RSS 1.0Yale Journal on Regulation
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More Competitive Search Through RegulationThis Article identifies a set of possible regulations that could be used both to make the search market more competitive and simultaneously ameliorate the harms flowing from Google’s current monopoly position. The purpose of this Article is to identify conceptual problems and solutions based on sound economic principles and to begin a discussion from which robust and specific policy recommendations can be drafted.
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Market Design for Personal DataIt is now generally understood that personal data––that is, data that relate to individual consumers––drive digital markets. Personal data underlie targeted advertising, which draws billions of dollars into ad-supported markets. Personal data are useful for other purposes as well. Firms in digital markets rely on personal data to deliver their core products and services––we refer to these collectively as “web services”1––to hone and improve them, and to recommend related products and services. These data facilitate innovation, allowing yet more services and “smart” products with increasingly personalized functionalities. Personal data can allow governments to deliver better public services, such as transportation systems, or can help researchers better understand how humans interact with algorithms and which policies might best serve society. And data can also facilitate competition, by improving quality and providing insight into consumer conduct that encourages entry. In these various ways, the massive quantity of personal data currently collected undoubtedly contributes to consumer welfare. But there also are downsides to the collection and use of personal data on such a grand scale. “Surveillance capitalism,” as Professor Shoshana Zuboff has termed it, has blurred the line between the personal and the public, and has commodified our habits, interests, and beliefs in ways that can feel distasteful and invasive. Massive data collection also has made information about us more accessible to government and commercial actors who often face little to no accountability for its misuse.
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Fairness and Contestability in the Digital Markets ActAccording to the managerial strategy literature, a, if not the, key to large profits is the creation of “moats” that protect firms from competition. Firms with market power create moats to maintain that power, and there exist strong incentives to develop new technologies that allow for broader and deeper moats. On the other hand, from a broader societal perspective, and particularly from the perspective of consumers, these moats often are harmful: they surround customers and deny them the opportunity to purchase from competitors. As a result, consumers suffer from the high prices and/or low quality imposed by the incumbent firm, whose incentives to provide the amount and type of innovation desired by consumers are decreased.
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Equitable Interoperability: The “Supertool” of Digital Platform GovernanceThis Article is concerned with competition in digital platform markets where network effects are strong. As is widely acknowledged, these markets have an inherent tendency towards concentration, leaving consumers with little competition in the market. We explain how interoperability regulation can help stimulate competition in the market in a way that benefits consumers. There are different types of regulations that involve different levels of regulatory control of firms’ strategies and products. Interoperability is a form of regulation that is less intrusive than many others and is particularly suited to digital business models and fast changing digital technology. The report solicited by the European Commission on “Competition Policy for the Digital Era” (the Vestager Report) made this point in 2019,1 and we build on it here. Policy tools in this area include data portability and open standards, as well as interoperability. We will distinguish among these tools below, but we note here that the focus of this Article is on interoperability.
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Consumer Protection for Online Markets and Large Digital PlatformsConsumer-protection law is vital for ensuring that market-based economies work in the economic interest of consumers as well as businesses, and thus to the benefit of society as a whole. This is well understood. Caveat emptor—“let the buyer beware”—may have made sense as the default risk allocation between buyer and seller in the village marketplaces of yore, in which transactions were relatively small, and buyers and sellers were likely to know and expect future dealings with each other. These features would naturally encourage traders to comply with community-generated and community-enforced norms of commercial fair dealing.1 In these admittedly idealized markets, sellers who cheated would quickly be found out, and they would face high social and economic costs, in contrast to the social and economic costs sellers face in modern markets, where traders are more likely to be strangers engaged in one-off transactions. The idealized markets of yore also dealt mostly in physical goods, which allowed buyers the opportunity to examine the goods before purchase. Modern markets, especially online markets, differ from the idealized village marketplace in significant ways. The scope and scale of most contemporary online markets, for example, make it unrealistic to hope that relational obligations or a shared sense of morality could fully counterbalance incentives to cheat.
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In Search of the Public Interest“Public interest” standards in statutory delegations to agencies represent the greatest hopes and the darkest fears of the U.S. administrative state. On the one hand, the public interest standard provides a vessel for agencies to infuse policymaking with the moral and ethical commitments of the community. On the other hand, regulation in the public interest opens the door to the arbitrary exercise of tyrannical state power. Despite the lofty aspirations and ominous warnings about regulation in the public interest, little is known about how agencies actually decide what is in the public interest when charged by statute to do so. This Article seeks to move beyond the rhetoric surrounding regulation in the public interest by conducting a grounded inquiry into how agencies implement public interest standards in the statutes they administer. Using data from agency adjudications under four different statutory schemes dating from the early twentieth century to the present, the study investigates how agencies define the public interest, whether agencies use public interest standards with unfettered discretion based on whatever criteria they wish (as some fear), and whether agencies apply public interest standards in ways that infuse policy making with common good or community values (as some hope).
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The Whistleblower Industrial ComplexAlthough the whistleblower programs (WBPs) created by Dodd-Frank have received universal acclaim, little is known about how they actually work. In 2021, the Securities and Exchange Commission (SEC) received an average of forty-nine whistleblower tips every workday. Success depends on sifting through this avalanche of tips to determine which ones to investigate. To date, however, the tip-sifting process has been entirely shrouded in secrecy. This Article breaks new ground. It offers a rare look inside the WBPs administered by both the SEC and the Commodity Futures Trading Commission (CFTC), shining a bright light on the critical role played by private whistleblower attorneys in the tip-sifting process. Using a new dataset comprised of information I obtained under the Freedom of Information Act, I find (among other things) that tipsters represented by lawyers appear to significantly outperform unrepresented ones, repeat-player lawyers appear to outperform first-timers, and lawyers who used to work at the SEC appear to outperform just about everybody. The upshot is that the SEC and CFTC have effectively privatized the tip-sifting function at the core of the WBPs. Private lawyers have earned hundreds of millions of dollars in fees from these programs, with a disproportionate share going to a concentrated group of well-connected, repeat players. Unlike traditional plaintiff-side securities attorneys and attorneys who represent clients seeking government payments in many other contexts, private whistleblower lawyers operate free from virtually all public accountability, transparency, or regulation. I highlight significant efficiency and accountability deficits imposed by this private outsourcing program and propose reforms to realign these private actors with the public interest.
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Equal Treatment Agreements: Theory, Evidence & PolicyWhile the rise of dual-class companies—companies like Facebook, Google, and Visa, which have two or more classes of common stock that differ in voting rights—has been widely observed over the past decade, prior commentators have largely overlooked the important “equal treatment” agreements that are embedded in many dual-class charters. Equal treatment agreements require that stockholders are treated equally, for example by ensuring that all stockholders receive the same consideration per share in the sale of the company, thereby potentially taking away one of the most important benefits of holding the high-vote shares. Using an original database of 312 dual-class charters and their equal treatment agreements, this Article is the first to conduct a robust empirical analysis of equal (and unequal) treatment agreements in dual-class companies. As a policy matter, the Article identifies when such structures are desirable and efficient from a law-and-economics perspective. In doing so, this Article highlights certain agreements (which I term “unequal treatment agreements”) that require equal treatment except for a fixed proportion of disparate consideration as promising structures to facilitate efficient deals, deter inefficient deals, and manage moral hazard. Based on this analysis, the Article provides implications for stakeholders including founders, investors, practitioners, and courts.
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The Corporate Governance of Public UtilitiesRate-regulated public utilities own and operate one-third of U.S generators and nearly all the transmission and distribution system. These firms receive special regulatory treatment because they are protected from competition and subject to rate caps. In the past decade, they also have been at the center of high-profile corporate scandals. They have bribed regulators to secure subsidies for coal-fired generators and nuclear reactors. They have caused wildfires and coal-ash spills that resulted in hundreds of deaths and billions of dollars in liability. Their failure to maintain reliable electric service has contributed to catastrophic blackouts. Perhaps most consequentially, they have emerged as powerful opponents of state and federal climate action. This Article describes the unique corporate governance challenges public utilities face and argues that these governance challenges contribute to the pervasive inefficiencies and the frequency of corporate misconduct that characterize utility industries. American corporate law provides special protections to shareholders, such as the right to elect corporate boards and the requirement that directors and managers owe fiduciary duties to shareholders. The economic justification for these protections is that shareholders are the residual claimants of corporations: because they receive any value a corporation generates beyond what it owes to its fixed claimants, they have the appropriate incentives to pursue value-enhancing investments.
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The Market for Corporate CriminalsThis Article identifies problems and opportunities at the intersection of mergers and acquisitions (M&A) and corporate crime and compliance. In M&A, criminal successor liability is of particular importance, because it is quantitatively less predictable and qualitatively more threatening to buyers than successor liability in tort or contract. Private successor liability requires a buyer to bear bounded economic costs, which can in turn be reallocated to sellers via the contracting process. Criminal successor liability, however, threatens a buyer with non-indemnifiable and potentially ruinous punishment for another firm’s wrongful acts. This threat may inhibit the marketability of businesses that have criminal exposure, creating social cost in the form of inefficient allocations of corporate control. Such a result would be unfortunate because M&A could instead be a lever for promoting compliance. Yet criminal successor liability undermines this possibility and, in turn, the public’s interest in compliance. To countervail these problems, this Article proposes new prosecutorial policies that, through better-targeted sanctions and compliance-enhancing mergers, would promote M&A markets, deter corporate crime, and foster corporate reform.
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Opening a Federal Reserve AccountTo open bank accounts, new customers provide personal information and make a deposit. Within a few minutes (or perhaps a few days), new customers get access to payment services. For many years, the process financial institutions used to open accounts at Federal Reserve Banks was similar. Eligible banks filled out a one-page form and within a week received an account allowing them access to the Federal Reserve’s payment systems. Recently, however, Federal Reserve Banks have spent years considering account requests from novel banks. This Article examines the Federal Reserve’s process for evaluating requests for accounts. Using interviews, court documents, and other sources, it analyzes recent account requests from a cannabis credit union, a narrow bank, a public bank, a cryptocurrency custody bank, and a trust company. These requests reveal a lack of transparency and consistency. Most district Federal Reserve Banks do not explain how institutions should apply for accounts. It is not clear who decides whether to open the account. While the Federal Reserve Banks all evaluate risk associated with accounts and payments, the twelve Reserve Banks may not have the same risk tolerances. Decisions may be inconsistent. Even getting a decision can take years. Unfortunately, the Federal Reserve’s recently adopted guidelines, which consist primarily of a risk identification framework, do not fix these problems.
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Uptier Exchange Transactions: Lawful Innovation or Lender-on-Lender Violence?This Note examines the recent phenomenon of “uptier exchange transactions”: transactions in which a borrower takes assignment of existing loans from participating lenders—those lenders holding a majority of the principal amount of the loan—and then issues new superpriority tranches of debt to the participating lenders, subordinating nonparticipating lenders in the process. Uptier exchange transactions were born in the throes of the COVID-19 pandemic and continue to evolve in the courts. This Note analyzes these transactions and all major litigation concerning them to date. It makes a normative argument in favor of curbing the reach of uptier exchange transactions through equitable judicial interpretation. Finally, this Note proposes an amendment to Article 9 of the Uniform Commercial Code that would protect nonparticipating lenders against these transactions, invoking the Trust Indenture Act of 1939 as a textual model.
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Restoring Indian Reservation Status: An Empirical AnalysisIn McGirt v. Oklahoma, the Supreme Court held that the eastern half of Oklahoma was Indian country. This bombshell decision was contrary to settled expectations and government practices spanning 111 years. It also was representative of an increasing trend of federal courts recognizing Indian sovereignty over large and economically significant areas of the country, even where Indians have not asserted these claims in many years and where Indians form a small minority of the inhabitants. Although McGirt and similar cases fundamentally turn on questions of statutory and treaty interpretation, they are often couched in consequence-based arguments about the good or bad economic effects of altering existing jurisdictional relationships. One side raises a “parade of horribles.” The other contends that “the sky is not falling.” Yet, to date, there is hardly any empirical literature to ground these debates. Litigants have instead been forced to rely upon impressionistic reasoning and economic intuitions. We evaluate these competing empirical claims by exploiting natural experiments: judicial rulings altering the status quo of Indian reservation status. Applying well-established econometric techniques, we first examine the Tenth Circuit’s Murphy v. Royal decision in 2017 and the Supreme Court’s McGirt v. Oklahoma decision in 2020, which both held that the eastern half of Oklahoma was in fact Indian country. To do so, we leverage monthly employment data at the county level, annual output data at the county level, and daily financial data for public companies incorporated in Oklahoma. Contrary to the “falling sky” hypothesis that recognition of Indian jurisdiction would negatively impact the local economy, we observe no statistically significant effect of the Tenth Circuit or Supreme Court opinions on economic output in the affected counties.
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Commission ChairsSince 1950, Congress has granted chairs of many multimember commissions chief-executive authority as a way to increase administrative efficiency. Although it intended to maintain the ability of commission majorities to dictate policy, it inadvertently strengthened the authority of chairs to such an extent that majorities cannot enact their preferred policies without their chair’s cooperation. Using their agenda authority and their authority to direct staff, chairs dictate which policy documents staff develop and which items receive a vote, meaning that a commission majority cannot enact policy if its chair prohibits staff from drafting a rule or refuses to allow a vote to occur. Despite this shift, it is common among scholars and judges to think of commissions as bodies of equals, resulting in applications of the unitary executive theory that fail to appropriately take into account the substantial amount of power chairs wield. This Article is the first comprehensive study of the authority of commission chairs, and it examines the statutes and power dynamics scholars routinely ignore. Using a novel dataset of all federal executive-branch commissions, this Article finds that the majority of commissions operate under a “strong-chair” model, while associate commissioners in fewer than one-in-five commissions have any statutory authority to restrict their chairs’ actions. Using this data, it evaluates the effects of the strong-chair model on commission governance and offers several changes that, if made, could give associate commissioners more control and supervisory authority over the agencies. Doing so would return chairs to their original role as officials who simply keep the agencies operating efficiently and ensure that majority rule drives commission actions. The Article then evaluates this research’s implications for doctrinal applications of the unitary executive theory. Because presidents appoint commission chairs, this research suggests that presidential control of independent agencies is far less attenuated than proponents of the unitary executive theory presently contemplate.
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The Logic and Limits of the Federal Reserve ActThe Federal Reserve is a monetary authority subject to minimal executive and judicial oversight. It also has the power to create money, which permits it to disburse funds without drawing on the U.S. Treasury. Since 2008, it has leveraged this power to an unprecedented extent. It has rescued teetering financial conglomerates, purchased trillions of dollars of mortgage-backed securities, and opened numerous ad hoc lending facilities to support ordinary businesses, nonprofits, and municipalities. This Article identifies the causes and consequences of the Federal Reserve's expanded footprint by recovering the logic and limits of its enabling act. It argues that to understand the Federal Reserve—including its independence, expansion, and capacity—it is necessary first to understand the statutory scheme for money and banking. Congress chartered investor-owned banks to issue most of the money supply and established the Federal Reserve for a limited purpose: to administer the banking system. Congress equipped the Federal Reserve with an interrelated set of tools to achieve a specific objective: ensure that the banking system creates enough money to keep economic resources productively employed nationwide. The rise of shadow banks—firms that issue alternative forms of money without a bank charter—has impaired the Federal Reserve’s tools. As the Federal Reserve has scrambled to adapt, it has taken on tasks it was not built to handle. This evolution has prompted calls for the Federal Reserve to tackle even more policy challenges. It has also undermined the Federal Reserve’s ability to effectively achieve its core goals. An overloaded Federal Reserve is understandable, but not desirable. Congress should modernize the Federal Reserve Act, and the banking laws on which it depends, to improve monetary administration in the United States.
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Privacy for Sale: The Law of Transactions in Consumers’ Private DataLawmakers, regulators, consumer advocates, and the business community have focused increasing attention on the policy issues that arise at the intersection of privacy, technology, and commerce. Yet the law governing what businesses can do with consumer data remains unsettled and unclear. The United States has no dedicated and comprehensive privacy law, relying instead on a patchwork of general consumer protection laws and industry-specific regulations like HIPAA. The FTC has created what scholars have called a “common law of privacy” through its enforcement actions and published guidance, but how privacy law applies to business practices often remains uncertain. This Article uncovers a large new trove of privacy law, elaborating the jurisprudence of privacy with reports submitted to courts in which hundreds of millions of consumers’ private information has been put up for sale. A unique provision of bankruptcy law requires the appointment of a privacy expert when consumer information is put up for sale, to report on the sale’s legality. These expert reports constitute an unrecognized but substantial body of privacy law. The Article presents and analyzes reports submitted from 2005 to 2020—a hand-collected dataset gathered from 141 court dockets. The reports dramatically increase what is known about how the “common law of privacy” applies in practice to sales of consumer data in a legal forum, and what the future of privacy law may hold.
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Stakeholder Capitalism in the Time of COVIDThis Article tests the claims of supporters of stakeholder capitalism (“stakeholderism”) in the context of the COVID pandemic. Supporters of stakeholderism advocate encouraging and relying on corporate leaders to use their discretion to serve stakeholders such as employees, customers, suppliers, local communities, and the environment. The pandemic followed and was accompanied by peak support for, and broad expressions of commitment to, stakeholderism from corporate leaders. Nonetheless, and even though the pandemic heightened risks to stakeholders, we document that corporate leaders negotiating deal terms failed to look after stakeholder interests. We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced from April 2020 to March 2022, totaling 122 acquisitions with an aggregate consideration exceeding $800 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders.
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The Promise & Perils of Open FinanceWe are at the dawn of a new age of Open Finance. Open Finance seeks to harness the potential of new platform technology to enhance customer data access, sharing, portability, and interoperability—thereby leveling the informational playing field and fostering greater competition between incumbent financial institutions and a new breed of financial technology (fintech) disruptors. According to its proponents, this competition will yield a radical restructuring of the financial services industry, offering more and better choices for consumers looking to make fast payments, borrow money, invest their savings, manage household budgets, and compare financial products and services. The promise of Open Finance is very real. Yet its proponents have largely ignored the economics driving the development of the key players at the heart of this new infrastructure: data aggregators. Data aggregators are the connective tissue of Open Finance—the pipes through which most of this valuable data flow. Like other types of infrastructure, these pipes are characterized by economies of scale and network effects that erect substantial barriers to entry, undercut competition, and propel the market toward monopoly. In the United States, these dynamics are compounded by the highly fragmented structure of both the conventional financial services industry and the emerging fintech ecosystem. The result is an embryonic market structure in which a small handful of data aggregators have a massive head start, and where one company in particular—Plaid—already enjoys a dominant market position. This Article describes the promise and perils of Open Finance and explains how policymakers can tap into its potential while simultaneously preventing the abuse of monopoly power and avoiding the creation of a new strain of too-big-to-fail institutions.
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Why Robinhood Is Not a FiduciaryThis Note examines the theoretical and practical limitations of regulating broker-dealers under a fiduciary-duty paradigm. Drawing on a recent example of fiduciary regulation of broker-dealers in Massachusetts, as well as recent literature on the theoretical underpinnings of fiduciary relationships, this Note argues that fintech broker-dealers like Robinhood lack the elements of “discretion” and “best interest” necessary to establish a fiduciary relationship. Beyond theoretical coherence, there are also practical reasons to seek an alternative to a fiduciary standard. These include the need to preserve the distinct market-making functions of broker-dealers and to address infrastructural problems beyond the scope of a recommendation. This Note proposes an alternative to fiduciary regulation: expanding Regulation Systems Compliance and Integrity to include brokers like Robinhood.
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Propertizing Environmental AttributesTangible environmental resources such as land and water have been the object of property rights and traded in markets for millennia. In a development largely unnoticed by legal scholars, technology now allows a new class of environmental resources that are much harder to see and touch to be measured and potentially sold—environmental attributes. Some of these resources have already been partially packaged into property rights for sale by some governments and private actors, such as actual and avoided carbon emissions, and the environmental benefits of renewable power and electric cars. However, other resources, such as avoided water use, remain unpropertized. Trading environmental attributes can help to achieve important societal objectives, such as decarbonizing the energy system, although there are also criticisms of using markets for these goals. This Article emphasizes that property rights need to be created in environmental attributes if policymakers and private actors wish to enlist markets to achieve societal goals. The Article explains the steps involved in creating property rights in environmental attributes. Drawing on the approaches already used to create property rights in some of these attributes, the Article identifies a menu of options for establishing property rights in attributes that currently can be measured and those that technology will allow to be isolated in the future. In addition, it applies this menu to recommend a first-in-time rule for establishing property rights in avoided electricity use from energy-efficient appliances and other energy saving measures, a prominent example of the recently recognized class of environmental attributes. Recognizing society’s growing interest in harnessing newer environmental attributes, this Article concludes that markets in such attributes could expand if the rules for initially allocating these resources were clarified.
