Journal of Law, Economics, and Organization - Advance Access

Optimal Standards of Negligence When One Party Is Uninformed of the Standards

Lando, H. — 2009-07-01

This article analyzes optimal negligence standards when only one of two (future) parties will be informed of the standards. When the informed party is the injurer and acts first, the simple negligence rule is optimal, and under certain conditions, the first best standard of due care is optimal. The informed party will have an incentive to comply with the standard due to the discontinuity of the negligence rule, whereas the uninformed party may infer this and hence also take appropriate precautions. In general, the optimal policy for the court depends on who acts first and on who the injurer is. Thus, optimal rules are contributory negligence when the informed party is the victim and acts first, no liability when the uninformed party is the injurer and acts first, and strict liability without contributory negligence when the uninformed party is the victim and acts first. (JEL K10, K13, K14)

Even if it is not Bribery: The Case for Campaign Finance Reform

Daley, B., Snowberg, E. — 2009-06-29

We develop a dynamic multidimensional signaling model of campaign finance in which candidates can signal their ability by enacting policy and/or by raising and spending campaign funds, both of which are costly. Our model departs from the existing literature in that candidates do not exchange policy influence for campaign contributions; rather, they must decide how to allocate their efforts between policymaking and fundraising. If high-ability candidates are better policymakers and better fundraisers, then they will raise and spend campaign funds even if voters care only about legislation. Campaign finance reform alleviates this phenomenon and improves voter welfare at the expense of politicians. Thus, we expect successful politicians to oppose true campaign finance reform. We also show that our model is consistent with findings in the empirical and theoretical campaign finance literature. (JEL D72, D82)

Legislative Pivots, Presidential Powers, and Policy Stability

Crisp, B. F., Desposato, S. W., Kanthak, K. — 2009-06-26

We offer a general model of policy making across presidential systems, exploring how checks and balances interact with legislative party systems to determine the responsiveness of political systems to electoral change. Using the two dominant theories of policy making in the United States as a starting point, we formally model the legislative process across presidential regimes characterized by a wide array of institutional designs, simulate expected policy behavior, and then test our models empirically with data capturing economic policy choices. (JEL D72, D71, H11, C63)

The Incorporation Choices of Privately Held Corporations

Dammann, J., Schundeln, M. — 2009-06-26

Exploiting a large new database, this article explores the incorporation choices of closely held U.S. corporations. The majority of corporations in our sample incorporate in the state in which their primary place of business (PPB) is located. However, among the corporations with 1000 or more employees, only about half incorporate in their PPB state, and of those that do not, more than half are incorporated in Delaware. We find statistically significant and robust evidence that corporations from states with judiciaries that are held in low esteem are more likely to incorporate outside of their PPB state. Furthermore, corporations are more likely to migrate away from states where the risk of veil piercing is perceived to be high, that have adopted so-called exculpation statutes, or that offer a particularly generous level of minority shareholder protection. (JEL K22, G38, H70, R30)

Is the World Flat? Country- and Firm-Level Determinants of Law Compliance

Chong, A., Gradstein, M. — 2009-06-26

This research revisits the effects of a country's institutional framework on individual firms' behavior, focusing, in particular, on firms' propensity to comply with legal rules. We purport to explain the variation in compliance with legal rules by employing a rich data set on thousands of firms from dozens of countries. We find that most of the variation emanates from countrywide differences in institutional quality, although various firm characteristics play a role as well. We also find indications that differences across countries diminish with the level of development. (JEL D21, K42, O17, O57)

Organized Business, Political Competition, and Property Rights: Evidence from the Russian Federation

Pyle, W. — 2009-06-23

Political competition and "merchant group" pressures have been pointed to as forces that limit state threats to the property rights of firms. This article presents evidence confirming their importance and highlighting an interesting feature of their interaction. Drawing on separate surveys of managers at industrial enterprises and directors of business associations in the Russian Federation, we demonstrate that a firm's willingness to contest government predation, its ability to influence reforms to its institutional environment, and its propensity to invest in physical capital are positively related both to the membership in a business association and to the level of political competition in its region. Of particular note, the relationship between association membership and property rights strengthens in less politically competitive regions. Business community collective action, that is, appears to serve as a substitute for political competition in securing firms' property rights. (JEL D23, D71, P26)

Determinants of Nationalization in the Oil Sector: A Theory and Evidence from Panel Data

Guriev, S., Kolotilin, A., Sonin, K. — 2009-06-23

In this article, we study nationalizations in the oil industry around the world during 1960–2006. We show, both theoretically and empirically, that governments are more likely to nationalize when oil prices are high and when political institutions are weak. We consider a simple dynamic model of the interaction between a government and a foreign-owned oil company. Even though nationalization is inefficient, it does occur in equilibrium when oil prices are high. The model's predictions are consistent with the analysis of panel data on nationalizations in the oil industry around the world since 1960. Nationalization is more likely to happen when oil prices are high and the quality of institutions is low, even controlling for country fixed effects. (JEL D23, L33, L71, P48)

Disobedience and Authority

Marino, A. M., Matsusaka, J. G., Zabojnik, J. — 2009-04-24

This article presents a theory of the allocation of authority in an organization in which centralization is limited by the agent's ability to disobey the principal. We extend the concept of real authority by observing that not only does the principal have to be informed to give an order but also the worker must be willing to follow the order. We show that workers are given more authority when they are costly to replace or do not mind looking for another job, even if they have no better information than the principal. The allocation of authority thus depends on external market conditions as well as the information and agency problems emphasized in the literature. We explore the implications of this insight for hiring policies and managerial styles.

The Distributional Consequences of Diversity-Enhancing University Admissions Rules

Chan, J., Eyster, E. — 2009-04-24

This article examines public attitudes toward university admissions rules by focusing on the imposition of the costs of racial diversity across majority citizens. High-income majority citizens, who tend to have better academic qualifications, favor more diversity under affirmative action, which imposes its costs on marginal majority candidates. Low-income majority citizens prefer less diversity under affirmative action and would rather achieve diversity by de-emphasizing academic qualifications. Increasing income inequality among majority citizens tends to reduce the median citizen's support for affirmative action. Our results help explain why affirmative action has become increasingly unpopular among white voters and why white voters who oppose affirmative action may support top-x-percent rules like those recently introduced in California, Florida, and Texas. (JEL D72, D78, I23)

Early Entrant Protection in Approval Regulation: Theory and Evidence from FDA Drug Review

2009-04-22

Early entrant protection in approval regulation exists when the first incumbents in an exclusive market niche receive more favorable regulatory treatment than later entrants. We show that this pattern can prevail for two reasons: regulatory capture and consumer co-optation. We consider a decision-theoretic model of dynamic product approval by an uncertain regulator. The model predicts early entrant protection even when later entrants offer quality improvements over market incumbents. We then test the model using duration analyses of New Drug Application approval times for 1080 new molecular entities submitted to the US Food and Drug Administration (FDA) from 1950 to 2006 and later approved. FDA approval times are shown to be increasing in order of market entry for the entire period studied and across numerous subsamples. A standard deviation rise in the log of order of entry is associated with a 3.6-month increase in expected FDA approval time. The entry-order gradient appears to be heavily influenced by disease-level variables but not by firm-level effects, supporting a consumer co-optation explanation and disfavoring capture and producer rent-seeking accounts. The gradient appears heightened by the 1962 Kefauver-Harris Amendments but unaffected by the 1992 Prescription Drug User Fee Act; the influence of some disease-level factors upon the gradient may have been reduced by the 1992 statute. (JEL C44, I18, L51, H11)

Competition, Monopoly, and Aftermarkets

Carlton, D. W., Waldman, M. — 2009-04-07

Consider a durable goods producer that has the option of monopolizing an aftermarket such as repair for its own product. An important question is whether such monopolization reduces welfare? We show that the answer to this question is frequently no. In particular, we explore three models that illustrate various ways in which aftermarket monopolization can reduce inefficiencies and thus increase social welfare and frequently also consumer welfare. Our article shows that efficiency enhancing aftermarket monopolization may be much more common than previous literature suggests. (JEL K21, L12, L49)

What Do We Talk About When We Talk About Corruption?

Mendez, F., Sepulveda, F. — 2009-03-03

In this article, we analyze the behavior of three objective measures of corruption: absolute corruption incidence, relative corruption incidence, and corruption rents. We present a theoretical model of bribery and investment in which these measures of corruption are defined and compared. We then study the changes that arise when key parameters of the model change and show that, under identical circumstances, the behavior of any particular corruption measure can differ completely from the behavior of the other measures. Furthermore, in our model high and low corruption lead to two types of equilibria. We show that the behavior of all three measures can vary substantially when the type of equilibrium changes. (JEL K42, D73, P37)

Opportunism in Organizations

Vafai, K. — 2009-02-06

This article characterizes the incentive contracts that optimally immunize an organization against the opportunistic activities of its members. We analyze an agency relationship with moral hazard where a principal relies on a supervisor to obtain verifiable information about an agent's output. The supervisor's discretion allows him to engage in two types of individual opportunism, namely abuse of power and abuse of authority, as well as two types of group opportunism, namely collusion with the agent and collusion with the principal. Individual opportunism occurs when the supervisor asks a tribute to reveal information, whereas group opportunism occurs when the supervisor receives a bribe to conceal information. We find that the effective, and hence most noxious, form of opportunism is individual opportunism and derive the opportunism-proof contracts, that is, the optimal contracts that protect the organization against both individual and group opportunism.

"The essence of an organization is limitation of the autonomy of all its members or parts, since all are subject to power from the others ..." (Hickson et al. 1971: 217).

"Corruption in general is harmful to economic, political, and organizational development. But all forms of corruption are not created equal. Some forms are more harmful than others" (Klitgaard 1988: 46).

Population-Based Liability Determination, Mass Torts, and the Incentives for Suit, Settlement, and Trial

Daughety, A. F., Reinganum, J. F. — 2009-02-05

We explore how the incentives of a plaintiff, when considering filing suit and bargaining over settlement, differ between suits associated with stand-alone torts cases and suits involving mass torts. We contrast "individual-based liability determination" (IBLD), wherein a clear description of the mechanism by which a defendant's actions translate into a plaintiff's harm is available, with "population-based liability determination" (PBLD), wherein cases rely on the prevalence of harm in the population to persuade a judge or jury to draw an inference of causation or fault. PBLD creates a "rational optimism effect" on the plaintiff's part that is inherent in many mass tort settings. This effect creates incentives for higher settlement demands and results in greater interim expected payoffs for plaintiffs and, thus, an increased propensity to file suit. Consequently, defendants in PBLD cases face increased ex ante expected costs compared with the IBLD regime, thereby increasing incentives to take care. (JEL K13, K41, D82)

Should Firms be Allowed to Indemnify Their Employees for Sanctions?

Mullin, W. P., Snyder, C. M. — 2009-01-20

Policymakers have questioned whether firms should be allowed to indemnify their employees for personal sanctions for corporate crimes. This article provides the first formal analysis of this form of indemnification. Targeting employees with unindemnifiable sanctions carries the social cost of exposing employees of law-abiding firms to the risk of mistaken government prosecution. Deterrence is typically achieved more efficiently by sanctioning the firm alone. We find the circumstances under which the government should additionally sanction employees to be quite limited and the circumstances under which the government should ban indemnification of these sanctions to be more limited still. One circumstance is when an unindemnifiable employee sanction provides prosecutors with leverage to adjust the employee's sanction in exchange for his cooperation against the firm. (JEL K22, D82, L20)

Carrots, Sticks, and the Multiplication Effect

Dari-Mattiacci, G., Geest, G. D. — 2009-01-20

Although a punishment can be applied only once, the threat to punish can be repeated several times. This is possible because when parties comply, the punishment is not applied and can thus be used to support a new threat. We refer to this feature of sticks as the "multiplication effect." The same is not possible with promises to reward since carrots are used up every time a party complies; hence, at each round a new reward is needed. We show that the multiplication effect of sticks has pervasive consequences in economics and law and provides a unified explanation for seemingly unrelated phenomena such as comparative negligence, legal aid, the dynamics of riots and revolutions, the use of property rules, the commons problem, and the most-favored-nation clause in settlement negotiations. (JEL K14, K42)

Incentive Contracts with Enforcement Costs

Doornik, K. — 2008-12-20

Legal enforcement of contracts is expensive and therefore parties will typically negotiate to avoid these costs. However, if negotiation takes place under asymmetric information, enforcement will occur in some states. We study a simple principal-agent model with risk neutrality and limited liability and assume costly, nonautomatic enforcement and private information by the principal. We show that the form of the contract systematically affects the likelihood of proceeding to court. In order to reduce the probability of enforcement, an optimal incentive contract must be one step. In addition, the principal may leave the agent with some surplus and effort will typically deviate from the productively efficient level. (JEL D82, D86, K40)

Double-Sided Moral Hazard, Efficiency Wages, and Litigation

Gurtler, O., Krakel, M. — 2008-12-09

We consider a moral-hazard problem in a principal-agent relationship. Each party can renege on the signed contract since verification of effort is costly and subject to uncertainty. It is shown that ex-post litigation can restore incentives of the agent. Moreover, when the litigation can be settled by the parties, the pure threat of using the legal system may suffice to implement the first-best solution. This finding is quite robust. In particular, it holds for situations where the agent is protected by limited liability, where the parties have different technologies in the litigation contest, or where the agent is risk averse. (JEL D86, J33, K41)

Chilling, Settlement, and the Accuracy of the Legal Process

Friedman, E., Wickelgren, A. L. — 2008-12-05

In this article, we ask the basic question: Is it necessarily the case that allowing or promoting settlement of lawsuits enhances social welfare? Our answer is not necessarily; there are circumstances where actually prohibiting settlement generates more social welfare than allowing it. Settlement can lower social welfare because it reduces the accuracy of legal outcomes. Reducing this accuracy reduces the ability of the law to deter harmful activity without chilling legitimate activity that might be mistaken for harmful activity. In some circumstances, the welfare loss from the chilling of legitimate activity can outweigh the gains from litigation cost savings, even if there are no restrictions on the damage rule. (JEL K00, K41, D82, C78)

Disagreement and the Allocation of Control

Van den Steen, E. — 2008-12-03

This article studies the allocation of control when there is disagreement—in the sense of differing priors—about the right course of action. People then value control rights since they believe that their decisions are better than those of others. More disagreement (due to, e.g., fundamental uncertainty) increases the value that players attach to control. The article shows that all income and control of a project should then be concentrated in one hand: income rights should go more to people with more control since such people value income higher (because they have a higher opinion of the decisions made); control rights should go more to people with more income since they care more (and believe that they make better decisions). Different projects may be optimally "owned" by different people. Furthermore—with residual income exogenously allocated—complementary decisions should be more co-located, whereas substitute decisions should be more distributed. Confident people with a lot at stake should—in a wide range of settings—get more control. (JEL D7, D8, L2, M1)

Uncertainty, Pay for Performance, and Asymmetric Information

Balmaceda, F. — 2008-11-25

This article develops a new rationale for the emergence of pay-for-performance contracts where the labor market is competitive, workers are risk averse, and firms are risk neutral and unaware of workers' productivities. The article shows that the prevalence of pay for performance rises and the pay-for-performance sensitivity falls as environmental uncertainty increases. This empirical regularity is unaccounted for alternative models such as the standard agency model.

Putting the "Con" into Constitutions: The Economics of Prison Gangs

Skarbek, D. — 2008-11-07

This paper investigates the internal governance institutions of criminal enterprise by examining the law, economics, and organization of the La Nuestra Familia prison gang. To organize effectively within the confines of penitentiaries, the gang needs to provide a credible commitment for member safety to potential entrants and a means of preventing predation and misconduct within the gang. I analyze the governance structure outlined in the gang's written constitution and show how it solves the collective action problems associated with multilevel criminal enterprises. (JEL D23, K42, L23, P16)

Professionals or Politicians: The Uncertain Empirical Case for an Elected Rather than Appointed Judiciary

Choi, S. J., Gulati, G. M., Posner, E. A. — 2008-11-05

Conventional wisdom holds that appointed judges are superior to elected judges because appointed judges are less vulnerable to political pressure. However, there is little empirical evidence for this view. Using a data set of state high court opinions, we construct measures for three aspects of judicial performance: effort, skill, and independence. The measures permit a test of the relationship between performance and the four primary methods of state high court judge selection: partisan election, non-partisan election, merit plan, and appointment. Appointed judges write higher quality opinions than elected judges do, but elected judges write more opinions, and the evidence suggests that the large quantity difference makes up for the small quality difference. In addition, elected judges are not less independent than appointed judges. The results suggest that elected judges focus on providing service to the voters, whereas appointed judges care more about their long-term legacy as creators of precedent.

If the state has a problem with judicial impartiality, it is largely one the state brought upon itself by continuing the practice of popularly electing judges.

Justice O'Connor, concurring in Republican Party of Minn. v. White, 536 U.S. 765, 792 (2002).

An Institutional Explanation for the Stickiness of Federal Grants

Brooks, L., Phillips, J. H. — 2008-09-12

Researchers have struggled to understand why federal block grants, contrary to economic theory, have a large stimulative effect on the spending of state and local governments. This article proposes and tests an institutional explanation for this effect. We argue that certain budgetary rules, by limiting the ability of subnational governments to respond to voter demands for increased spending, may systematically force lawmakers to under-provide public goods. When this occurs, governments are likely to treat grant revenue as a supplement to total expenditures and not return this money to voters in the form of a tax cut as suggested by existing theory. To evaluate our hypothesis, we use data on the Community Development Block Grant program and municipal tax and expenditure limitations. Results show that restrictive fiscal institutions significantly increase the stimulative power of federal grant revenue. (JEL H7, H4, R5)

A Right to Silence for Civil Defendants?

Wickelgren, A. L. — 2008-09-08

The Fifth Amendment guarantees criminal defendants the right to silence, blocking the court from drawing adverse inferences from the defendant's silence. This article investigates the conditions under which extending such protection to civil defendants might increase (or decrease) social welfare. If discovery is imperfect, then defendants who acquire information about the dangerousness of their actions may hide this evidence at trial if it is bad. This tends to make the private benefit from acquiring such information exceed the social benefit. Furthermore, the private benefit from acquiring this information is greater when the court will infer the information is bad if the defendant does not present it. Thus, there are situations in which a right to silence may be necessary to prevent a defendant from acquiring information for which the social costs exceed the social benefit. On the other hand, if it is hard to hide damaging information and the release of damaging information tends to induce lawsuits, then a right to silence may dampen already insufficient incentives to acquire information. (JEL K40, K41)

Growing Pains: The School Consolidation Movement and Student Outcomes

Berry, C. R., West, M. R. — 2008-08-28

Between 1930 and 1970, average school size in the United States increased from 87 to 440 students and average district size increased from 170 to 2300 students, as over 120,000 schools and 100,000 districts were eliminated through consolidation. We exploit variation in the timing of consolidation across states to estimate the effects of changing school and district size on student outcomes using data from the Public-Use Micro-Sample of the 1980 US census. Students educated in states with smaller schools obtained higher returns to education and completed more years of schooling. Reduced form estimates confirm that students from states with larger schools earned significantly lower wages later in life. Although larger districts were associated with modestly higher returns to education and increased educational attainment in most specifications, any gains from the consolidation of districts were far outweighed by the harmful effects of larger schools. (JEL I2, H7, H4)

Where Is Credit Due? Legal Institutions, Connections, and the Efficiency of Bank Lending in Vietnam

Malesky, E. J., Taussig, M. — 2008-06-20

Rapid development of the domestic private sector in communist China and Vietnam has been offered as evidence against a large literature that claims a solid legal infrastructure is required for the financial sector to contribute to economic development. One component of the counterargument holds that relationship-based lending has served as an effective substitute for legal institutions. In this article, we challenge this assertion with empirical findings that show bank credit allocation that relies heavily on "connections" undermines the impact of finance on investment growth. Our data come from Vietnam, where—like China—the private sector and financial sector are expanding dramatically but rule of law has not kept pace. Although Vietnam's banking sector is in transition toward a healthier system, it still allocates a disproportionate share of credit to "connected" enterprises in less competitive regions. We find that political connections, in particular, are an ineffective tool for channeling bank credit to the most profitable investors. Using a two-stage empirical approach, we find evidence that banks place greater value on connections than performance and that the firms with greater access to bank loans are no more profitable than firms without them. By some measures, connected firms are even significantly less profitable. We conclude by demonstrating that the most profitable investors in Vietnam have forgone the formal banking system, preferring to finance their activities out of reinvested earnings or informal loans (JELG21, G28, G30, O12, K11).

Political Compromise and Bureaucratic Structure: The Political Origins of the Federal Reserve System

Jeong, G.-H., Miller, G. J., Sobel, A. C. — 2008-06-12

What is the origin of the structural independence of the Federal Reserve System? Unlike existing explanations on central bank independence, we show that the structural independence of the Fed is not the result of intentional design but a product of compromise among disparate groups. Using agenda-constrained ideal point estimation techniques to estimate both the preferences of senators on key questions of Fed structure and the locations of alternative forms of the bill with respect to those preferences, we show that the structural features of the Fed in the final bill differed markedly from the original preferences of legislators representing competing groups. The result was a compromise that offered the prospect of significant independence for the new agency. The Fed case shows that political compromise can provide useful bureaucratic insulation when the short-term incentives of political principals promote unstable, self-seeking policy choices (JEL N41, N21).

Corruption, Extortion, and the Boundaries of the Law

Andrianova, S., Melissas, N. — 2008-06-05

We consider a setup in which a principal must decide whether or not to legalize a socially undesirable activity. The law is enforced by a monitor who may be bribed to conceal evidence of the offense and who may also engage in extortionary practices. The principal may legalize the activity even if it is a very harmful one. The principal may also declare the activity illegal knowing that the monitor will abuse the law to extract bribes out of innocent people. Our model offers a novel rationale for legalizing possession and consumption of drugs while continuing to prosecute drug dealers.

Specialization, Firms, and Markets: The Division of Labor within and between Law Firms

Garicano, L., Hubbard, T. N. — 2008-05-07

This article uses confidential microdata from the Census of Services to examine law firms' field boundaries. We find that the share of lawyers working in field-specialized firms increases as market size increases and lawyers field specialize, indicating that transaction costs among lawyers, and not just complementarities in clients' demands, affect law firms' field boundaries. Moreover, we find that this pattern is mainly true when looking at fields where lawyers are involved in dispute resolution rather than in structuring transactions. We then analyze which combinations of specialists tend to work in the same firm and which tend not to do so. We relate our results to theories of law firms' boundaries from the organizational economics literature. Our evidence leads us to eliminate risk sharing as an important determinant of firms' field boundaries and narrows the set of possible monitoring or knowledge sharing explanations. (JEL D23, J44, L14, L84)

Auctions Versus Negotiations in Procurement: An Empirical Analysis

Bajari, P., McMillan, R., Tadelis, S. — 2008-05-07

Should the buyer of a customized good use competitive bidding or negotiation to select a contractor? To shed light on this question, we consider several possible determinants that may influence the choice of auctions versus negotiations. We then examine a comprehensive data set of private sector building contracts awarded in Northern California during the years 1995–2000. The analysis suggests a number of possible limitations to the use of auctions. Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project. Some implications of these results for procurement in the public sector are discussed (JEL D23, D82, H57, L14, L22, L74).

Chinatown Revisited: Owens Valley and Los Angeles--Bargaining Costs and Fairness Perceptions of the First Major Water Rights Exchange

Libecap, G. D. — 2008-05-04

I examine a complicated bargaining problem in the acquisition of private land and water rights by Los Angeles in Owens Valley. This is a pivotal episode in the political economy of contemporary western water. More broadly, Owens Valley provides empirical evidence on how the gains from exchange were divided among the parties and how equity concerns shaped the process and succeeding assessment of market allocation. Negotiations for key properties took place within a bilateral monopoly context, and the bargaining strategies of both parties raised the transaction costs of exchange and formed fairness perceptions about the outcome of the exchange. I analyze the bargaining environment and estimate the determinants of when properties sold and the prices paid for land and water. Farmers who colluded did better by selling the properties than if they had remained in agriculture. Their "cartels," however, were not strong enough to secure more of the surplus from reallocating water from agriculture to urban demand. Most of the gains went to Los Angeles landowners, and this is a source of the notion of water "theft" that continues today.

Coming to the Nuisance: Revisiting Spur in a Model of Location Choice

Innes, R. — 2008-04-16

Building on recent work of Pitchford and Snyder (PS, 2003), this article models effects of alternative property rights regimes on sequential location decisions of two players. A new resident decides whether to "come to the nuisance" by locating next to an existing business or to locate elsewhere where there are no negative externalities between occupants. Faced with a new resident, the existing business can relocate. Once situated, local residents bargain to address negative externalities. However, location decisions are non-contractible. In this setting—contrary to PS—the first best is achieved by allocating property rights to the first party, entitling the initial resident to full compensation for damages. This rule is consistent with the Spur Industries decision. Allocating property rights to second parties excessively encourages residents to "come to the nuisance," whereas stronger first-party rights (injunctive or exclusion) excessively deter nuisances from moving to areas less prone to external harm. (JEL K11, K32, D62, D23)

Why Have Robberies Become Less Frequent but More Violent?

O'Flaherty, B., Sethi, R. — 2008-04-15

Although the incidence of robbery has declined sharply since the early 1990s, the proportion of robberies resulting in victim injury has increased and the rate of victim resistance has remained relatively stable. We provide a theoretical explanation for these trends. Deterrence policies that make robbery more costly for offenders result in a decline in the incidence of robbery through the exit of those with the best outside options. The group of robbers who exit consists disproportionately of those who would have fled in the face of victim resistance, and hence, the pool of remaining robbers is more likely to respond violently to noncompliance by victims. This effect is reinforced by what we call victim hardening: a change in the distribution of attributes in the victim pool that makes resistance more likely. This can arise, for instance, through an increase in crime avoidance by the most compliant victims. Deterrence and victim hardening both result in lower robbery rates and greater violence conditional on resistance but have opposing effects on the rate of resistance, thus accounting for its relative stability over time. (JEL K42, K14)

Revenue Sharing Distortions and Vertical Integration in the Movie Industry

Gil, R. — 2008-04-11

I analyze how variation in firm boundaries affect economic outcomes in the movie industry. Specifically, I focus on movie distributors and their contracts with exhibitors to show their movies on their screens. I argue that vertical integration solves the distortion on movie run length created by the revenue sharing contracts used in the industry. Since I observe the same movie showing in the same period under different organizational forms in the Spanish market, I use a difference on different approach to exploit this variation and study differences in outcomes across organizational forms. I show that integrated theaters run their own movies longer than other movies, and longer than nonintegrated theaters do. This effect is stronger for movies of more uncertain demand due to higher contractual complexity. I also find that integrated distributors specialize in the movies of higher demand uncertainty. (JEL L14, L22, L82)