American Law and Economics Review - current issue

Management Always Wins the Close Ones

Listokin, Y. — 2008-12-17

While much has been made of "shareholder democracy" as a lever of corporate governance, there is little evidence about the efficacy of voting. This paper empirically examines votes on management-sponsored resolutions and finds widespread irregularities in the distribution of votes received by management. Management is overwhelmingly more likely to win votes by a small margin than lose by a small margin. The results indicate that, at some point in the voting process, management obtains highly accurate information about the likely voting outcome and, based on that information, acts to influence the vote. The precise point at which this occurs is unclear, though it is likely to be near the "poll-closing" time. Whatever the cause of management's advantage, it is clear that shareholder voting does not constitute a "representative" direct democracy.

Defense Costs and Insurer Reserves in Medical Malpractice and Other Personal Injury Cases: Evidence from Texas, 1988-2004

Black, B., Hyman, D. A., Silver, C., Sage, W. M. — 2008-12-17

We study defense costs for commercially insured personal injury tort claims in Texas over 1988–2004, and insurer reserves for those costs. We rely on detailed case-level data on defense legal fees and expenses, and Texas state bar data on lawyers’ hourly rates. We study medical malpractice ("med mal") cases in detail, and other types of cases in less detail. Controlling for payouts, real defense costs in med mal cases rise by 4.6 percent per year, roughly doubling over this period. The rate of increase is similar for legal fees and for other expenses. Real hourly rates for personal injury defense counsel are flat. Defense costs in med mal cases correlate strongly with payouts, both in ordinary least squares (OLS) and in an instrumental variable analysis. They also correlate with the stage at which a case is resolved, and case duration. Mean duration declined over time. Med mal insurers predominantly use outside counsel. Case-level variation in initial expense reserves predicts a small fraction of actual defense costs. In other areas of tort litigation (auto, general commercial, multi-peril, and other professional liability), defense costs rose by 2.2 percent per year. Defense costs in these cases are predicted by the same factors as in med mal cases, plus the presence of multiple defendants.

Insurer reserving practices raise some puzzles. Med mal insurers did not react to the sustained rise in defense costs by adjusting their expense reserves, either in real dollars or relative to reserves for payouts. Thus, expense reserves declined substantially relative to defense costs. In other litigation areas, expense reserves rose along with defense costs.

Does Post-Accident Drug Testing Reduce Injuries? Evidence from a Large Retail Chain

Morantz, A. D., Mas, A. — 2008-12-17

This study examines the effects on occupational injury claims of a recently implemented post-accident drug testing (PADT) program in a large retail chain. We find that claims have fallen significantly in affected districts, suggesting that PADT programs can reduce injury claims, even in workplaces that already utilize other forms of drug testing. Our results also suggest that some types of employees—such as full-time workers, male workers, and higher-tenure workers—are particularly responsive. Finally, we find some "circumstantial evidence" that a portion of the observed decline could be caused by employees’ reduced willingness to report workplace accidents.

Bankruptcy Law and Entrepreneurship

Armour, J., Cumming, D. — 2008-12-17

Recent initiatives in a number of countries have sought to promote entrepreneurship through relaxing the legal consequences of personal bankruptcy. Whilst there is an intuitive link, relatively little attention has been paid to the question empirically, particularly in the international context. We investigate the relationship between bankruptcy laws and entrepreneurship using data on self-employment over 16 years (1990–2005) and fifteen countries in Europe and North America. We compile new indices reflecting how "forgiving" personal bankruptcy laws are. These measures vary over time and across the countries studied. We show that bankruptcy law has a statistically and economically significant effect on self-employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors.

Evidentiary Standards and Information Acquisition in Public Law

Stephenson, M. C. — 2008-12-17

This article considers the type of evidence that an overseer (e.g., a court) should require before allowing a government agent to take some proposed action. The court can increase agency research incentives by prohibiting actions unless the agent produces supporting evidence, and/or by permitting action even when the agent uncovers adverse evidence. The court thus faces a trade-off between an evidentiary standard's ex post effects on the agent's policy decision and its ex ante effects on the agent's incentive to do research. An extension allows the court to make research effort a precondition for action, regardless of the evidence produced.

The Optimal Penalty for Sexually Transmitting HIV

Francis, A. M., Mialon, H. M. — 2008-12-17

We develop an endogenous signaling model of sexual behavior and testing under risk of HIV infection to determine whether current criminal laws against exposure to HIV are efficient and to identify the socially optimal law. We consider a law to be socially optimal if it induces information revelation, so that non-fully-informed HIV transmission does not occur. We find that current HIV-specific criminal laws in the United States, which stipulate a single penalty for knowingly exposing another individual to risk of HIV infection, are not generally optimal. The optimal law stipulates a single penalty for knowingly or unknowingly transmitting HIV, and no penalty for exposing another individual to risk of infection without transmitting the virus. The optimal expected penalty is estimated to be approximately 1–2 years of prison.

The Economics of US Civil War Conscription

Perri, T. J. — 2008-12-17

US conscription in the Civil War is analyzed. Conscription was designed to gain federal control of enlistments, leaving state and local governments much of the fiscal and administrative responsibility for raising troops. Due to the hiring of substitutes, the payment of a fee to avoid service (commutation), and community-provided funds, only 2% of those who served were conscripted. Theory suggests that federal pay and local government bonuses increase as the marginal opposition by citizens to the number of reluctant draftees increases, and commutation could have lowered social cost. Instead, commutation was a binding ceiling on the price of substitutes.

Global Market Surveillance

Cumming, D., Johan, S. — 2008-12-17

This paper provides evidence on market surveillance from exchanges and securities commissions from twenty-five jurisdictions in North, Central and South America, Western and Eastern Europe, Africa, and Asia. Exchanges as SROs engage in a greater range of single-market surveillance of market manipulative practices than securities commissions, but the scope of cross-market surveillance activity is very similar among exchanges and securities commissions. Cross-market surveillance is more effective with information-sharing arrangements, and securities commissions are more likely to engage in information sharing than exchanges are. Relative to the scope of single-market surveillance, the scope of cross-market surveillance shows a stronger positive association with trading velocity, the number of listed companies, and market capitalization. The data also indicate that as at 2005, there is ample scope for jurisdictions to expand their cross-market surveillance and thereby stimulate investor confidence and trading activity.