Recent Submissions

  • Contractual Landmines

    Scott, Robert E.; Choi, Stephen J.; Gulati, Mitu (Yale Journal on Regulation, 2024)
    Conventional wisdom is that the standardized boilerplate terms used in large commercial markets survive unchanged because they are an optimal solution to the contracting problems facing parties in these markets. As Smith and Warner explained, “harmful heuristics, like harmful mutations, will die out.” But an examination of a sample of current sovereign bond contracts reveals numerous instances of harmful landmines—some are deliberate changes to standard language that increase a creditor’s nonpayment risk, others are blatant drafting errors, and yet others are inapt terms that have been carelessly imported from corporate transactions. Moreover, these landmines differ from each other in important respects: deliberate changes to the standard form reflect strategic lawyering on behalf of sovereign clients, while errors that only benefit subsequent activists reflect haste in adapting precedents to new transactions. Using both quantitative data and interviews with market participants, we find that the conventional view fails to recognize the unique and distorting role that lawyers play in the drafting of standard form contracts. Systematic asymmetries in the market for the lawyers who negotiate and draft these contracts explain why real-world contracts depart from the efficient contract paradigm.
  • Discretionary Investing by ‘Passive’ S&P 500 Funds

    Molk, Peter; Robertson, Adriana Z. (Yale Journal on Regulation, 2024)
    So-called passive index funds—investment funds that are designed to track a pre-specified underlying index—have become a dominant force in the investing landscape, collectively controlling over $12 trillion in assets. It is widely assumed that these funds are obligated to follow their underlying index, and that fund managers cannot, or do not, select portfolios that deviate from the index’s holdings. As a result, various critics have attacked these funds, raising concerns about their corporate governance incentives and their influence on market efficiency. We show this assumption is overly simplistic. To do so, we examine funds that track the most prominent index, the S&P 500. S&P 500 index funds do not typically commit to holding even a representative sample of the underlying index, nor do they commit to replicating the returns of that index. Managers have the legal flexibility to depart substantially from the underlying index’s holdings. We also show that these departures are commonplace: S&P 500 index funds routinely depart from the underlying index by meaningful amounts. While these departures are largest among smaller funds, they are also present among megafunds: even among the largest S&P 500 funds, holdings differed from the index by a total of between 1.7% and 7.5% in the fourth quarter of 2022. Across all S&P 500 funds, these deviations amounted to almost $61.5 billion in discretionary investment decisions. Moreover, at least within observed ranges, we find no meaningful relationship between these deviations and investment flows. In sum, S&P 500 index funds have substantial investment discretion, which they exercise to an extent not previously recognized. Our findings complicate the narrative around index funds and weaken many of the criticisms levied against them. At the same time, to the extent that investors—and particularly retail investors—fail to recognize this discretion, our findings suggest they may not be getting what they expect.
  • Credit Markets and the Visible Hand: The Discount Window and the Macroeconomy

    Conti-Brown, Peter; Skeel, David (Yale Journal on Regulation, 2024)
    In times of crisis such as the 2008 financial crisis and the 2020 COVID-19 pandemic central banks throughout the world engage in interventions with lasting effects on financial markets and the macroeconomy, for better and worse. The negative political consequences of these interventions—fears of politicizing central banking and inflationary concerns about dramatic interventions among them—can dampen the enthusiasm for such interventions early in the face of crisis. This dynamic creates a dilemma for the US central bank, the Federal Reserve, causing it to eschew interventions beyond monetary policy until the crisis has already crashed, at which point the Fed moves into every aspect of policy throughout the economy. This Article highlights the inadequacy of this dynamic. Sole reliance on monetary policy is insufficient in the face of growing crisis, while the Fed's vast emergency lending facilities face ever stiffer political, inflationary, and equity concerns. The Article advocates instead for a new approach to macroeconomic stability, not just through monetary policy or emergency interventions, but through judicious use of the sleeping giant of Fed policy, the bank-intermediated discount window. Focusing on the problematic credit market for debtors-in-possession in the midst of bankruptcy, the Article suggests a reformed system that safeguards the Fed, supports small and medium-sized enterprises, and stabilizes the macroeconomy without exposing the system to the pockets of instability that the Fed’s overreliance on dramatic intervention can do.
  • Mass Shootings and Mass Torts: New Directions in Gun Manufacturer Liability

    Hallas, Laura (Yale Journal on Regulation, 2024)
    Mass shootings are a particularly gutting form of American gun violence. The statistics are staggering to the point of numbing, with the issue’s intensity and timeliness enforced day after day, round after round. Gun manufacturers occupy a vital role in the chain of events ending with mass shooting headlines, yet they face little liability for their involvement because of a 2005 protective federal statute. This Note argues that there may be opportunity for change. Specifically, this Note offers evidence that once strong statutory protections may be weakening and presents strategies for creating previously unimaginable mass tort claims against gun manufacturers.
  • Grid Reliability in the Electric Era

    Macey, Joshua C.; Welton, Shelley; Wiseman, Hannah (Yale Journal on Regulation, 2024)
    The United States has delegated the responsibility of keeping the lights on to a self-regulatory organization called the North American Electric Reliability Corporation (NERC). Although NERC is a crucial example of industry-led governance—and regulates in an area that is central to our economy and basic human survival—this unusual institution has received scant attention from policymakers and scholars. Such attention is overdue. To decarbonize its economy, the United States must enter a new “electric era,” transitioning many sectors to run on electricity while also transforming the electricity system itself to run largely on clean but intermittent renewable resources. These new resources demand new approaches to electric grid reliability—approaches that NERC is failing to adequately embrace. This Article traces NERC’s history, situates NERC in ongoing debates about climate change and grid reliability, and assesses the viability of reliability self-regulation in the electric era. A self-regulatory model for maintaining U.S. electric-grid reliability sufficed in prior decades, when regulated monopolies managed nearly every segment of electricity production. But the criteria that NERC once used to justify self-regulation— ’ expertise, clear accountability metrics, and public-private alignment of interests—no longer hold. The climate crisis creates a need for expertise beyond NERC’s domain, while the introduction of competition in the electricity sector blurs lines of accountability for reliability failures. NERC’s structure also perpetuates an incumbency bias at odds with public goals for the energy transition. These shifting conditions have caused to fail to keep pace with the reliability challenges of the electric era. Worse still, outdated NERC standards help entrench fossil-fuel interests by justifying electricity-market rules poorly suited to accommodate renewable resources. We therefore suggest a suite of reforms that would increase direct government oversight and accountability in electricity-reliability regulation.
  • The Nondelegation Doctrine and the Structure of the Executive

    Froomkin, David B. (Yale Journal on Regulation, 2024)
    In a series of recent opinions, the Supreme Court has threatened to transform the nondelegation doctrine into a device for imposing sweeping limits on congressional authority to empower the regulatory state. But, as a matter of history and logic, the nondelegation doctrine has a quite different purpose. This Article argues that the nondelegation doctrine plays an underappreciated role in constitutional structure: encouraging the segmentation of executive power. The nondelegation doctrine vindicates the Article I Vesting Clause by preventing Congress from being divested of its legislative power. Its purpose is to reinforce Congress’s legislative supremacy in the realm of ordinary law, not to impede Congress’s ability to achieve legislative objectives by delegating regulatory authority to administrative agencies. The nondelegation doctrine accomplishes its distinctly structural purpose by constraining the delegation of broad powers to the President directly, a constraint that encourages legislative delegation of regulatory authority to administrative agencies. The Article explains as a matter of theory why broad delegations to the President, unlike the delegation of substantial regulatory authority to administrative agencies, jeopardize legislative supremacy and hence pose heightened nondelegation concerns, and it finds strong support for this distinction in the history of nondelegation decisions. It concludes that the diffuse departmental structure of the modern administrative state is a testament to the great success of the nondelegation doctrine, not evidence of its underenforcement. Indeed, the contemporary push to reinvent the nondelegation doctrine in an indiscriminate way would turn it into something closer to its opposite, a cudgel against legislative supremacy rather than its guardian. †
  • The Financial Inclusion Trilemma

    Levitin, Adam J. (Yale Journal on Regulation, 2024)
    The challenge of financial inclusion is among the most intractable policy problems in banking. Despite living in the world’s wealthiest economy, many Americans are shut out of the financial system. Five percent of American households lack a bank account, and an additional thirteen percent rely on expensive and sometimes predatory fringe financial services, such as check cashers or payday lenders. Financial inclusion presents a policy trilemma. It is possible to simultaneously achieve only two of three goals: widespread availability of services to low-income consumers, fair terms of service, and profitability of service. Thus it is possible to provide fair and profitable services, but only to a small, cherry-picked population of low-income consumers. Conversely, it is possible to provide profitable service to a large population, but only on exploitative terms. Or it is possible to provide fair services to a large population, but not at a profit. The financial inclusion trilemma is not a market failure. Instead, it is the result of the market working. The market result, however, does not accord with policy preferences. Rather than addressing that tension, American financial inclusion policy still leads with market-based solutions, soft government nudges, and the hope that technology will transform the economics of small-balance deposit accounts and small-dollar loans. It is time to recognize the policy failure in financial inclusion and consider to a menu of stronger regulatory interventions: hard service mandates, taxpayer subsidies, and public provision of financial services. In particular, this Article argues for following the approach taken in Canada, the European Union, and the United Kingdom. This approach—the adoption of a mandate for the provision of free or low-cost basic banking services to all qualified applicants—is the simplest solution to the problem of the unbanked. Addressing small-dollar credit, however, remains an intractable problem, largely beyond the scope of financial regulation because the challenge many low-income consumers face is solvency, not liquidity.
  • More Competitive Search Through Regulation

    Heidhues, Paul; Bonatti, Alessandro; Celis, L. Elisa; Crawford, Gregory S.; Dinielli, David; Luca, Michael; Salz, Tobias; Schnitzer, Monika; Scott Morton, Fiona; Sinkinson, Michael; et al. (Yale Journal on Regulation, 2023)
    This 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.
  • Market Design for Personal Data

    Bergemann, Dirk; Crémer, Jacques; Dinielli, David; Groh, Carl-Christian; Heidhues, Paul; Schäfer, Maximilian; Schnitzer, Monika; Scott Morton, Fiona; Seim, Katja; Sullivan, Michael (Yale Journal on Regulation, 2023)
    It 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.
  • Fairness and Contestability in the Digital Markets Act

    Crémer, Jacques; Crawford, Gregory S.; Dinielli, David; Fletcher, Amelia; Heidhues, Paul; Schnitzer, Monika; Scott Morton, Fiona (Yale Journal on Regulation, 2023)
    According 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.
  • Equitable Interoperability: The “Supertool” of Digital Platform Governance

    Scott Morton, Fiona M.; Crawford, Gregory S.; Crémer, Jacques; Dinielli, David; Fletcher, Amelia; Heidhues, Paul; Schnitzer, Monika (Yale Journal on Regulation, 2023)
    This 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.
  • Consumer Protection for Online Markets and Large Digital Platforms

    Dinielli, David; Scott Morton, Fiona M.; Seim, Katja; Sinkinson, Michael; Fletcher, Amelia; Crawford, Gregory S.; Crémer, Jacques; Heidhues, Paul; Luca, Michael; Salz, Tobias; et al. (Yale Journal on Regulation, 2023)
    Consumer-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.
  • In Search of the Public Interest

    Short, Jodi L. (2023)
    “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).
  • The Whistleblower Industrial Complex

    Platt, Alexander I. (2023)
    Although 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.
  • Equal Treatment Agreements: Theory, Evidence & Policy

    Petrucci, Caley (2023)
    While 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.
  • The Corporate Governance of Public Utilities

    Kovvali, Aneil; Macey, Joshua C. (2023)
    Rate-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.
  • The Market for Corporate Criminals

    Jennings, Andrew K. (2023)
    This 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.
  • Opening a Federal Reserve Account

    Andersen Hill, Julie (2023)
    To 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.
  • Uptier Exchange Transactions: Lawful Innovation or Lender-on-Lender Violence?

    Skeen, Jackson (2023)
    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.
  • Restoring Indian Reservation Status: An Empirical Analysis

    Velchik, Michael K.; Zhang, Jeffery Y. (2023)
    In 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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