American Law and Economics Review - recent issues

The Economics of the Bill of Rights

Mialon, H. M., Rubin, P. H. — 2008-05-03

We elucidate, connect, and synthesize the literature that employs economics to study the individual rights and freedoms protected by the constitutional amendments comprising the Bill of Rights, especially as they relate to crime. Economics is uniquely suited to studying decisions involving tradeoffs, and each of the amendments requires tradeoffs. Emphasizing these tradeoffs allows us to discuss the constitutional rights in terms of "more or less," as opposed to taking an absolutist approach. We find that the economic literature on the amendments of the Bill of Rights is vibrant and growing, and that viewing the amendments within the framework of economics is highly useful.

How Important is State Enforcement for Trade?

Leeson, P. T. — 2008-05-03

According to conventional wisdom, state-provided contract enforcement is critical to an expansive, growing trade. This paper estimates state enforcement's impact on international trade for one hundred and fifty-seven countries over the last half a century. I find that state enforcement increases trade between nations by about fifteen to thirty-eight percent. This effect is significant though modest compared to intuition about the importance of government enforcement, the long-run growth of trade, and the estimated effect of trade's other determinants. Thus, while state enforcement appears to enhance trade, it does so less impressively than its status as essential for flourishing trade tends to suggest.

Interpreting Empirical Estimates of the Effect of Corporate Governance

Listokin, Y. — 2008-05-03

Empirical studies of corporate governance address potential endogeneity problems, but fail to place endogeneity in the context of a model and ignore the possibility of disparate treatment effects across companies. This paper tackles these defects. The model and analysis in the paper demonstrate that: (1) Valid and positive estimates for the effect of governance can only arise if there is random variation in governance and governance is systematically underproduced, or governance is chosen randomly without bias and the randomness under study concerns a subpopulation with below-average governance. (2) Governance models that correct for endogeneity using subsamples of firms, fixed effects, or instrumental variables estimates focus on subpopulations of companies that may have different responses to a governance treatment than the average firm.

Case Dismissed: Police Discretion and Racial Differences in Dismissals of Felony Charges

Tomic, A., Hakes, J. K. — 2008-05-03

Prior research has produced conflicting evidence of racial profiling during traffic stops. We instead analyze rates of case dismissal against felony arrestees by race. Superficial bias based on "unobservables" should be reduced because of the evidentiary requirements and nonnegligible costs of filing charges. Nonetheless, using data from over 58,000 US felony cases from 1990 to 1998, our probit analysis finds higher rates of dismissals for blacks for the subset of crimes that rely on police to make snap judgments. This suggests there may be more aggressive policing of blacks in these situations. Case dismissal rates are also elevated for both whites and blacks when blacks are underrepresented on local police forces.

Patent-Secret Mix in Complex Product Firms

Ottoz, E., Cugno, F. — 2008-05-03

Different protection mechanisms may be employed at the same time when an innovation is comprised of separately protectable components. If patents and trade secrets can be mixed in protecting single innovations, a strengthening in patent breadth may induce a lower level of patenting, as innovators are more prone to rely on secrecy.

Guilt Shall Not Escape or Innocence Suffer? The Limits of Plea Bargaining When Defendant Guilt is Uncertain

Bjerk, D. — 2007-10-26

This article examines optimal prosecutor behavior with respect to plea bargaining when defendant guilt is uncertain. I show that when jury beliefs and behavior are determined endogenously in equilibrium along with defendant and prosecutor behavior, plea bargaining can play only a limited role in managing society's conflicting desires to maximize punishment of the guilty and minimize punishment of the falsely accused. In particular, while it can be optimal for prosecutors to use plea bargaining to induce a large fraction of guilty defendants to voluntarily sort themselves from the innocent, such sorting must come at the cost of imposing relatively short sentences on such guilty defendants who accept plea bargains.

Tort Liability Litigation Costs for Commercial Claims

Hersch, J., Viscusi, W. K. — 2007-10-26

This article analyzes tort liability litigation costs using the Texas Department of Insurance Commercial Liability Insurance Closed Claim database for the years 1988–2004. Insurer costs to defend claims in which a suit was filed average $35,000 per claim in 2004$, which corresponds to a share of 0.18 of total expenditures. Claims with higher stakes and complexity lead to greater reliance on outside counsel and less reliance on in-house counsel. Total transactions costs for each dollar received by claimants average $0.75 for all claims and $0.83 for claims in which the claimant retained an attorney and a suit was filed.

Bundled Discounts, Leverage Theory, and Downstream Competition

Simpson, J., Wickelgren, A. L. — 2007-10-26

Under plausible circumstances, a monopolist in one market can use its control of prices in that market to force competing downstream buyers to sign tying contracts that will lever its monopoly into another market. Specifically, the monopolist of the tying good can place each downstream buyer in a prisoner's dilemma by offering them more favorable pricing on the tying good if they sign a requirements-tying contract covering the tied good. Since a buyer benefits on receiving more favorable pricing on the tying good and the competitors do not, and suffers if the competitors receive more favorable pricing on the tying good and the buyer does not, buyers will sign the tying contract even when they would earn higher profits if they all refused to sign. This enables a monopolist in one market to inefficiently exclude an entrant in another market.

Amended Final-offer Arbitration Outperforms Final-offer Arbitration

Deck, C., Farmer, A., Zeng, D.-Z. — 2007-10-26

Amended final-offer arbitration (AFOA) has been developed as an attractive alternative mechanism to final-offer arbitration (FOA). Under AFOA, more reasonable offers win, but the outcome is determined by the loser's offer and the arbitrator's value. In AFOA, disputants making extreme offers are penalized, thereby encouraging compromise. This article compares the theoretical and behavioral properties of AFOA and FOA. Controlled laboratory experiments indicate that AFOA significantly outperforms FOA, generating substantially greater prearbitration settlement. Consistent with theoretical predictions, offers converge under AFOA; however, FOA offers neither converge nor are consistent with theoretical predictions. This work suggests practitioners should consider adopting AFOA over FOA.

Successor Liability and Asymmetric Information

Choi, A. H. — 2007-10-26

The doctrine of successor liability transfers tort liability arising from the seller's past conduct from the seller to the buyer. If the buyer has as much information about the liability as the seller, all beneficial acquisitions take place and the seller takes the efficient level of precaution. However, if the seller has more information about the liability than the buyer, not all beneficial acquisitions are consummated and the seller takes a suboptimal level of precaution. I argue that, in the presence of information asymmetry, the courts should increase the damages against the (potential) seller to provide better incentives to take precaution while decreasing the damages against the buyer to encourage more beneficial asset sales.

Do Harsher Prison Conditions Reduce Recidivism? A Discontinuity-based Approach

Chen, M. K., Shapiro, J. M. — 2007-06-28

We estimate the causal effect of prison conditions on recidivism rates by exploiting a discontinuity in the assignment of federal prisoners to security levels. Inmates housed in higher security levels are no less likely to recidivate than those housed in minimum security; if anything, our estimates suggest that harsher prison conditions lead to more post-release crime. Though small sample sizes limit the precision of our estimates, we argue that our findings may have important implications for prison policy, and that our methodology is likely to be applicable beyond the particular context we study.

Sidgwick's Utilitarian Analysis of Law: A Bridge from Bentham to Becker?

Medema, S. G. — 2007-06-28

Jeremy Bentham's utilitarian analysis of crime and punishment is regularly characterized as an inspiration for the economic analysis of law, whereas Henry Sidgwick has been all but ignored in the discussions of the history of law and economics. Sidgwick is well known as the godfather of Cambridge welfare economics. Yet, as we will show, his utilitarian analysis of issues in property, contract, tort, and, criminal law reflects themes now associated with the Chicago approach and advances on Bentham in multiple ways—including through the use of marginal analysis—making him a bridge on the road from Bentham to Becker.

On Understanding the Increase in U.S. Patent Litigation

Cook, J. P. — 2007-06-28

Patent litigation in the United States has increased dramatically in the last 20 years. Understanding this increase, and the concomitant increase in patent grants, can help us to better understand the sources of technological innovation and productivity. The approach described here provides a means to simultaneously examine both the "friendly court" hypothesis and the hypothesis of an increase in research productivity associated with the information age. The results support the notion that both hypothesized factors, changes in court outcomes and increased research productivity and the associated increase in patenting activity, have played a role in the growth of patent litigation.

An Economic Analysis of State and Individual Responsibility Under International Law

Posner, E. A., Sykes, A. O. — 2007-06-28

The international law of state responsibility determines when states are liable for international law violations. States are generally liable when they have control over the actions of wrongdoers; thus, the actions of state officials can implicate state responsibility whereas the acts of private citizens usually do not. We argue that the rules of state responsibility have an economic logic similar to that of vicarious liability in domestic law: the law in both cases provides third parties with incentives to control the behavior of wrongdoers whom they can monitor and influence. We also discuss international legal remedies and individual liability under international criminal law.

Is There An Expressive Function of Law? An Empirical Analysis of Voting Laws with Symbolic Fines

Funk, P. — 2007-06-28

This article empirically investigates whether law affects behavior beyond deterrence ("expressive function of law"). With Swiss panel data, I find that the legal abolition of the voting duty significantly decreased average turnout, even though the fines for not voting have only been symbolic. As for the size of Cantonal turnout reduction, it widely differs between the Cantons and is highly correlated with voter participation before the removal of the voting duty. In contrast to the voting duty, the introduction of postal voting did not affect voter turnout in spite of the substantial decrease in transaction costs. Therefore, in public good areas such as voting, even a sanctionless law targeting at the civic duty might have a bigger impact on behavior than actions which affect the costs of provision for the public good.

A Bargaining Model of Holdouts and Takings

Miceli, T. J., Segerson, K. — 2007-06-28

The holdout problem is commonly cited as the justification for eminent domain, but the nature of the problem is not well understood. This article models the holdout problem in a bargaining framework, where a developer seeks to acquire several parcels of land for a large-scale development. We show that in the absence of eminent domain, holdouts are a significant threat, resulting in costly delay. However, if the developer has the power to use eminent domain to acquire the land from holdouts, all sellers will bargain, thus avoiding delay. An offsetting cost is that owners may negotiate prices below their true value, possibly resulting in excessive transfer of land to the developer.

Optimal Discretion in the Application of Rules

Shavell, S. — 2007-06-28

Discretion is examined as a feature of the design of rule-guided systems. That is, given that rules have to be administered by some group of persons, called adjudicators, and given that their goals may be different from society's (or a relevant organization's), when is it socially desirable to allocate discretionary authority to the adjudicators and, if so, to what extent? The answer reflects a tradeoff between the informational advantage of discretion—that adjudicators can act on information not included in rules—and the disadvantage of discretion—that decisions may deviate from the desirable because adjudicators' objectives are different from society's. The control of discretion through limitation of its scope, through decision-based payments to adjudicators, and through the appeals process, is also considered.

Should Legal Empiricists Go Bayesian?

Strnad, J. — 2007-06-28

Bayesian empirical approaches appear frequently in fields such as egineering, computer science, political science and medicine, but almost never in law. This article illustrates how such approaches might be very useful in empirical legal studies. In particular, Bayesian approaches enable a much more natural connection between the normative or positive issues that typically motivate such studies and the empirical results.