Recent Submissions

  • The Law and Economics of Antidiscrimination Law

    Donohue, John (2005-07-01)
    This essay provides an overview of the central theoretical law and economics insights concerning antidiscrimination law across a variety of contexts including discrimination in labor markets, housing markets, consumer purchases, and policing. The different models of discrimination based on animus, statistical discrimination, and cartel exploitation are analyzed for both race and sex discrimination. I explore the theoretical arguments for prohibiting private discriminatory conduct and illustrate the tensions that exist between concerns for liberty and equality. I also discuss the critical point that one cannot automatically attribute observed disparities in various economic or social outcomes to discrimination, and illustrate the complexities in establishing the existence of discrimination. The major empirical findings showing the effectiveness of federal law in the first decade after passage of the 1964 Civil Rights Act are contrasted with the generally less optimistic findings from subsequent antidiscrimination interventions.
  • Mark(et)ing Nondiscrimination

    Ayres, Ian; Brown, Jennifer (2005-09-01)
  • A Third Model of Legal Compliance: Testing for Expressive Effects in a Hawk/Dove Game

    McAdams, Richard; Nadler, Janice (2003-07-01)
    Economic theories of legal compliance emphasize legal sanctions, while psychological and sociological theories stress the perceived legitimacy of law. Without disputing the importance of either mechanism, we test a third way that law affects behavior, an expressive theory that claims law influences behavior by creating a focal point around which individuals coordinate. The focal point theory makes three claims: (1) that the need for coordination is pervasive because "mixed motive" games involving coordination model common disputes; (2) that, in such games, any third-party cheap talk that calls the players' attention to a particular equilibrium tends to produce that equilibrium; and (3) that law, by publicly endorsing a particular equilibrium, tends to call the players' attention to that outcome. After explaining the first and third claim, we offer an experimental test of the second. Specifically, we investigated how various forms of third party cheap talk influence the behavior of subjects in a Hawk/Dove or Chicken game. Despite the players' conflicting interests, we found that messages highlighting one equilibrium tend to produce that outcome. This result emerged when the message was selected by an overtly random, mechanical process, and also when it was delivered by a third-party subject; the latter effect was significantly stronger than the former only when the subject speaker was selected by a merit-based process. These results suggest that, in certain circumstances, law generates compliance not only by sanctions and legitimacy, but also by facilitating coordination around a focal outcome.
  • Reexamining the Market for Judicial Clerks and other Assortative Markets

    Priest, George (2003-09-08)
    For many decades, scholars have puzzled over why the market for judicial clerks has been characterized by increasingly early bidding, with interviews and offers extended at progressively early points in a student's law school career. An important article published recently by Jolls, Avery, Judge Posner and Alvin Roth reported the results of a study the authors conducted of judges and clerks documenting the many ways in which the market operated inefficiently. In their view, the clerk market corresponds to other markets studied chiefly by Roth that show timing disturbances claimed to be market failures. The authors recommended adoption of a modified matching program, similar to the program that matches medical residents with hospitals. This paper reanalyzes the clerkship market and the other markets studied by Professor Roth from the standpoint of the costs and benefits of information acquisition. It shows that, far from market failure, the use of time as a currency in the market, represents the working out of market forces where other, more traditional terms of trade - in particular, price - are unavailable. The paper also shows that virtually all of the other markets studied by Roth that show timing peculiarities are characterized by restraints on the use of price to clear the market.
  • Does Terrorism Increase Crime? A Cautionary Tale

    Donohue, John; Ho, Daniel (2005-08-01)
  • The Costs of Wrongful-Discharge Laws

    Autor, David; Donohue, John; Schwab, Stewart (2005-05-01)
    We estimate the effects on employment and wages of wrongful-discharge protections adopted by U.S. state courts during the last three decades. We find robust evidence that one wrongful-discharge doctrine, the implied-contract exception, reduced state employment rates by 0.8 to 1.6 percent. The initial impact is largest for female, younger, and less-educated workers – those who change jobs frequently – while the longer-term effect is greater for older and more-educated workers – those most likely to litigate. By contrast, we find no robust employment or wage effects of two other widely recognized wrongful-discharge laws: the public-policy and good-faith exceptions.
  • Don’t Tell, Don’t Ask: Narrow Tailoring After Grutter and Gratz

    Ayres, Ian; Foster, Sydney (2005-09-01)
    The Supreme Court’s affirmative action decisions in Grutter v. Bollinger and Gratz v. Bollinger changed the meaning of “narrow tailoring.” While the narrow tailoring requirement has always had multiple dimensions, a central meaning has been that the government must use the smallest racial preference needed to achieve its compelling interest. We might have expected, therefore, that if the Court were to uphold one of the two programs at issue in Grutter and Gratz, it would, all other things being equal, uphold the program with smaller racial preferences. We show, however, that the preferences in the admissions program upheld in Grutter were larger than the preferences in the admissions program struck down in Gratz. This result was not necessarily wrong, but the Court’s analysis was wrong. The Grutter and Gratz Courts replaced the “minimum necessary preference” requirement with a requirement that admissions programs provide “individualized consideration,” which we show amounts to a “Don’t Tell, Don’t Ask” regime. The Court will not “ask” probing questions about the size and differentiation of preferences as long as the government decisionmaker does not “tell” the Court how much of a racial preference it is giving. Indeed, as an example of the differential standards the Court applied, we demonstrate that while the Court impugned the admissions program at issue Gratz for making race decisive for “virtually every minimally qualified minority applicant,” in fact the fraction of qualified minority applicants for whom race was decisive was smaller in the admissions program struck down in Gratz than it was in the admissions program upheld in Grutter. We call for a return to the minimum necessary preference requirement. Instead of examining whether preferences are “individualized,” courts should determine whether the constitutionally relevant benefits of granting preferences of a given size outweigh the constitutionally relevant costs, both overall and at the margin.
  • Bayesian Juries and The Limits to Deterrence

    Friedman, Ezra; Wickelgren, Abraham (2002-11-22)
    We consider a model of crime with rational Bayesian Jurors. We find that if jurors are not perfectly informed, even when there is no limit to the size of the punishment that can be imposed, it is not possible to deter all crime. There is a finite lower bound on the crime rate which results from the difficulties in achieving a conviction with imperfect evidence and very low crime rates. Crime can not be reduced below this rate by increasing the penalty, but the lower bound can be decreased by improving the quality of evidence presented to jurors, or by increasing the threshold of evidence necessary for prosecution.
  • Simultaneous and Sequential Anticommons

    Parisi, Francesco; Schulz, Norbert; Depoorter, Ben (2003-03-20)
    This paper defines a framework for anticommons analysis based on the fragmentation of property rights. In differentiating between sequential and simultaneous cases of property fragmentation, we describe and assess the equilibria obtained under each scenario. Our model reveals how the private incentives of excluders do not capture the external effects of their decisions. Moreover, our model suggests that the result of underutilization of joint property increases monotonically in both (a) the extent of fragmentation; and (b) the foregone synergies and complementarities between the property fragments. Within this context, we can therefore explore important implications for possible institutional responses to a range of issues raised by the concept of property fragmentation.
  • Patent Oppositions

    Levin, Jonathan; Levin, Richard (2002-08-01)
    In recent years, patent protection has extended into new areas, giving rise to serious concern about the lack of clear guidelines for patentability. We analyze the effect of introducing a patent opposition process that would allow patent validity to be challenged directly after a patent is granted. In many cases, such a system would avoid costly litigation at a later date. In other cases, the opposition process would increase the cost of conflict resolution, but would also reward holders of valid patents and limit the rewards to invalid patents. Our analysis suggests significant positive welfare gains from the introduction of a patent opposition process.
  • Fragmentation of Property Rights: A Functional Interpretation of the Law of Servitudes

    Depoorter, Ben; Parisi, Francesco (2003-05-22)
    This Article argues that recent developments in economic theory provide a new rationale for the dichotomous approach of land use arrangements in the law of servitudes that is almost universal in the modern Western legal tradition. The treatment of certain land-related promises as enforceable contracts between parties, rather than real rights that run with the land in perpetuity, can be explained as an attempt to minimize the transaction and strategic costs resulting from dysfunctional property arrangements. As demonstrated by the Authors, benchmark doctrines such as "touch and concern," and the civil law principles of "prediality" and numerus clausus, have served as instruments to limit excessive or dysfunctional fragmentation of property rights. Section I of this Article describes the dichotomous approach of land use arrangements in the law of servitudes in Common Law and Civil Law systems. Section II provides a functional explanation of the legal rules in this area. Section III documents and explains the changing approach to land use law in both Common Law and Civil Law jurisdictions. Section IV discusses the role of property law in a changing economy. Section V reflects on the appropriate scope of freedom of contract in the law of servitudes. Section VI concludes.
  • The Logic of Reciprocity: Trust, Collective Action, and Law

    Kahan, Dan (2002-12-11)
    The Logic of Collective Action has for decades supplied the logic of public policy analysis. In this pioneering application of public choice theory, Mancur Olson ele gantly punctured the premise -- shared by a diverse variety of political theories -- that individuals can be expected to act consistently with the interest of the groups to which they belong. Absent externally imposed incentives, wealth-maximizing individuals, he argued, will rarely find it in their interest to contribute to goods that benefit the group as a whole, but rather will "free ride" on the contributions that other group members make. As a result, too few individuals will contribute sufficiently, and the well-being of the group will suffer. These are the assumptions that dominate public policy analysis and ultimately public policy across a host of regulatory domains -- from tax collection to environmental conservation, from street-level policing to policing of the internet.
  • The Theory of Value Dilemma: A Critique of the Economic Analysis of Criminal Law

    Kahan, Dan (2002-12-11)
    Criminal law can justly lay claim to being the native domain of law and economics. From Bentham to Becker, no area of law has been more brightly illuminated by the radiance of economic logic. Not coincidentally, in no other area of the law has the conflict between economics and ordinary moral sensibilities been perceived to be so sharp. When we are deciding how to apportion punishment, our instinct is to look backwards: wrongdoers should be condemned in proportion to the reprehensibility of their acts. I'll call the position that punishment should flow directly from these intuitions intrinsic value retributivism. Economics, in contrast, uses the forward-looking idiom of deterrence: punishment is justified if and to the extent that it produces a desired state of affairs; if the optimal degree of punishment so derived is out synch with intuitions about the reprehensibility of a particular crime, so much the worse for those intuitions. My goal in this essay is to demonstrate that economic analysis lacks the conceptual resources needed to criticize intrinsic value retributivism in this fashion. The economic theory necessarily presupposes some theory of value that tells us what states of affairs we are trying to maximize through punishment. To construct that theory, the members of a community must consult their shared intuitions. Once a theory of value so derived is plugged into deterrence theory, however, the results won't differ in any material respect from the ones the law would produce if informed explicitly by intrinsic value retributivism. This claim, which I'll call the theory of value dilemma, can be reduced to three sub-claims. The first is that the economic analysis of criminal law depends on an externally specified theory of value; without some account of what state of affairs the law is trying to maximize, the consequentialist logic of deterrence can't get off the ground. Second, this theory of value is essentially political; that is, there's nothing internal to economic approach that justifies discounting the valuations implicit in the decisions of a democratic political community's legal institutions, and hence nothing internal to economics that forecloses political advocacy of any particular theory of value. And the third and final sub-claim is that these politically derived evaluations will, as a practical and conceptual matter, always dominate the distinctive normative components of the economic theory of deterrence. I'll discuss each of these points in turn.
  • Event Studies and the Law: Part II--Empirical Studies and Corporate Law

    Bhagat, Sanjai; Romano, Roberta (2001-05-09)
    This paper is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology’s application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The paper concludes by sketching the methodology’s use in evaluating the economic effects of regulation. While event studies’ usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.
  • Path Dependence in the Law: The Course and Pattern of Legal Change in a Common Law System

    Hathaway, Oona (2003-03-01)
    Part I of this Article provides an overview of path dependence theory. It outlines the theory and briefly describes three separate strands of the theory: increasing returns path dependence, evolutionary path dependence, and sequencing path dependence, which are rooted in the economics, biological, and rational choice theory literatures, respectively. Although each of these strands has specific and unique characteristics, they are linked by a central insight: In each, an outcome or decision is shaped in specific and systematic ways by the path leading to it. Each of these strands of path dependence in turn has important implications for the course and pattern of change in the common law system. Accordingly, Part II applies path dependence theory to the common law. At the core of the common law system is the requirement that courts adhere to the body of principles and rules of action that derive their authority "solely from usages and customs of immemorial antiquity, or from the judgments and decrees of the courts recognizing, affirming, and enforcing such usages and customs." Under the doctrine of stare decisis, higher courts' previous decisions are controlling, courts give their own decisions significant weight, and courts look to non-binding decisions for persuasive precedent. Consequently, although there is some flexibility in the system, precedent remains central to legal deliberation. The doctrine of stare decisis thus creates an explicitly path-dependent process. Later decisions rely on, and are constrained by, earlier decisions. More important, the way in which history shapes legal outcomes corresponds to the three-fold division introduced in Part I. Because each legal decision increases the probability that the next will take a particular form, the common law exhibits increasing returns path dependence. Because the law changes through a process of punctuated yet historically constrained evolution, the common law exhibits evolutionary path dependence. And because the legal process involves sequential decisionmaking in a process marked by competing alternatives and multiple actors, the common law exhibits sequencing path dependence. Therefore, just as biological and social processes are constrained by history, the law is firmly guided by the heavy hand of the past. Finally, Part III turns from the descriptive to the normative. It analyzes the implications of path dependence theory for the doctrine of stare decisis. Path dependence theory reveals that significant costs may arise out of the reliance on precedent in a common law system. The Article concludes with the claim that, all other things being equal, where the costs of path dependence are expected to be especially significant, courts should consider relaxing the doctrine of stare decisis. This prescription not only supports modifying existing practices of reliance upon precedent, but also provides a theoretical basis for some existing distinctions in the degree that judges rely on certain categories of precedent.
  • The Law and Economics of Costly Contracting

    Schwartz, Alan; Watson, Joel (2001-12-01)
    In most of the contract theory literature, contracting costs are assumed either to be high enough to preclude certain forms of contracting, or low enough to permit any contract to be written. Similarly, researchers usually treat renegotiation as either costless or prohibitively costly. This paper addresses the middle ground between these extremes, in which the costs of contracting and renegotiation can take intermediate values and the contracting parties can themselves influence these costs. The context for our analysis is the canonical problem of inducing efficient relation-specific investment and efficient ex post trade. Among our principle results are: (i) The efficiency and complexity of the initial contract are decreasing in the cost to create a contract. Hence, the best mechanism design contracts can be too costly to write. (ii) When parties use the simpler contract forms, they require renegotiation to capture ex post surplus and to create efficient investment incentives. In some cases, parties want low renegotiation costs. More interesting is that, in other cases, parties have a strict preference for moderate renegotiation costs. (iii) The effect of Contract Law on contract form is significant but has been overlooked. In particular, the law's interpretive rules raise the cost of enforcing complex contracts, and thus induce parties to use simple contracts. Worse, the law also lowers renegotiation costs, which further undermines complex contracts and is also inappropriate for some of the simpler contracts.
  • Contract Theory and the Limits of Contract Law

    Schwartz, Alan; Scott, Robert (2003-04-25)
    Contract law has neither a complete descriptive theory, explaining what the law is, nor a complete normative theory, explaining what the law should be. These gaps are unsurprising given the traditional definition of contract as embracing all promises that the law will enforce. Even a theory of contract law that focuses only on the enforcement of bargains must still consider the entire continuum from standard form contracts between firms and consumers to commercial contracts between business firms. No descriptive theory has yet explained a law of contract that comprehends such a broad domain. Normative theories that are grounded in a single norm -- such as autonomy or efficiency -- also have foundered over the heterogeneity of contractual contexts to which the theory is to apply. Pluralist theories attempt to respond to the difficulty that unitary normative theories pose by urging courts to pursue efficiency, fairness, good faith and the protection of individual autonomy. Such theories need, but so far lack, a meta principle that tells which of these goals should be decisive when they conflict. We attempt to make progress here with a more modest approach -- to set out and defend a normative theory to guide decisionmakers in the regulation of business contracts.
  • The Cost of Commitment

    Hathaway, Oona (2003-04-01)
    Over the last half-century, the number of treaties that address issues of human rights has grown from a handful to hundreds. The majority of nations now belongs to a panoply of international agreements - some regional, some universal - that address human rights issues ranging from labor standards to the treatment of prisoners to gender equality. The last decade in particular has witnessed a concerted push from the United Nations to bring nations into the human rights fold through ratification of the six core United Nations human rights treaties. Yet despite the proliferation of treaties and the growing attention to countries' decisions to join them, little attention has been paid to what influences countries' decisions to join these treaties. In this Article, I focus on only a small part of the broader puzzle of human rights treaty membership. Putting to one side, for the moment, the ways in which countries benefit from joining human rights treaties, I seek insight into how the cost of committing to human rights treaties influences countries' decisions to join. I begin by proposing a new way of conceiving of the cost of consenting to be bound by a treaty. I argue that for treaties with minimal enforcement provisions - which includes most human rights treaties - understanding the cost of commitment requires taking into account not only the cost that would be entailed in bringing the country's practices into compliance with the treaty but also the likelihood that those costs will be realized. I then investigate whether countries appear to be influenced by this cost of membership when they decide whether or not to join particular treaties. The Article uses empirical evidence drawn from a database that covers 166 nations over a time span of forty years to shed some light on the decisions of nations to join human rights treaties. Do countries with better human rights practices ratify more readily than those with worse human rights practices; Is the propensity of nations to ratify treaties affected by the enforcement mechanisms used in the treaties; Do democratic nations ratify more readily than nondemocratic nations; Is there a difference in the willingness of democratic and nondemocratic nations to commit to a treaty when their practices are out of step with the treaty's requirements; These are a few of the questions that I ask in this Article. The empirical evidence, while far from conclusive, provides some preliminary answers that I hope will serve as a roadmap to future, more detailed investigation.
  • Assessing the Cost of Regulatory Protections: Evidence on the Decision to Sell Securities Outside the United States

    Choi, Stephen (2001-05-01)
    This paper examines the factors that affect the decision of U.S. companies to issue securities offshore compared with inside the United States. Utilizing a data set of 1,444 domestic private placements and offshore offerings from 1993 to 1997, the paper reports that firms that experienced a private securities fraud lawsuit in the past resort to foreign sources of capital more frequently. Similarly, companies in standard industrial classification groups that are targeted more often with private securities fraud litigation are also more likely to issue securities offshore than to conduct domestic private placements. Not all issuers, however, choose to exit the U.S. regime. The paper employs past experience with a SEC investigation as a proxy for the amount of risk that the issuer may pose to investors. Issuers with private securities fraud litigation experience that also encountered a past SEC investigation are more likely to raise capital through a domestic offering, consistent with the hypothesis that some issuers choose to raise capital in the United States when the bonding and signaling value of the U.S. legal liability regime outweighs the costs associated with antifraud liability.

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