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Abstract:
The purpose of this paper is to offer a formal model of corporate income tax evasion. While individual tax evasion is essentially a portfolio selection problem, corporate income tax evasion is much more complicated. When the owner of a firm decides to evade taxes, not only does it risk being detected by the tax authorities but, more importantly, the optimal compensation scheme offered to the employees will be altered. Specifically, due to the illegal nature of tax evasion, the contract offered to the manager is necessarily incomplete. This creates a distortion in the manager's effort, and reduces the efficiency of the contract. Tax evasion thus increases the profit retained by the firm not only at the expense of the risk of being detected, but also in the efficiency loss of internal control.

tax evasion, internal control, incomplete contract, contract enforcement, renegotiation

Abstract:
External recruitment has often been viewed as a necessary evil in that it trades off the need for outside talent with incentives of inside workers. This paper, however, shows that even from an incentive viewpoint, external recruitment has its positive role to play. Specifically, if promotion is based on relative performance, then negative activities in the form of sabotage are a valuable instrument to compete. This results in inefficiency of the workers' efforts. External recruitment, by reducing the marginal return of negative activity, can restore the incentives of the workers to engage in productive activity and enhances the firm's performance. We also show that even when negative activities are not a concern, external recruitment can sometimes avoid the shirking equilibrium, or prevents collusion of workers.

External recruitment, Sabotage, promotion, relative performance, collusion

Abstract:
External recruitment has often been viewed as a necessary evil in that it trades off the need for outside talent with incentives of inside workers. This paper, however, shows that even from an incentive viewpoint, external recruitment has its positive role to play. Specifically, if promotion is based on relative performance, then negative activities in the form of sabotage are a valuable instrument to compete. This results in inefficiency of the workers' efforts. External recruitment, by reducing the marginal return of negative activity, can restore the incentives of the workers to engage in productive activity and enhances the firm's performance. We also show that even when negative activities are not a concern, external recruitment can sometimes avoid the shirking equilibrium, or prevents collusion of workers.

External recruitment, Sabotage, promotion, relative performance, collusion

Abstract:
This paper studies the "negative" activities of members in organizations. In competing for promotion, the members not only can work to enhance their own performances, but can also work to "sabotage" their opponents in order to decrease their performances. They find it worthwhile to engage in negative activities because promotion is based on relative performance, and that its nature is all-or-nothing. We investigate the nature, determinants and impact of the negative activities. We find that abler members are subject to more attacks. Moreover, not only is there double inefficiency in effort, but also that those of the highest caliber might not have the best chance to be promoted. The paper also discusses several institutional designs to reduce the influence of negative activities.

rank-order tournament, sabotage, relative performance, promotion, organization

Abstract:
This article theoretically compares the British and American fee-shifting rules in their influences on the behavior of the litigants and the outcomes of litigation. We build up a comprehensive litigation model with asymmetric information and agency costs, which makes it possible to make comparison on a broad arrays of issues in a single unified framework. We then solve for the equilibria under both American and British rules, and thereby compare their equilibrium settlement amounts and rates, expenditures incurred in trials, as well as the plaintiff's chances of winning and incentive to sue. The theoretical results are broadly consistent with existing empirical evidence.

Abstract:
This paper theoretically compares the British and American fee-shifting rules in their influences on the behavior of the litigants and the outcomes of litigation. We build up a comprehensive litigation model with asymmetric information and agency costs, and solve for the equilibria under both American and British rules. We thereby compare their equilibrium settlement amounts and rates, expenditures incurred in trials, as well as the plaintiff's chances of winning and incentive to sue. The theoretical results are broadly consistent with existing empirical evidence.

fee-shifting rules, contingency fees, British rules, American rules, agency cost, bargaining

Abstract:
This paper theoretically compares the British and American fee-shifting rules in their influences on the behavior of the litigants and the outcomes of litigation. We build up a comprehensive litigation model with asymmetric information and agency costs, and solve for the equilibria under both American and British rules. We thereby compare their equilibrium settlement amounts and rates, expenditures incurred in trials, as well as the plaintiff's chances of winning and incentive to sue. The theoretical results are broadly consistent with existing empirical evidence.

fee-shifting rules, contingency fees, British rules, American rules, agency cost, bargaining

Abstract:
This paper proposes a formal model of migration in which workers are heterogeneous and markets are stochastically correlated. We derive and characterize the optimal migration pattern of the family. It is shown to depend on the differences in expected incomes, costs of migration, income risks, and more importantly market correlation. We show that migration can take place even when migrants earn less abroad and, more surprisingly, when earnings in the foreign country are riskier for every member of the family. Moreover, it may well be an optimal arrangement to have only dependents migrate, thus rationalizing the recent dependent-oriented migration flows from places like Hong Kong and Taiwan. We also provide some evidence in support of our theory.

migration, risk diversification, family, dependents

Abstract:
This paper proposes a formal model of migration in which workers are heterogeneous and markets are stochastically correlated. We derive and characterize the optimal migration pattern. It is shown to depend on differences in expected earnings, costs of migration, income risks, and more importantly market correlations. We show that migration can take place even when the emigrants earn less abroad and, more surprisingly, when earnings in the foreign country are riskier. Moreover, it may well be an optimal arrangement to have only dependents migrate, thus rationalizing the dependent-oriented migration flows from places like Hong Kong and Taiwan. We also provide some evidence in support of our theory.

International Migration, Decision-making under Uncertainty

Abstract:
The paper studies the nature, determinants, and impacts of "negative" activities in organizations. In competing for promotion, the members in organizations can work not only to enhance their own performances, but also to "sabotage" their opponents' performances. They find it worthwhile to engage in negative activities because promotion is based on relative, rather than absolute, performance, and its nature is winner-take-all. We find that abler members are subject to more attacks. Consequently, not only is there double inefficiency in effort, but also members of highest caliber do not necessarily have the best chance of promotion. Finally, we discuss several institutional designs that might help to reduce the influence of negative activities.

promotion, tournament, relative performance, sabotage

Abstract:
The paper studies the nature, determinants, and impacts of "negative" activities in organizations. In competing for promotion, the members in organizations can work not only to enhance their own performances, but also to "sabotage" their opponents' performances. They find it worthwhile to engage in negative activities because promotion is based on relative, rather than absolute, performance, and its nature is winner-take-all. We find that abler members are subject to more attacks. Consequently, not only is there double inefficiency in effort, but also members of highest caliber do not necessarily have the best chance of promotion. Finally, we discuss several institutional designs that might help to reduce the influence of negative activities.

promotion, tournament, relative performance, sabotage

Abstract:
The paper considers an ascending price auction with two bidders, in which the buyers are given the additional option to obtain the object immediately by paying a fixed price (the buy-out price). We completely characterize the optimal bidding strategy of the bidder and the optimal buy-out price of the seller. We show that the more risk-averse a buyer, the earlier he is willing to buy out the object. Moreover, the seller's optimal buy-out price is decreasing in the his own degree of risk-aversion, and increasing in that of the buyer. The expected transaction price and the expected utility of the seller are higher with the buy-out option. Finally, contrary to the usual ascending price auctions, the longer it takes for an item to be sold, the lower is its transaction price. All the theoretical predictions are confirmed in the data we collect from Taiwan's Yahoo! auction site.

auctions, on-line auctions, buy-out

Abstract:
This paper proposes a simple model for multiple second-price auctions which run parallel to each other, in the sense that though they might not begin or end at the same time, they have certain periods of overlap. We characterize the equilibrium bidding strategy of the buyers and the equilibrium price of each auction. Last-minute bids arise naturally in the equilibrium. We show that, except for the last auction, the maximum price a buyer is willing to pay is less than his valuation, and that the ex ante expected transaction prices are identical for all auctions. A simple empirical test is also performed to verify the theoretical implication of the model.

online auctions, parallel auctions, last-minute bids, eBay

Abstract:
The purpose of an open primary is to incorporate more moderate votes into the primary elections. This intention may backfire when nonparty members strategically participate in the primary: The result on an open primary might become even more extreme than when nonparty members are not allowed to vote. Realizing this, the party members might also vote strategically to counter-react. If this occurs, then it might actually coordinate the votes of the party's supporters. The effect of strategic voting behavior on the result of primary depends on the size of the party, turnout rate of the nonparty members, the positions of the candidates and the proportion of voters who vote strategically. Strategic voting behavior can sometimes improve social welfare.

open primary, closed primary, strategic voting, Hotelling model, presidential election

Abstract:
The purpose of an open primary is to incorporate more moderate votes into the primary elections. This intention may backfire when nonparty members strategically participate in the primary: The result on an open primary might become even more extreme than when nonparty members are not allowed to vote. Realizing this, the party members might also vote strategically to counter-react. If this occurs, then it might actually coordinate the votes of the party's supporters. The effect of strategic voting behavior on the result of primary depends on the size of the party, turnout rate of the nonparty members, the positions of the candidates and the proportion of voters who vote strategically. Strategic voting behavior can sometimes improve social welfare.

open primary, closed primary, strategic voting, Hotelling model, presidential election

Abstract:
This paper invesigates the optimal compensation scheme for workers in a team who value not only absolute but also relative incomes. A worker is said to be more ambitious if his utility places more weight on relative income. In this case the firm can exploit the worker's preference for relative comparison to design a compensation scheme that induces the same effort level with lower cost. Under the optimal compensation scheme, the workers' wages are shown to depend on relative performance, and exhibit wage compression. More importantly, even if the production technology calls for absolute performance evaluation in the traditional principal-agent framework, the optimal wage structure still relies on relative performance. Finally, in contrast to past literature, worker heterogeneity is shown to reduce the firm's profit.

relative performance, absolute performance, promotion tournament, wage contract, relative income comparison

Abstract:
This paper extends the results in Hidvegi et al. (2006) to the case when the number of bidders is common knowledge in an English auction with buy-out. In that case when some bidders drop out, the remaining bidders have to update their information, and change the threshold auction price at which they are willing to buy out accordingly. We explicitly model the information-updating process during auction and the implied recursive nature of the optimal buy-out strategy. Using a recursive equation linking the value functions for n- and (n+1)-bidder cases, we completely characterize the dynamic optimal buy-out strategy. It is shown that the bidders will postpone buy-out (by waiting until the aution price is higher) when some of them drop out.

English auction, buy-out, buy-price, on-line auction

Abstract:
In the paper we construct a spatial model that specifies voter utility in terms of responsiveness to public policy and provide an explanation of the seeming paradox that voters who vote for the incumbent also unilaterally self-impose term limits. Our model shows that when the position of the incumbent is closer to the median voter position, it is less likely that voters will support term limits. But if the incumbent's party is more moderate, it is more likely that voters will support term limits. In addition, we argue that term limits or the threat of it will increase the responsiveness of the politicians' policy platforms.

term limits, incumbency advantage, spatial model of voting, risk aversion

Abstract:
Trade policies such as tariffs are often featured by the prisoners' dilemma. One country's trade liberalization is vulnerable to the opportunism of another country. This problem is more serious in cases where a country behaving opportunistically can only be punished by the victims. In a trade model with three countries, we show that "circular concessions" are the only way to have any Pareto-improving trade liberalization. The circular nature of the concessions implies that if punishment can be carried only by the victim of opportunistic behavior, multilateral trade liberalization cannot be sustained. Our results have implications for the rule design in multilateral systems such as the WTO.

multilateral trade liberalization, WTO

Abstract:
The paper studies the nature, determinants, and impact of negative activities in organizations. In competing for promotion, the members in organizations can work not only to enhance their own performances, but also to 'sabotage' their opponent's performances. It is worthwhile for them to engage in negative activities because promotion is generally based on relative, rather than absolute, performance, and its nature is winner-take-all. We find that abler members are subject to more attacks. Consequently, not only is there a double inefficiency in effort, but also members of the highest caliber might not have the best chance of being promoted. Finally, we discuss several institutional designs that might help to reduce the influence of negative activities.

Abstract:
Judicial torture to extract information or elicit confession was a common practice in pre-modern societies, both in the East and the West. Moreover, often it was applied not only on the suspects, but also on the witnesses and plaintiffs as well. This paper proposes a positive theory for judicial torture. It is shown that torture reflects the magistrate's attempt to balance type I and type II errors in decision-making, by forcing the guilty to confess with higher probability than the innocent, and thereby decreases type I error at the cost of type II error. In that case, torturing the witnesses or the plaintiff might also serve the same function, as it helps to screen the cases so that only those with greater merits enter the court. When the information revealed during investigation improved as a result of technological advance, a judicial system based on torture became inferior to one based on evidence. This result is then used to explain the historical development of the judicial system.

Torture, Type I and Type II errors, Evidence

Abstract:
Using newly collected data on the labor dispute in Taiwan, we study the selection process of cases settled out of court, cases dropped after settlement fails, and cases actually brought to the court. We find that the size of the stakes plays an important role in the interrelation between settlement and litigation. In particular, our study shows that increasing stakes would decrease the probability of settlement, decrease the recovery rate in settlement, and increase the probability of litigation after settlement fails. The result of our empirical analysis indicates that while the plaintiff’s creditability of threatening a lawsuit is an important issue, this credibility issue is not so important as to undermine the pattern that an increase in the stakes would decrease the likelihood of settlement. Our study also reveals that the mediation mechanism performs the function of allowing workers with small claims to obtain effective recovery, which would have been impossible if those workers had to resort to litigation. This result also suggests that the traditional models are inadequate in explaining the settlement mechanism of disputes involving small claims. Finally, we find that the workers’ risk-aversion might cause their recovery rate in settlement drops as the amount of their initial claims increase.

settlement and litigation, economic analysis of law, labor dispute, case selection

Abstract:
By modeling judicial torture as a war of attrition, the paper derives the optimal strategies of the magistrate and the accused defendant as functions of their characteristics and the nature of uncertainty. Torture can occur as an equilibrium outcome in which both parties take costly actions to overcome informational barriers. Whether the magistrate will torture, and its result if he does, is shown to depend on how he evaluates the loss of type II error against the torturee's pain, his belief on how likely it is that the defendant is guilty, and the defendant's disutility of being tortured relative to the legal penalty of crime.

torture, type I and II errors, evidence, war of attrition, imperfect information

Abstract:
Based on the frictional matching framework, the paper provides a theoretical model for the two-sided platform in which the number of participants on both sides of the platform and the source of network externalities are endogenously determined. The platform is shown to exhibit both positive cross-group and negative within-group networks externalities. Moreover, unlike the previous literature, a participant's utility is bounded, even if the number of participants on the other side of the platform goes to infinity. The optimal prices of the platform owner are shown to depend not only on the cost of providing service and the benefits of the participants, but also on how a new entrant (either a buyer or a seller) affects the matching probability. Because of the existence of the negative externalities, the platform never subsidizes the sellers.

two-sided platform, search, matching, pricing, network externalities

Abstract:
In the paper we construct a spatial model that specifies voter utility in terms of responsiveness to public policy and provide an explanation of the seeming paradox that voters who vote for the incumbent also unilaterally self-impose term limits. Our model shows that when the position of the incumbent is closer to the median voter position, it is less likely that voters will support term limits. But if the incumbent's party is more moderate, it is more likely that voters will support term limits. In addition, we argue that term limits or the threat of it will increase the responsiveness of the politicians' policy platforms.

term limits, incumbency advantage, spatial model of voting, risk aversion

Abstract:
Taiwan's large-scale legal reform in 2003 provides an excellent natural experiment-like setting for empirical investigation to many issues related to legal procedures and practices. Using trial data from 2004 to 2007, we test whether there has been a systematic difference in trial outcomes between criminal defendants with different types of defense counsel, and examine the policy implications on issues related to adequate legal representation of indigent defendants. Our study finds that defendants who hire their own legal counsels do fare better: they are less likely to be convicted and, when they are, receive lighter punishment. Moreover, even among those who do not retain counsels, there is also a difference in trial outcomes: those represented by public defenders are more likely to be convicted than those represented by assigned counsels, but once convicted the former receive less severe punishment. Our study suggests that public defenders more often use a tactic during trial that encourages the defendants to confess to the crime in exchange for more lenient punishment.

criminal justice system, indigent defense system, public defender