Regulation of economic activity is ubiquitous around the world, yet standard theories predict it should be rather uncommon. I argue that the ubiquity of regulation is explained not so much by the failure of markets, or by asymmetric information, as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. The approach accounts for the ubiquity of regulation, for its growth over time, as well as for the fact that contracts themselves are heavily regulated. It also makes predictions, both across activities and across jurisdictions, for the efficiency of regulation and litigation as strategies of enforcing efficient conduct.
We propose a theory of financial intermediaries operating in markets influenced by investor sentiment. In our model, banks make, securitize, distribute, and trade loans, or they hold cash. They also borrow money, using their security holdings as collateral. Banks maximize profits, and there are no conflicts of interest between bank shareholders and creditors. The theory predicts that bank credit and real investment will be volatile when market prices of loans are volatile, but it also points to the instability of banks, especially leveraged banks, participating in markets. Profit- maximizing behavior by banks creates systemic risk.
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We present a model of intuitive inference, called “local thinking,” in which an agent combines data received from the external world with information retrieved from memory to evaluate a hypothesis. In this model, selected and limited recall of information follows a version of the representativeness heuristic. The model can account for some of the evidence on judgment biases, including conjunction and dis- junction fallacies, but also for several anomalies related to demand for insurance.
We document that, in a cross section of countries, government regulation is strongly negatively correlated with measures of trust. In a simple model ex- plaining this correlation, distrust creates public demand for regulation, whereas regulation in turn discourages formation of trust, leading to multiple equilibria. A key implication of the model is that individuals in low-trust countries want more government intervention even though they know the government is corrupt. We test this and other implications of the model using country- and individual-level data on trust and beliefs about the role of government, as well as on changes in beliefs during the transition from socialism.
We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on “the same” standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls. (JEL E22, F23, G31, H25, H32, L26)
Efficient legal rules are central to efficient resource allocation in a market economy. But the question whether the common law actually converges to efficiency in commercial areas has remained empirically untested. We create a data set of 461 state court appellate decisions involving the economic loss rule in construction disputes and trace the evolution of this law from 1970 to 2005. We find that the law did not converge to any stable resting point and evolved differently in different states. Legal evolution is influenced by plaintiffs’ choice of which legal claims to make, the relative economic power of the parties, and nonbinding federal precedent.
We collect data on the rules and practices of financial and conflict disclosure by members of Parliament in 175 countries. Although two- thirds of the countries have some disclosure laws, less than one-third make disclosures available to the public, and less than one-sixth of potentially useful information is publicly available in practice, on average. Countries that are richer, more democratic, and have free press have more disclosure. Public disclosure, but not internal disclosure to parliament, is positively related to government quality, including lower corruption. (JEL J13, I21, I12)
Peter Bauer was one of the greatest development economists in liistory. He was an advocate of property rights protection and free trade before tliese ideas became commonplace. He appreciated before otliers did tlie crucial roles of entrepreneurship and trade in development. He was also one of the earliest opponents of the over- population tliesis, recognizing tliat tlie poor like tlie rich should have tlie right to choose the number of children tliey have, tliat many developing countries are underpopulated, and that population growtli will anyhow slow down once they become richer Bauer's writings are remarkable for tlieir deep humanity and commitment to tlie welfare of tlie people in die developing world, but without the fake sanctimony tliat characterizes much of die modem rhetoric.
Simeon Djankov et al. (2003) introduce a measure of the quality of contract enforcement—the formalism of civil procedure—for 109 countries as of 2000. For 40 of these countries, we compute proce- dural formalism every year since 1950. We find that large differences in procedural formalism between common and civil law countries existed in 1950 and widened by 2000. For this area of law, the find- ings are inconsistent with the hypothesis that national legal systems are converging, and support the view that legal origins exert long lasting influence on legal rules. (JEL K41, O17)