies

admin — Thu, 08 Apr 2010 05:59:04 +0000

Many statutes are administered by administrative agencies. This paper shows that, when interpreting an ambiguous statute, administrative agencies choose between two strategies of statutory interpretation: the risky strategy, a relatively aggressive interpretation that provokes an appeal by the firm; and the safe strategy, a relatively nonaggressive interpretation that the firm complies with. The paper also shows that a change in the level of judicial deference may result in a shift from the risky strategy to the safe one, or vice versa. Therefore, contrary to the commonly held view, an increase in the level of judicial deference may result in agencies choosing a less aggressive statutory interpretation, and in more court decisions reversing agencies’ statutory interpretation.

The Changing Landscape of Blockbuster Punitive Damages Awards

admin — Thu, 08 Apr 2010 05:59:04 +0000

This article investigates the determinants of the blockbuster punitive damages awards of at least $100 million. As of the end of 2008, there had been one hundred such awards with an average value of $3.0 billion. The U.S. Supreme Court decision in State Farm v. Campbell suggested a single-digit upper bound on the punitive damages/compensatory damages ratio, which reduced the annual number of blockbuster awards, the total annual value of blockbuster awards, and the punitive damages/compensatory damages ratio. Applying the 1:1 ratio from Exxon Shipping Co. et al. v. Baker et al. broadly would eliminate most of the blockbuster awards.

Corruption and the Distortion of Law Enforcement Effort

admin — Thu, 08 Apr 2010 05:59:04 +0000

We consider the distortions that corruption generates in law enforcement. Corruption dilutes deterrence, and hence the government needs to adjust law enforcement activities appropriately. We argue that this distortion is not the only one taking place. A misalignment of goals between the government and the enforcers results in another set of agency costs by which activities that put enforcers in direct contact with criminals increase at the cost of other law enforcement activities. The paper discusses the implications of both distortions.

The Economics of Injunctive and Reverse Settlements

admin — Thu, 08 Apr 2010 05:59:04 +0000

This paper extends the economic literature on settlement and draws some practical insights on reverse payment settlements. The key contributions follow from the distinction drawn between standard settlements, in which the status quo is preserved, and injunctive settlements, w and under which reverse settlements will be observed among injunctive settlements. Reverse settlements are likely when the stakes associated with the injunction are large relative to damages and litigation costs. The analysis has broader implications for efficient remedies and legal rules. (JEL K10, K40, K41, D24, O34)

Do Independent Prosecutors Deter Political Corruption? An Empirical Evaluation across Seventy-eight Countries

admin — Thu, 08 Apr 2010 05:59:04 +0000

It is hypothesized that prosecution agencies that are dependent on the executive have less incentives to prosecute crimes committed by government members that in turn increases their incentives to commit such crimes. Here, this hypothesis is put to an empirical test focusing on a particular kind of crime, namely corruption. In order to test it, it was necessary to create an indicator measuring de jure as well as de facto independence of the prosecution agencies. The regressions show that de facto independence of prosecution agencies robustly reduces corruption of officials.

Externalities from Recycling Laws: Evidence from Crime Rates

admin — Thu, 08 Apr 2010 05:59:04 +0000

This paper tests whether laws that encourage bottle recycling and also increase the labor incomes of low-wage workers have the additional effect of reducing petty crime rates. A simple choice theory model of crime participation and labor supply suggests that low-wage workers may substitute time and effort away from illegal activity to legal and remunerative recycling activity. Between 1973 and 2001, eleven states and one city enacted bottle recycling laws, and this paper exploits the variation in the year of implementation of the bottle laws to measure and test for any reduction in crime rates. The results show that city-level petty crime rates in bottle law states are on average 11% lower than city-level petty crime rates in non–bottle law states. Although the primary positive benefits of recycling income go to low-income individuals, the unexpected secondary benefit of lower crime rates affects both high- and low-income individuals. (JEL Q50, K40)

Municipal Bond Ratings and Citizens’ Rights

admin — Thu, 08 Apr 2010 05:59:04 +0000

Municipal bond ratings give investors information about bonds’ default probabilities. They also affect societal objectives by altering the cost of public infrastructure but are not regulated. This paper explores the possibility that these ratings involve behavior analogous to redlining, which is discrimination against people in places with a high minority composition. Drawing on our civil rights laws, the paper develops a regulatory framework to balance societal objectives with a rating agency’s business interests. An application to the ratings of cities’ general obligation bonds finds evidence suggesting redlining-type behavior. This analysis supports the need for regulation of municipal bond ratings.

Auditor Independence and the Quality of Information in Financial Disclosures: Evidence for Market Discipline versus Sarbanes-Oxley Proscriptions

admin — Thu, 08 Apr 2010 05:59:04 +0000

Does auditor independence increase the quality of financial disclosures, and is regulation necessary to realize such improvements? Conventional wisdom answers “yes!,” but lacks support from scholarly studies. We thus investigate whether auditor independence affects earnings quality in ways that prior research would have missed, and consider the efficiency-consequences of regulation that restricts auditors from producing non-audit services (NAS). Results from our research design offer stronger evidence that auditor independence increases earnings quality. Importantly, however, they offer little evidence that a client-firm’s choice of auditor independence creates externalities, and thus speak more directly against the recent Sarbanes–Oxley restriction on NAS.

Introduction to the Death Penalty Symposium

admin — Thu, 04 Feb 2010 11:12:10 +0000

Introduction to the Death Penalty Symposium

admin — Thu, 04 Feb 2010 11:12:10 +0000

Potential Savings from Abolition of the Death Penalty in North Carolina