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Seventeenth Annual Conference of the European Association of Law and Economics, Ghent, Belgium, September 2000
International Review of Law and Economics 21 (2002) 355–357
Editorial
Seventeenth Annual Conference of the European Association of Law and Economics, Ghent, Belgium, September 2000 This special issue contains a selection of papers, presented at the 17th Annual Conference of the European Association of Law and Economics, held at Ghent on September 14–16, 2000. At this conference, about 40 papers were presented, covering a wide range of topics, including property law, intellectual property, corporate law, banking law and antitrust law. As usual, an anonymous refereeing process has been organized, according to the high standards of the International Review of Law and Economics. The issue opens with an empirical study of Clas Bergström, Theodore Eisenberg and Stefan Sundgren on ‘Secured Debt and the Likelihood of Reorganization’. This study of Finnish reorganizations finds that creditor groups most likely to be well-secured are most likely to oppose reorganization. This is in line with theoretical findings that suggests that secured creditors often have more to lose than to gain in reorganizations, since if after reorganization the value of the firm appreciates, the secured creditors receive only part of the gain, while if the firm’s value depreciates, the secured creditors bear all of the cost. The second paper is a theoretical model of Markus A. Lehmann on ‘Error Minimization and Deterrence in Agency Control: Judicial Review and the Role of the Standard of Proof’. In the model a regulatory agency may collude with regulatees, and a watchdog organization may scrutinize the agency’s decision-making and find evidence speaking for collusive behavior. Lowering the evidence standard leads to an increased collusion deterrence and to a lower probability of acquitting collusive administrators (type I error), but also to a higher probability of convicting innocent administrators (type II error). It is shown that the welfare-maximizing standard of evidence is lower than the one that merely minimizes the costs of legal errors. The paper further analyzes the conditions under which both error cost minimization and complete deterrence coincide with welfare-maximization. The third and fourth paper are on the new Basle Accord. The Basle Accord of 1988 regulated how much equity banks must set aside as a cushion against default risk. In its 1999 proposal for a new Accord, the Basle Committee seeks to introduce different equity rations for customers of different risk levels. In an article entitled ‘The New Basle Accord, Internal Ratings, and the Incentives of Banks’, Roland Kirstein shows that even if we assume that banks have better diagnosis skills than external rating agencies, external ratings are better able to implement 0144-8188/02/$ – see front matter © 2002 Elsevier Science Inc. All rights reserved. PII: S 0 1 4 4 - 8 1 8 8 ( 0 1 ) 0 0 0 7 4 - 6
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Editorial / International Review of Law and Economics 21 (2002) 355–357
the goals of the Basle Committee than internal ratings. This is due to a lack of incentives by supervision of internal ratings, even if imperfect and only occasional. However, this requires that a fine be imposed if the supervising authority comes to a result different from the internal rating assigned by the bank. In the next article, ‘Banking in a Theory of the Business Cycle: A Model and Critique of the Basle Accord on Risk-Based Capital Requirements for Banks’, Robert E. Krainer presents a theoretical framework for understanding the investment decisions and financing decisions of financial and non-financial enterprises over the business cycle. At the core of this theoretical framework is an agency problem between relatively more risk averse depositor/bondholders and relatively less risk averse stockholders. The solution is a corporate governance system that takes the form of an up-front contract that directs managers to make portfolio/investment decisions in the interest of their stockholders, and financing decisions in the interest of their depositor/bondholders. The Basle Accord on risk-based capital requirements for depository institutions is one particular regulatory application of this more general theoretical framework. The paper concludes with a comparison between the Basle Accord and the 100 percent reserve or narrow banking proposal as the means of achieving a risk-free medium of exchange and a financial system that facilitates the optimal transfer of resources from savers to investors consistent with society’s aversion towards risk. The paper by Roger D. Blair and Richard E. Romano analyzes the competitive significance of advance price announcements. In the model, advance price announcements are used by firms to communicate private information on demand or cost. By so sharing the information, the firms are able to set their prices at more profitable levels. When the advance price announcements resolve demand uncertainty, profits rise and consumer surplus falls. Interestingly, when the advance price announcements resolve cost uncertainty, both profits and consumer welfare rises. Finally, the authors examine U.S. antitrust policy regarding price announcements. In their paper on ‘Fair Use and Copyright Protection: A Price Theory Explanation’, Ben Depoorter and Francesco Parisi criticize the transaction-cost-based justification of the fair-use doctrines, according to which these doctrines were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. Computer technology has reduced transaction costs associated with copyright transfer. Nevertheless, the authors suggest that, when viewed in light of the anticommons theory, fair use doctrines retain a valid efficiency justification. Even if copyright licenses can be transferred at no cost (for instance, in a “click and pay” frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses. The authors identify a number of critical variables that should guide and constrain the application of fair use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate. In the seventh paper, ‘Civil and Criminal Sanctions Against Blackmail: An Economic Analysis’, Fernando Gómez and Juan-José Ganuza offer a new perspective on the legal prohibition of blackmail. They use a simple game-theoretic model of the blackmail interaction under three alternative legal regimes: blackmail as a legally enforceable contract, blackmail as a voidable contract, and criminal blackmail. The paper shows that the first two are substantially
Editorial / International Review of Law and Economics 21 (2002) 355–357
357
equivalent, and are unable to prevent a successful blackmail equilibrium outcome. Making blackmail a crime can instead alter this result for some parameters of the model. Surprisingly, the non-regulation of blackmail could also destabilize, in a one-shot interaction, the successful blackmail outcome. In plausible dynamic interactions, however, it fails to do so and, in fact, its effects actually resemble those of blackmail as an enforceable contract. This result might explain why most legal systems stick to the criminalization of blackmail. In the final paper of this issue, Per-Olof Bjuggren and Henrik Donner focus on the ownership structure of the Gotha Canal, a seaway through Sweden that connects the Baltic Sea with the Atlantic Ocean. It is nowadays considered to be one of the most famous cultural landmarks in Sweden. The Gotha Canal was privately owned from 1832 until 1978. Since then, it has been owned by the state. This paper analyses why the change from private to state ownership took place and also looks at the implication of this ownership change for profit maximizing behavior and maintenance of the canal. Gerrit De Geest Utrecht University, Utrecht, The Netherlands Corresponding author Present address: Economic Institute/CIAV Kromme Nieuwegracht 22, 3512 HH Utrecht The Netherlands Tel.: +32-9-281-24-24; fax: +32-9-281-24-24 E-mail address: [email protected] (G. De Geest) Roger J. Van den Bergh Erasmus University Rotterdam, Rotterdam, The Netherlands E-mail address: [email protected] (R.J. Van den Bergh)
Editorial
Seventeenth Annual Conference of the European Association of Law and Economics, Ghent, Belgium, September 2000 This special issue contains a selection of papers, presented at the 17th Annual Conference of the European Association of Law and Economics, held at Ghent on September 14–16, 2000. At this conference, about 40 papers were presented, covering a wide range of topics, including property law, intellectual property, corporate law, banking law and antitrust law. As usual, an anonymous refereeing process has been organized, according to the high standards of the International Review of Law and Economics. The issue opens with an empirical study of Clas Bergström, Theodore Eisenberg and Stefan Sundgren on ‘Secured Debt and the Likelihood of Reorganization’. This study of Finnish reorganizations finds that creditor groups most likely to be well-secured are most likely to oppose reorganization. This is in line with theoretical findings that suggests that secured creditors often have more to lose than to gain in reorganizations, since if after reorganization the value of the firm appreciates, the secured creditors receive only part of the gain, while if the firm’s value depreciates, the secured creditors bear all of the cost. The second paper is a theoretical model of Markus A. Lehmann on ‘Error Minimization and Deterrence in Agency Control: Judicial Review and the Role of the Standard of Proof’. In the model a regulatory agency may collude with regulatees, and a watchdog organization may scrutinize the agency’s decision-making and find evidence speaking for collusive behavior. Lowering the evidence standard leads to an increased collusion deterrence and to a lower probability of acquitting collusive administrators (type I error), but also to a higher probability of convicting innocent administrators (type II error). It is shown that the welfare-maximizing standard of evidence is lower than the one that merely minimizes the costs of legal errors. The paper further analyzes the conditions under which both error cost minimization and complete deterrence coincide with welfare-maximization. The third and fourth paper are on the new Basle Accord. The Basle Accord of 1988 regulated how much equity banks must set aside as a cushion against default risk. In its 1999 proposal for a new Accord, the Basle Committee seeks to introduce different equity rations for customers of different risk levels. In an article entitled ‘The New Basle Accord, Internal Ratings, and the Incentives of Banks’, Roland Kirstein shows that even if we assume that banks have better diagnosis skills than external rating agencies, external ratings are better able to implement 0144-8188/02/$ – see front matter © 2002 Elsevier Science Inc. All rights reserved. PII: S 0 1 4 4 - 8 1 8 8 ( 0 1 ) 0 0 0 7 4 - 6
356
Editorial / International Review of Law and Economics 21 (2002) 355–357
the goals of the Basle Committee than internal ratings. This is due to a lack of incentives by supervision of internal ratings, even if imperfect and only occasional. However, this requires that a fine be imposed if the supervising authority comes to a result different from the internal rating assigned by the bank. In the next article, ‘Banking in a Theory of the Business Cycle: A Model and Critique of the Basle Accord on Risk-Based Capital Requirements for Banks’, Robert E. Krainer presents a theoretical framework for understanding the investment decisions and financing decisions of financial and non-financial enterprises over the business cycle. At the core of this theoretical framework is an agency problem between relatively more risk averse depositor/bondholders and relatively less risk averse stockholders. The solution is a corporate governance system that takes the form of an up-front contract that directs managers to make portfolio/investment decisions in the interest of their stockholders, and financing decisions in the interest of their depositor/bondholders. The Basle Accord on risk-based capital requirements for depository institutions is one particular regulatory application of this more general theoretical framework. The paper concludes with a comparison between the Basle Accord and the 100 percent reserve or narrow banking proposal as the means of achieving a risk-free medium of exchange and a financial system that facilitates the optimal transfer of resources from savers to investors consistent with society’s aversion towards risk. The paper by Roger D. Blair and Richard E. Romano analyzes the competitive significance of advance price announcements. In the model, advance price announcements are used by firms to communicate private information on demand or cost. By so sharing the information, the firms are able to set their prices at more profitable levels. When the advance price announcements resolve demand uncertainty, profits rise and consumer surplus falls. Interestingly, when the advance price announcements resolve cost uncertainty, both profits and consumer welfare rises. Finally, the authors examine U.S. antitrust policy regarding price announcements. In their paper on ‘Fair Use and Copyright Protection: A Price Theory Explanation’, Ben Depoorter and Francesco Parisi criticize the transaction-cost-based justification of the fair-use doctrines, according to which these doctrines were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. Computer technology has reduced transaction costs associated with copyright transfer. Nevertheless, the authors suggest that, when viewed in light of the anticommons theory, fair use doctrines retain a valid efficiency justification. Even if copyright licenses can be transferred at no cost (for instance, in a “click and pay” frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses. The authors identify a number of critical variables that should guide and constrain the application of fair use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate. In the seventh paper, ‘Civil and Criminal Sanctions Against Blackmail: An Economic Analysis’, Fernando Gómez and Juan-José Ganuza offer a new perspective on the legal prohibition of blackmail. They use a simple game-theoretic model of the blackmail interaction under three alternative legal regimes: blackmail as a legally enforceable contract, blackmail as a voidable contract, and criminal blackmail. The paper shows that the first two are substantially
Editorial / International Review of Law and Economics 21 (2002) 355–357
357
equivalent, and are unable to prevent a successful blackmail equilibrium outcome. Making blackmail a crime can instead alter this result for some parameters of the model. Surprisingly, the non-regulation of blackmail could also destabilize, in a one-shot interaction, the successful blackmail outcome. In plausible dynamic interactions, however, it fails to do so and, in fact, its effects actually resemble those of blackmail as an enforceable contract. This result might explain why most legal systems stick to the criminalization of blackmail. In the final paper of this issue, Per-Olof Bjuggren and Henrik Donner focus on the ownership structure of the Gotha Canal, a seaway through Sweden that connects the Baltic Sea with the Atlantic Ocean. It is nowadays considered to be one of the most famous cultural landmarks in Sweden. The Gotha Canal was privately owned from 1832 until 1978. Since then, it has been owned by the state. This paper analyses why the change from private to state ownership took place and also looks at the implication of this ownership change for profit maximizing behavior and maintenance of the canal. Gerrit De Geest Utrecht University, Utrecht, The Netherlands Corresponding author Present address: Economic Institute/CIAV Kromme Nieuwegracht 22, 3512 HH Utrecht The Netherlands Tel.: +32-9-281-24-24; fax: +32-9-281-24-24 E-mail address: [email protected] (G. De Geest) Roger J. Van den Bergh Erasmus University Rotterdam, Rotterdam, The Netherlands E-mail address: [email protected] (R.J. Van den Bergh)