Journal of Law, Economics, and Organization - current issue

Editor's Note

Ayres, I. — 2009-03-30

Matching Bankruptcy Laws to Legal Environments

Ayotte, K., Yun, H. — 2009-03-30

We study a model of optimal bankruptcy law in an environment where legal quality can vary along two dimensions: the expertise of judges and the quality of contract enforcement. We analyze a model in which a judicially influenced bankruptcy process can enhance the efficiency of incomplete contracts by conditioning the allocation of control rights in bankruptcy on firm quality. We consider the optimal balance of debtor and creditor interests as a function of the legal environment and show that the optimal degree of "creditor-friendliness" in the bankruptcy code increases as judicial ability to recognize firm quality falls and as the quality of contract enforcement deteriorates. Our model shows that a bankruptcy law that attempts to preserve going-concern value, such as US Chapter 11, requires judicial expertise to be effective. Where such expertise is unavailable, a law that focuses more on creditor recovery is preferred. (JEL D86, G33, G34, K22)

Sustaining Cooperation with Joint Ventures

Cooper, R. W., Ross, T. W. — 2009-03-30

Antitrust agencies and courts have expressed concerns that joint ventures and strategic alliances between firms that compete in other markets might serve to reduce the vigor of their competition. This article explores a mechanism through which a joint venture between two (or more) firms in one market can serve to facilitate collusion in another market—even one unconnected vertically or horizontally by costs or demand. In the models studied here, play in one market has the effect of altering players' beliefs about their rivals' play in the second market. A joint venture in one market may provide a credible punishment mechanism for firms colluding in another market. The joint venture may also provide a vehicle for the transmission, between players, of information in a way that helps cooperative types find each other and collude in other markets. (JEL L12, L41, K21)

A Principal-Agent Theory of En Banc Review

Clark, T. S. — 2009-03-30

This paper adds to the existing literature on en banc rehearings in two ways. First, I incorporate theoretical results from the literature on Supreme Court certiorari decisions and argue that the ideological direction of panel decisions should influence the probability of en banc rehearing only in conjunction with the panel's ideological predisposition. Second, I build upon existing theories of en banc review by incorporating the multiple levels of the judicial hierarchy into the context in which the circuit decides to hear a case en banc. From these insights, I develop and test three hypotheses about the determinants of en banc review. Specifically, I contend that the ideological relationship between a three-judge panel, the full circuit, and the Supreme Court should all interact with the ideological orientation of the panel's decision when the circuit decides whether or not to review the panel en banc. Original data including all en banc rehearings between 1986 and 1996 are then used to test the theoretical predictions. The empirical analysis provides considerable support for the hypotheses. The findings represent two important advances in the study of the judicial hierarchy: They highlight the strategic interaction between ideological disposition and panel composition in the en banc review process and demonstrate the incentives created by the multiple levels of the federal judiciary. More broadly, the theory and findings developed here have implications for strategic auditing in a political hierarchy. (JEL K40, D72)

Why Divorce Laws Matter: Incentives for Noncontractible Marital Investments under Unilateral and Consent Divorce

Wickelgren, A. L. — 2009-03-30

The Coase Theorem suggests that married couples will divorce if and only if doing so increases their joint surplus, regardless of the legal rules governing divorce. This does not mean, however, that divorce laws only affect the distribution of rents. Because the distribution of rents affects each spouse's incentives for noncontractible investments, divorce laws can affect the joint welfare of the couple. This article analyzes the effects of the consent divorce regime and the unilateral divorce regime on incentives for selfish and cooperative marital investments. Using these results, the article demonstrates how endogenous choice of marriage with noncontractible investments can explain some recent empirical results concerning the effects of the shift from consent divorce to unilateral divorce. (JEL C78, D1, D23, J12, J18, K3, K36)

Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis

Kamar, E., Karaca-Mandic, P., Talley, E. — 2009-03-30

This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of American public targets to be bought by private acquirers rather than public ones with the corresponding change for foreign public targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little effect on the going-private propensities of larger firms. (JEL G30, G34, G38, K22)

Accuracy Versus Falsification Costs: The Optimal Amount of Evidence under Different Procedures

Emons, W., Fluet, C. — 2009-03-30

An arbiter can decide a case on the basis of his priors or he can ask for further evidence from the two parties to the conflict. The parties may misrepresent evidence in their favor at a cost. The arbiter is concerned about accuracy and low procedural costs. When both parties testify, each of them distorts the evidence less than when they testify alone. When the fixed cost of testifying is low, the arbiter hears both, for intermediate values one, and for high values no party at all. The arbiter's ability to remain uninformed as well as sequential testifying makes it more likely that the arbiter requires evidence. (JEL D82, K41, K42)

An Economic Model of Whistle-Blower Policy

Heyes, A., Kapur, S. — 2009-03-30

"Whistle-blowing" is an increasingly common element of regulatory enforcement programs and one that is encouraged by recent legislation in the United States and elsewhere. We examine how responsive regulators should be to whistle-blower tip-offs and how severe should penalties be for wrongdoers detected in this way. Competing psychological theories as to what motivates employees to become whistle-blowers are operationalized as alternative behavioral heuristics. Optimal policy depends upon the motives attributed to whistle-blowers—which of the theories you subscribe to—but is not in general characterized by maximal penalties nor routine pursuit of complaints, even when pursuit is costless. (JEL K42, K32)

Has Devolution Injured American Workers? State and Federal Enforcement of Construction Safety

Morantz, A. D. — 2009-03-30

Although the issue of regulatory devolution has received much scholarly scrutiny, rigorous empirical studies of its effects on important policy outcomes are scarce. This article explores the effects of partial regulatory devolution in the occupational safety arena by exploiting a unique historical anomaly whereby some US states enforce protective labor regulations that are enforced elsewhere by the federal Occupational Safety and Health Administration. Analyzing data from the construction industry, this article contains several important findings. First, state inspectors use traditional enforcement tools more sparingly than their federal counterparts, typically citing fewer violations and collecting lower fines per violation. Second, although federal enforcement significantly lowers the estimated frequency of nonfatal construction injuries, it also predicts a significant increase in occupational fatalities. I suggest that although higher underreporting of nonfatal injuries in federally regulated states could explain this puzzling finding, it is equally possible that different regulatory styles have different "comparative advantages" in deterring nonfatal injuries on one hand and occupational fatalities on the other. (JEL D73, D78, H73, I18, J08, J28, J88, K00, K23, K31, K32, L51, and L74)

Optimal Vertical Arrangements When Resale Is Possible

Selvaggi, M. — 2009-03-30

This paper pinpoints optimal vertical arrangements in settings characterized by incomplete contracting and resale of an intermediate input (a "widget"). In the Grossman-Hart-Moore property rights theory, we conclude that sometimes strictly complementary assets should be owned separately to permit the emergence of a secondary market. In a richer model where the parties choose specific and nonspecific investments, vertical separation may also dominate joint ownership. The article then examines the profitability of three integration forms when the proposed bargaining model substitutes random-order values (e.g., the Shapley value). The conclusions differ markedly from existing claims. (JEL C70, C78, D23, L42)

Least-Cost Avoidance: The Tragedy of Common Safety

Dari-Mattiacci, G., Garoupa, N. — 2009-03-30

This article shows that the least-cost avoider approach in tort is not necessarily the optimal way to attain least-cost avoidance when accidents can be avoided by either of two parties. When parties do not observe each other's costs of care at the time of the accident and are unable to determine which party is the least-cost avoider, they fail to anticipate the outcome of the adjudication. Under these circumstances, accident avoidance becomes a commons problem because care by each individual party reduces the prospect of liability for both parties. As a result, parties suboptimally invest in care. We show that regulation removes this problem and is superior to tort liability both when parties act simultaneously and when they act sequentially. We further examine how different liability rules perform in this respect. (JEL K13, K32)

Judicial Independence Under a Divided Polity: A Study of the Rulings of the French Constitutional Court, 1959-2006

Franck, R. — 2009-03-30

This article analyzes whether the much-touted independence of the Conseil Constitutionnel (CC), the French Constitutional Court, is genuine. We construct a data set that comprises all the rulings of the CC between 1959 and 2006, taking into account the composition of the CC as well as the characteristics of the legislation reviewed by the judges. We find that the judges mainly rendered independent rulings when the polity was divided between left-wing and right-wing parties. (JEL D72, D73, K40)