Subnational Legal Property and Judicial System Efficiency and Firm-level Access to Finance: Evidence from Africa
Chukwunonye O. Emenalo (Lagos Business School, Pan-Atlantic University)

Abstract : Law and finance theory has been one of the most influential theories in institutional economics in recent times and links legal rules and regulations to financial outcomes. This paper tests this theory in nascent institutional contexts such as those in Africa by taking advantage of a panel dataset of Nigerian firms that combines data from subnational measures of the efficiency of the legal property and judicial system from the World Bank Doing Business Report and firm-level access to finance data from the World Bank Enterprise surveys. We investigated the effects of changes (reforms) to subnational institutional variables on firm-level access to finance. Based on firm fixed effects panel analysis of a sample of Nigerian firms that exploits changes in the subnational institutional variables between the years 2007 and 2014, we find that two statistically significant measures of the efficiency of the legal property system went contrary to the predictions of the law and finance theory, while the only statistically significant measure of the judicial system efficiency gave mixed findings for the law and finance theory. We discuss theoretical and policy implications of our findings. JEL codes: G20, K20, O55 Keywords: law and finance theory; legal property system efficiency; judicial system efficiency; access to finance; Africa; Nigeria

Formal Contracts Without Courts: Scoring Suppliers to Build Trust
Juan-Jose Ganuza (Universitat Pompeu Fabra)
Fernando Gomez (Universitat Pompeu Fabra)

Abstract : Why firms use contracts in a lawless world? Recent empirical findings point at the actual use of explicit (but imperfectly enforceable) formal contracts by businesses alongside substantial informal elements. In this paper we formally show the supporting role that formal contracts play for relational contracts. Even entirely disregarding contract enforcement through a Court or arbitrator, we formally show that contractual documents (even when known by the parties as not meant to be enforced) may have an important and positive influence on reputational or reciprocity-based sanctions upon their suppliers to sustain cooperation. We demonstrate that setting compliance with certain tasks in a formal contract reduces the cost of reputational punishments that firms may need to inflict in order to ensure the right incentives to provide effort. We also show that formal contracts impact the way in which reputational punishments will be structured: Formal contracts optimally induce a more eschewed pattern of sanctioning, compared to a benchmark case in which no formal contract has been agreed. Thus, when dealing with its counterparties a firm will be, when the relational contract comes together with a formal contract, less forgiving with those counterparties who have not performed the formal contract, and more forgiving with those other ones who have not infringed the provisions of the formal document.

Behavioral Law & Economics Goes to Court: the Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-surcharge Laws
Geoffrey A. Manne (International Center for Law & Economics)
Todd J. Zywicki (Scalia Law School, George Mason University)
Kristian Stout (International Center for Law & Economics)

Abstract : Recent efforts of behavioral law and economics scholars have been directed toward challenging a number of state laws that regulate retailers’ use of surcharge fees for consumer credit card payments. In 2016 the issue reached the Supreme Court. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics. In this article, we examine the merits of that effort. The Petitioners in the case and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech. Assessing the merits of the underlying economic arguments, we conclude that neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story” that happens to lack any empirical support. In fact, the evidence strongly suggests that consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.