Law and Economics

Compensation in personal injury cases: mean or median income? Abstract Courts typically base compensation for loss of income in personal injury cases on either mean or median work income. Yet, quantitatively, mean and median incomes are typically very different. For example, in the US, median income is 65% of mean income. In this paper we use economic theory to determine the relation between the appropriate make-whole (full) compensation and mean and median work incomes. Given that consumption uncertainty associated with compensation generally exceeds that associated with work income, we show that the appropriate make-whole compensation exceeds mean (and therefore median) work income. Hence, if the compensation must be either the mean or the median work income, then mean work income should generally be selected.

Choosing for Europe: judicial incentives and legal integration in the European Union Abstract We investigate the factors influencing the choice of domestic judges to pass on cases to the Court of Justice of the European Union. While EU judicial scholars have typically relied on integration theory or ad hoc theories of adjudication to explain referral activity, our theoretical framework draws on general judicial decision making theory and focuses on the incentives and constraints national judges face when deciding whether to submit a references to the Court of Justice. Consistent with our rationalist account of judging, we find empirical evidence that the rate at which national courts refer cases is influenced by familiarity with EU law, power-seeking motives and political fragmentation.

Law, economics and Calabresi on the future of law and economics Abstract There exists a distinction between ‘law and economics’ and the ‘economic analysis of law’. The former, corresponding to Coase’s approach, consists in taking legal rules into account insofar as they influence economic activities. The latter, associated to Posner’s name, consists in using economics to analyze legal problems. Methodologically speaking, if one admits that the economic analysis of law consists in using economic tools to analyze legal problems, Calabresi’s own work must be classified as such. However, Calabresi has always insisted that his own approach differs from Posner’s economic analysis of law. In this paper, we take the opportunity of Calabresi’s new book—The Future of Law and Economics—to revisit Calabresi’s approach to law and economics. In his book, Calabresi explains that the economic analysis of law is unsatisfactory because economics is too narrow. He insists on the need to amplify economic analysis by: first, adopting a more realistic approach à la Coase; second, taking merit goods into account; and third, including individuals’ propensity to be altruistic. We analyze these three aspects and show that it leads to a certain ambiguity in terms of the distinction between ‘law and economics’ and the ‘economic analysis of law’.

Use of formal insolvency procedure and judicial efficiency in Spain Abstract In the framework of law and finance literature, this study focuses on analysing the impact of judicial efficiency in firms’ decision on the use of court proceedings in the resolution of financial distress. The question as to whether the use of formal bankruptcy procedures can be related to efficiency in the implementation of legislation by the courts has been posed. The scarce empirical evidence has focused on the analysis of the impact of judicial efficiency at the international level, which implies assumption that the degree of efficiency is similar within each country. However, studies from Brazil and Spain have revealed the existence of differences among districts within the same country and its impact on different economic and financial aspects. Consequently, the work focuses on a single country allowing to isolate the effect of the content of the legislation from the efficiency of the application of these legal rules by the courts. The sample consists of 4160 unlisted firms in Spain experiencing financial difficulties, among which are companies that have and have not opted to use the formal bankruptcy proceedings. The results indicate that firms located in Spain’s autonomous communities that exhibit a higher efficiency of their judicial systems are more likely to use court proceedings to resolve financial distress.

An economic analysis of court fees: evidence from the Spanish civil jurisdiction Abstract The adoption of “court fees” has been traditionally justified as a means to improve the performance of enforcement institutions as they may have an effect of “deterrence” of the dispute. Judicial congestion has clear negative impacts on economic performance. Spain, which has one of the highest rates of litigation of the OECD, has traditionally lacked a general system of court fees. In 2002, the Congress passed a system of court fees to be paid by legal entities and enterprises. In 2012, the fees were extended to individuals and abrogated in 2015. This bounded period of enforcement allows us to empirically test the impacts of court fees on congestion. In order to do this, we collected a comprehensive database of quarterly data on the real workload of civil courts. This study concludes that the effects of court fees, although reduced court’s congestion, are far from homogeneous and depend on the type of procedure, the workload of the courts and the local macroeconomic conditions.

A reappraisal of the Arrovian postulate and the intellectual property regime: user-specific patents Abstract Recent advances in the economics of knowledge are raising questions related to the current intellectual property regime. This paper discusses the foundations of the appropriability trade-off, highlights the crucial distinction between inter- and intra-industry spillovers, and advocates the introduction of patents based on a combination of property and liability rules. These two-layered patents would include: (i) exclusive protection which applies the property rule to intra-industry spillovers: Rivals and competitors in the same product market would be unable to use proprietary patented knowledge without authorization from the patent holder which had exclusive intellectual property rights on its knowledge, and (ii) non-exclusive patents characterized by compulsory licensing which applies the liability rule to inter-industry spillovers. Prospective users of proprietary knowledge to generate new knowledge for innovation in other product markets, can access proprietary knowledge, for a royalty fee charged by the patent holder.

Do professions curb free-riding? An experiment Abstract The question of ethical conduct is key for professionals, such as lawyers, doctors, or experts of different kinds. We run a laboratory experiment aimed at investigating whether acting within a profession leads to more (or less) ethical, prosocial behaviour compared to acting outside of it. We also investigate how professionals react to others’ misbehaviour. We invite subjects studying or having studied economics, law or medicine and either match them in mixed groups or in homogeneous groups (telling them that we did so). We then let them play public goods games with punishment. Overall, there is little difference in cooperation levels and patterns of punishment between the homogeneous and heterogeneous groups. If anything, our subjects free ride more when matched with their peers than in a mixed group.

A mechanism design approach to child custody allocation in divorce Abstract The paper considers a household family comprising of husband, wife and their child. Each parent consumes a private good and contributes voluntarily for a household public good which is child’s welfare. When divorce occurs, the court has an ex ante transfer mechanism for the parents such that truthful revelation of valuation of child’s welfare by each parent becomes strategyproof. Based on this, the sole custody of child is assigned to the parent having the highest value. We find that the transfer mechanism of the court fails to satisfy ex post individual rationality of some types of the parents. We also show that the court’s mechanism bundled with an appropriate child support order achieves higher child’s welfare and satisfies individual rationality only if the non-custodial parent is extremely altruistic in nature. Thus the paper successfully explains widespread prevalence of non-payment of child support from a perspective which was not discussed previously. More significantly, the paper ends with a policy prescription of replacing the conventional child support system by an equivalent amount of transfer from the government to the custodial parent, and shows that it has the potential to correct the intrinsic loopholes of child support.

A regulation and transaction cost perspective on the design of corporate law Abstract For the corporate business model to be successful, it is important to align the interests of those who control and finance the firm. Corporate law has here an important task to fulfill. It offers a legal framework that can facilitate parties to conclude mutually preferable agreements at low transaction costs. The purpose of this paper is to show how to design corporate law to fulfill this task and apply this knowledge to a Swedish case. A two-dimension model that simultaneously considers both the regulation intensity and the level of default of corporate law is presented. The earlier literature treats these dimensions separately. By adding a transaction cost perspective to our model, we assess different regulatory techniques and examine how the Swedish legislation can be amended to help corporations by offering a standard contract that lowers the transaction costs of contracting. This can be achieved if default rules or standards of opt-out character are combined with other regulatory techniques with lower transaction costs such as opt-in alternatives and menus. We also show how our model can be used in other studies as a tool to analyze the design of legal rules.

On the choice of legal standards: a positive theory for comparative analysis Abstract In contrast to existing economic theory on the choice of legal standards in the enforcement of Competition Law, we develop a modelling framework that accounts explicitly for (a) Courts’ choices, given the substantive standard adopted and (b) Competition Authorities (CAs) setting legal standards anticipating Courts’ choices, recognizing that CAs place at least some weight on the implications of their choices for the outcome of the judicial review process and, hence, for their reputation. We then show why CAs may favor Per Se type standards (even when an error-minimising or welfare maximization approach would suggest the choice of an effects-based standard), with sub-optimal utilization of economic analysis, how this choice is affected by the Courts’ substantive standards, why the legal standards for any given conduct may differ between countries, why there may be a U-shaped empirical relationship between legal standards and the probability that the CA’s decisions are annuled and how the choice of standards affects other aspects of enforcement, such as the number of investigations undertaken.