Luigi Alberto Franzoni

Tax Evasion and Tax Compliance

This essay offers an overview of the theoretical and empirical research on tax evasion, delineating the variety of factors affecting noncompliance and examining possible remedies. Particular emphasis is placed on the institutional and procedural rules governing the tax enforcement policy.Revised version available: http://ssrn.com/abstract=1271168

Patents, Secrets, and the First-Inventor Defense

We analyze optimal patent design when innovators can rely on secrecy to protect their innovations. Secrecy has no fixed term but does not preclude accidental disclosure nor independent creation by other inventors. We derive the optimal scope of the rights conferred to such second inventors, showing that if the patent life is set optimally, second inventors should be allowed to patent and to exclude first inventors who have relied on secrecy. We then identify conditions under which it is socially desirable to increase patent life as much as is necessary to induce first inventors to patent. The circumstances in which it is preferable that they rely on secrecy seem rather limited. Copyright 2004 Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK..

Negotiated Enforcement and Credible Deterrence

This paper develops a model of law enforcement in which indicted offenders and the prosecutor can negotiate the penalty prior to the completion of the investigation. The analysis focuses on the credibility of the conviction threat: the prosecutor cannot commit to any predetermined level of investigative effort should the negotiation fail. The settlement stage introduces several new features of the optimal enforcement policy, including the possibility that maximal sanctions may not be optimal. We show that the screening process associated with the negotiation stage reduces the incentives for the prosecutor to undertake thorough investigations and increases the rate of noncompliance.

Innovation, Duplication, and the Contract Theory of Patents

In this paper we look at patents as alternative to trade secrets. We disentangle the disclosure motive for patent protection from the traditional reward motive by adjusting the level of patent protection so as to make the innovator just indifferent between patenting and keeping the innovation secret. Thus, we keep the reward (expected profits) to the innovator fixed and concentrate on ex-post efficiency. When duplication is not feasible and secrecy only entails the risk of public disclosure (a leakage), patents and secrets are perfect substitutes. Yet, a distinctive features of trade secret protection is that it allows for independent creation. The duplicative efforts to reproduce a concealed innovation make patents and secrets imperfect substitutes. If such duplicative efforts are actually exerted under secrecy, patents provide the pre-specified incentive to innovate at least social cost. If, however, the threat of duplication induces the innovator to preemptively license her trade secret, and such licensing agreements allow the innovator to appropriate all the saved duplication costs, then secrets can reward innovative activity more efficiently than patents. Thus, the issue of whether patents are socially preferable to secrets boils down to an assessment of the prevalence and the efficiency of trade secret licensing. The available empirical evidence suggests that licensing of trade secret information is limited and therefore hints at the superiority of patents.

Independent Auditors as Fiscal Gatekeepers

A wheel chock for aircraft comprising a first inverted U-shaped channel member which includes a horizontal upper surface and side surfaces extending downwardly therefrom to form vertical side edges. A first side panel is secured to one side edge of the first channel member and extends horizontally in a first direction with at least one locking hole extending therethrough. An aperture extends through each side surface of the first channel member in axial alignment about a horizontal axis. Both apertures are of a common predetermined diameter. A second U-shaped channel member includes a horizontal upper surface and side surfaces extending downwardly therefrom to form vertical side edges. A second side panel is secured to one side edge of the second channel member and extends horizontally in a second direction opposite from the first direction with at least one locking hole extending therethrough adapted to be positioned in alignment with at least one of the holes of the first side panel. A cylindrical rod extends horizontally in the second direction from adjacent to the end of the second channel member remote from the second side plate and is slidingly positionable within the apertures of the first channel member to an extent determined by the alignment of locking holes of the first and second side plates. A chain is secured to the first channel member adjacent to the apertures. The chain has a free end adapted to be positioned in alignment with the aligned holes of the first and second side plates.

On the Winner-Take-All Principle in Innovation Races

What is the optimal allocation of prizes in an innovation race? Should the winner take all or is it preferable that first inventors share the market with late independent duplicators? This paper re-examines the issue taking into account that the incentives to innovate depend not only on industry profits but also on the division of profits between early and late inventors. In our baseline model two firms race for an innovation in continuous time. In the winner-take-all system as soon as one firm innovates the other stops investing in RD in the alternative more permissive system the laggard continues to invest to duplicate the innovation and when it also succeeds the market becomes a duopoly. We compare the two regimes on welfare grounds finding that the winner-take-all system can be socially optimal in a broad set of circumstances much broader than envisioned by the recent literature. We discuss why we arrive at di§erent results than the early literature and the policy implications of our analysis.

Imperfect Competition in Certification Markets

This paper offers a theoretical analysis of imperfect competition in certification markets. Firms that intend to engage in a regulated activity must produce third-party certification of compliance with prescribed regulations and standards. The certification service is provided by independent certifiers competing a la Cournot. We show that the interaction between certifiers and firms results in a market equilibrium that can be illuminated by the techniques of standard oligopoly theory. When certifiers’ liability is not too low, the certify cation fee is determined by the degree of concentration of the certification market. Due to the peculiarity of this market, a lower concentration is not always socially desirable.

Original ArticlesIndependent auditors as fiscal gatekeepers1

This paper develops a framework for the analysis of gatekeeping in tax enforcement, whereby independent auditors are assigned the duty of attesting taxpayers’ returns. The equilibrium of the market for gatekeepers’ services is characterized, as well as taxpayers’ and auditors’ optimal behavior. The paper identifies the conditions under which the introduction of a mandatory attestation system is likely to be desirable. The results of the paper suggest that: (1) collusion may disrupt the gatekeeping system if the compounded liability of the auditor and the taxpayer is not sufficiently high; (2) a more extended delegation of the enforcement power to private auditors is generally desirable; (3) the cartelization of the gatekeepers’ market has definitely detrimental effects; and (4) when the probability that erroneous attestations are detected and sanctioned depends on the effort exerted by a public enforcer, multiple equilibria may arise, due to the substitutability of public and private monitoring.This paper develops a framework for the analysis of gatekeeping in tax enforcement, whereby independent auditors are assigned the duty of certifying taxpayers` reports. The equilibrium of the market for gatekeepers` services is characterized, as well as taxpayers` and auditors` optimal behavior. The paper discusses the optimal structure of the gatekeeping regime and determines the conditions under which it is socially preferable to direct public enforcement.

Liability Law and Uncertainty Spreading

This paper investigates the ability of liability rules to allocate uncertainty. Uncertainty includes both the standard risk and the ambiguity that arises when the causal link between conduct and harm is not conclusive, as is frequently the case with toxic torts. The optimal features of the strict liability rule and the negligence rule are obtained. Strict liability proves superior to negligence when harms are uncorrelated and victims are at least as uncertainty-averse as the injuring party. Negligence is preferable when harms are correlated and victims are numerous. Thus, negligence proves particularly apt to address systematic harms, such as those arising from design defects and warning failures. The main results also apply when accidents are bilateral and when parties can purchase insurance from an uncertainty-averse insurer.

Optimal Liability Design Under Risk and Ambiguity

This paper develops an original mean-variance model able to capture the disposition of the parties towards both standard risk and ambiguity. Ambiguity arises when the causal link between conduct and harm is not univocal, as is frequently the case with toxic torts. Risk aversion and ambiguity aversion tend to have a similar impact on optimal liability rules if greater care reduces the ambiguity perceived by the parties, i.e. if safety and predictability go hand in hand. Strict liability dominates negligence when the injurer has lower degrees of risk and ambiguity aversion than the victim and can formulate less ambiguous estimates of the probability of harm. The reverse result only holds under stronger conditions.