Journal of Law, Economics, and Organization - current issue

Editor's Note

Ayres, I. — 2008-03-04

Abortion Access and Risky Sex Among Teens: Parental Involvement Laws and Sexually Transmitted Diseases

Klick, J., Stratmann, T. — 2008-03-04

Laws requiring minors to seek parental consent or to notify a parent prior to obtaining an abortion raise the cost of risky sex for teenagers. Assuming choices to engage in risky sex are made rationally, parental involvement laws should lead to less risky sex among teens, either because of a reduction of sexual activity altogether or because teens will be more fastidious in the use of birth control ex ante. Using gonorrhea rates among older women to control for unobserved heterogeneity across states, our results indicate that the enactment of parental involvement laws significantly reduces risky sexual activity among teenage girls. We estimate reductions in gonorrhea rates of 20% for Hispanics and 12% for whites. Although we find a relatively small reduction in rates for black girls, it is not statistically significant. We speculate that the racial heterogeneity has to do with differences in family structure across races.

The Effects of the Fourth Amendment: An Economic Analysis

Mialon, H. M., Mialon, S. H. — 2008-03-04

We develop an economic model of crime and search that allows us to analyze the effects of the Fourth Amendment's exclusionary rule on crime and privacy. We find that the rule always increases crime but has two opposing effects on searches. It directly reduces searches by reducing the chances that they lead to successful conviction, but it also indirectly increases them by increasing crime. If its indirect effect dominates, the rule actually increases searches and has an ambiguous effect on wrongful searches. If its direct effect dominates, it reduces wrongful searches, thereby protecting privacy. Its direct effect is more likely to dominate the greater is the number of police officers per capita, the lower is the police's incentive to simply close cases and the more accountable the police are for their mistakes. Police accountability also increases crime but unambiguously reduces wrongful searches. We also explore the effects of long-term progress in search technology on crime and privacy.

Coerced Confessions: Self-Policing in the Shadow of the Regulator

Short, J. L., Toffel, M. W. — 2008-03-04

As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive data set for the "Audit Policy," a United States Environmental Protection Agency program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.

Evidentiary Arbitrage: The Fabrication of Evidence and the Verifiability of Contract Performance

Sanchirico, C. W., Triantis, G. — 2008-03-04

The design of legal obligations, whether by a public body such as a legislature or by private contract, should anticipate the enforcement process that induces compliance. Judicial enforcement is costly and imperfect, largely because of limits on the court's ability to detect facts accurately. In adversarial litigation, courts are often fooled by fabricated, suppressed, or otherwise manipulated evidence. Given that fabricated evidence is both more costly and less valuable than truthful evidence, one would think that contracting parties should design their agreement so as to deter future evidence fabrication. To the contrary, this article suggests that evidence fabrication may be harnessed by contracting parties to improve the (evidentiary) cost-efficiency of performance incentives in their relationship. This paper thereby addresses the concept of verifiability in contract theory, the puzzling tolerance of the adjudicatory system for fabrication, and the incentives to fabricate created by thresholds in burdens of proof.

Ministerial Weights and Government Formation: Estimation Using a Bargaining Model

Adachi, T., Watanabe, Y. — 2008-03-04

This article proposes a method to estimate relative ministerial weights in parliamentary democracies. Specifically, we present a bargaining model of government formation and estimate structural parameters of the model using data for (i) who the formateurs are, (ii) what each party's voting weight is, and (iii) what ministerial seats each party obtains. We also measure the effects of voting weights and formateur advantage on bargaining results. We apply our proposed method to the case of Japan. Our estimation results show that political players value pork-related posts (such as the Minister of Construction) much more than prestigious ones (such as the Minister of Foreign Affairs). We also find that there is a significant formateur advantage, whereas voting weights do not have a significant scale effect, which is consistent with the findings for European democracies.

Optimal Contracts When a Worker Envies His Boss

Dur, R., Glazer, A. — 2008-03-04

A worker's utility may increase with his income, but envy can make his utility decline with his employer's income. This article uses a principal-agent model to study profit-maximizing contracts when a worker envies his employer. Envy tightens the worker's participation constraint and so calls for higher pay and/or a softer effort requirement. Moreover, a firm with an envious worker can benefit from profit sharing, even when the worker's effort is fully contractible. We discuss several applications of our theoretical work: envy can explain why a lower-level worker is awarded stock options, why incentive pay is lower in nonprofit organizations, and how governmental production of a good can be cheaper than private production.

Relational Contracts, Multitasking, and Job Design

Schottner, A. — 2008-03-04

This article analyzes optimal job design in a repeated principal-agent relationship when there is only one contractible and imperfect performance measure for three tasks whose contribution to firm value is nonverifiable. The tasks can be assigned to either one or two agents. Assigning an additional task to an agent strengthens his relational contract. Therefore, broad task assignments are optimal when the performance measure strongly distorts incentives for the two-task job. This is more likely to be the case if these two tasks are substitutes.

A Theory of Brinkmanship, Conflicts, and Commitments

Schwarz, M., Sonin, K. — 2008-03-04

Many conflicts and negotiations can be viewed as dynamic games in which parties have no commitment power. In our model, a potential aggressor demands concessions from a weaker party by threatening war. The absence of commitment makes a continuous stream of transfers a more effective appeasement strategy than a lump-sum transfer. As long as both sides have constant marginal utility of consumption, it is possible to construct a self-enforcing peace agreement even if transfers shift the balance of power. When marginal utility of consumption is decreasing, a self-enforcing peace agreement may not be feasible. The bargaining power of the potential aggressor increases dramatically if she is able to make probabilistic threats, for example, by taking an observable action that leads to war with a positive probability. This "brinkmanship strategy" allows a blackmailer to extract a positive stream of payments from the victim, even if carrying out the threat is harmful to both parties. Our results are applicable to environments ranging from diplomacy to negotiations within or among firms and are aimed to bring together "parallel" investigations in the nature of commitment in economics and political science.

Commitment, Exchange Autonomy, and the Boundary of the Hierarchical Firm

Levy, N. — 2008-03-04

In this article, I present a theory of the boundary of the firm that accounts for some important characteristics of real-world multidivisional firms: operative decisions are in the hands of middle managers who are rewarded based on the performance of their units, managers' decisions are subject to approval and intervention by the top management of the firm, and managers are better informed regarding the affairs of their divisions. In this setup, the integration of an intermediate input supplier and its buyer as separate divisions within a single firm is desirable, as long as the choice of trading partners can be credibly delegated to the divisions' managers. I show that this is satisfied not only under the assumption of full commitment by the general office of the firm but also, remarkably, if it has no commitment power whatsoever. An explanation of the boundary of the firm emerges only if the general office retains some limited commitment power. I show that the general office mandates internal trades in more instances than would have been optimal with full commitment, adversely affecting the levels of investment undertaken by the divisions' managers. In such cases, it can be optimal to have the trade conducted between nonintegrated parties.

Competition, Contractibility, and the Market for Donors to Nonprofits

Castaneda, M. A., Garen, J., Thornton, J. — 2008-03-04

This article investigates theoretically and empirically the effects of competition for donors on the behavior of nonprofit organizations. Theoretically, we consider a situation in which nonprofit organizations use donations to produce some commodity, but the use of donations is only partially contractible. The main results of the model indicate that an increase in competition (i) decreases the fraction of donations allocated to perquisite consumption and (ii) increases the fraction of donations allocated to promotional expenditures. Moreover, the effects of competition are magnified by the ability to contract on the use of donations. These hypotheses are tested with data on the expenditures of nonprofit organizations in a number of subsectors where competition is primarily local. We use across–metropolitan statistical areas' variation to measure differences in competition and proxy contractibility by the importance of tangible assets, which are more easily observed by donors. The estimated effects of competition and contractibility are consistent with our model.