Journal of Law, Economics, and Organization - current issue

Editor's Note

Ayres, I. — Thu, 10 Sep 2009 21:34:06 PDT

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

Innes, R. — Thu, 10 Sep 2009 21:34:06 PDT

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)

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

Libecap, G. D. — Thu, 10 Sep 2009 21:34:06 PDT

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. (JEL D02, D23, D49, D74, K11, L13, N52, Q15, Q25)

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

Garicano, L., Hubbard, T. N. — Thu, 10 Sep 2009 21:34:07 PDT

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. — Thu, 10 Sep 2009 21:34:07 PDT

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).

Uncertainty, Pay for Performance, and Asymmetric Information

Balmaceda, F. — Thu, 10 Sep 2009 21:34:07 PDT

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. (JEL D86, L2, M5, J3)

Corruption, Extortion, and the Boundaries of the Law

Andrianova, S., Melissas, N. — Thu, 10 Sep 2009 21:34:07 PDT

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. (JEL D82, L22, K4)

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

Jeong, G.-H., Miller, G. J., Sobel, A. C. — Thu, 10 Sep 2009 21:34:07 PDT

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).

The Distributional Consequences of Diversity-Enhancing University Admissions Rules

Chan, J., Eyster, E. — Thu, 10 Sep 2009 21:34:07 PDT

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)

Why Have Robberies Become Less Frequent but More Violent?

O'Flaherty, B., Sethi, R. — Thu, 10 Sep 2009 21:34:07 PDT

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)

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

Malesky, E. J., Taussig, M. — Thu, 10 Sep 2009 21:34:07 PDT

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 (JEL G21, G28, G30, O12, K11).

Revenue Sharing Distortions and Vertical Integration in the Movie Industry

Gil, R. — Thu, 10 Sep 2009 21:34:07 PDT

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)

Acknowledgments

Thu, 10 Sep 2009 21:34:07 PDT