• A Critique of 'Tangibility' as the Basis for Property Rules

      Ayres, Ian; Goldbart, Paul (2001-03-09)
      Kaplow and Shavell have recently claimed that property rules tend to protect tangible entitlements more efficiently than do liability rules. They argue that while liability rules tend to efficiently harness the defendant’s private information when courts are imperfectly informed as to litigants’ valuations of intangible entitlements, this harnessing effect does not apply to tangible entitlements for two reasons. First, they argue that the prospect of multiple takings (by others or even the original entitlement holder taking back the entitlement) makes it impossible to implement liability rules with regard to tangible entitlements. Second, they argue that liability rules cannot harness private information when the disputants’ valuations are correlated and that valuations of tangibles tend to be more correlated than valuations of intangibles. In this essay, we reject both the multiple-takings and the correlated-value claims. Our thesis is that, while both present real problems of implementation, the authors’ own harnessing result can be extended to redeem the usefulness of liability rules even when values are correlated and even when there is the prospect of multiple takings. We will show that, even in the presence of these problems, enlightened courts can manipulate the damages that takers expect to pay so as to induce efficient takings. The authors’ numeric examples purporting to show the dominance of property rules systematically understate the potential efficiency of liability rules. Their examples compare the more efficient property rules to liability rules that use inefficient damages and systematically delegate allocative authority to the less efficient litigant. If the more appropriate comparisons are made, in all of Kaplow and Shavell’s examples liability rules (which anticipate non-consensual takings) dominate property rules.
    • 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.
    • Abortion and Crime: Unwanted Children and Out-of-Wedlock Births

      Lott, John; Whitley, John (2001-05-16)
      Abortion may prevent the birth of "unwanted" children, who would have relatively small investments in human capital and a higher probability of crime. On the other hand, some research suggests that legalizing abortion increases out-of-wedlock births and single parent families, which implies the opposite impact on investments in human capital and thus crime. The question is: what is the net impact? We find evidence that legalizing abortion increased murder rates by around about 0.5 to 7 percent. Previous estimates are shown to suffer from not directly linking the cohorts who are committing crime with whether they had been born before or after abortion was legal.
    • 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.
    • 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.
    • 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.
    • Does Terrorism Increase Crime? A Cautionary Tale

      Donohue, John; Ho, Daniel (2005-08-01)
    • 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.
    • Event Studies and the Law--Part I: Technique and Corporate Litigation

      Bhagat, Sanjai; Romano, Roberta (2001-05-01)
      Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.
    • 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.
    • 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.
    • Mark(et)ing Nondiscrimination

      Ayres, Ian; Brown, Jennifer (2005-09-01)
    • Non-Voted Ballots and Discrimination in Florida

      Lott, John (2001-07-09)
      The U.S. Commission on Civil Rights' Majority Report on the 2000 Presidential vote in Florida presents two types of empirical evidence that African-Americans were denied the right to vote. The report concluded that, "The Voting Rights Act prohibits both intentional discrimination and 'results' discrimination. It is within the jurisdictional province of the Justice Department to pursue and a court of competent jurisdiction to decide whether the facts prove or disprove illegal discrimination under either standard." To reach their conclusion that discrimination had occurred, the majority examined the impact of race on spoiled (or non-voted) ballot rates as well as the impact of race on the exclusion from voter eligibility lists because of past felony criminal records. They relied on empirical work regarding non-voted ballots and this empirical work relies solely on cross county regressions or correlations using data from 2000 alone. The evidence that African- Americans are erroneously placed on the ineligible list at higher rates than other racial groups is based upon a simple comparison of means.
    • Optimal Delegation and Decoupling in the Design of Liability Rules

      Ayres, Ian; Goldbart, Paul (2001-03-09)
      The central allocative decision confronting a judge in a nuisance dispute should not concern the identity of the initial entitlement recipient but rather the identity of the more efficient chooser—the litigant who can more efficiently allocate the entitlement. We show that liability rules can produce four basic allocations which differ centrally in the ways in which courts delegate to litigants the authority to ultimately allocate the entitlement. Two classes concern "single chooser" rules that vest (in the absence of an agreement to the contrary) the allocative decision solely in one of the litigants. The other two classes concern a new type of rule, "dual chooser" rules, that allow either party to veto the transfer of an entitlement. Dualchooser rules are more than a theoretical curiosity both because they exist in our current law and because at times they produce systematically greater allocative efficiency than either type of single-chooser rule. Two heads are sometimes better than one. A central result of the paper is that in choosing among different liability rules allocative concerns can be decoupled from distributive concerns. There exist an infinite number of liability rules which produce each of the four basic allocations, but every rule within a particular class divides differently between the litigants the expected value of the allocation. To successfully decouple, courts should at times impose "call option," "put option," "Pay or be Paid," and "Pay or Pay" rules.
    • 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.
    • 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.
    • 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.
    • Royalties for Artists Versus Royalties for Authors and Composers

      Hansmann, Henry (2001-04-11)
      Legislation creating or reinforcing resale royalties for visual artists retains substantial political popularity, particularly in the European Union -- despite the often skeptical attitude toward those rights in the economics literature. In this essay, we probe more deeply the affirmative arguments that can be made for a resale royalty right, in either a mandatory or a discretionary form. We also compare the rationale for visual artists’ resale royalties with the potential rationales for the now-well-established systems of royalty rights for authors and composers. This comparison has particular interest both because some of the principal arguments made against visual artists’ resale royalties also apply to authors’ royalties, and because the economic rationale for compensating authors with royalties has itself not been well explored. We also discuss briefly the related subject of display rights for visual artists. We conclude with some general implications for policy.
    • Sales and Elections as Methods for Transferring Corporate Control

      Gilson, Ronald; Schwartz, Alan (2001-04-13)
      Under standard accounts of corporate governance, capital markets play a significant role in monitoring management performance and, where appropriate, replacing management whose performance does not measure up. While the concept of a market for corporate control was once controversial, now even the American Law Institute acknowledges that "transactions in control and tender offers are mechanisms through which market review of the effectiveness of management's delegated discretion can operate. Recent case law in Delaware, however, appears to have altered dramatically the mechanisms through which the market for corporate control must operate. In particular, the interaction of the poison pill and the Delaware Supreme Court's development of the legal standard governing defensive tactics in response to tender offers have resulted in a decided, but as yet unexplained, preference for control changes mediated by means of an election rather than by a market. In this paper, we begin the evaluation of the preference for elections over markets that the Delaware Supreme Court has not yet attempted. We apply to this effort both doctrinal and insights derived from an interesting but complex formal literature that has developed to understand how voting structures work in political contests and jury deliberations. Since these contexts differ substantially from transfers of corporate control, our analysis raises a question of fit: are voting models suitable for analyzing the question asked here? In our view, the models do illuminate the takeover institution, but if this view is ultimately rejected, then we will have eliminated what at least superficially appears to be a useful set of tools. Part 1 provides a very brief account of the doctrinal development that has given us the current bias for elections, focusing on the last step in the process: the Delaware Supreme Court's decision in Unitrin, Inc. v. American General Corp. Part 2 then argues that economic efficiency, to be made precise in this context below, is the appropriate normative criterion for directing the choice between markets and elections as mechanisms for effecting a change in control that is resisted by management. Parts 3 and 4 next develop two models which show that elections can perform badly in proxy contests in which the principal issue is whether the target company should be sold or not. The first model assumes that shareholder voters are well informed about the economic variables of interest and the second supposes uncertainty about these variables. Market sales apparently lack the defects that these models show can affect elections. Current regulation, which facilitates competing bids, and current takeover technologies, which permit making them, would eliminate much of the inefficiency in takeover bidding that prior models have identified if bidders could make proposals directly to target shareholders. Then the target would be an auction seller. A standard result in auction theory is that if the seller chooses a revenue maximizing auction form it is a dominant strategy for bidders -- here potential acquirers -- to big their true valuations. The dominant strategy for a maximizing seller then is to accept the winning bid. Therefore, target shareholders would not be in a strategic situation in an auction world. As a consequence, we focus on the possible inefficiencies arising from a judicial preference for elections (in which it is optimal for shareholders to act strategically) over markets as a takeover mechanism. In Part 5, we return to doctrine to show how Unitrin's preference for elections over markets may be eliminated without requiring the Delaware Supreme Court to confess error. We also suggest that, for jurisdictions with courts less influential than those in Delaware, a statutory change to permit more sales of control would be best.
    • Should Campaign Donors Be Identified?

      Ayres, Ian (2001-08-29)
      About the only campaign finance issue on which there is a strong consensus is the belief that the law should force candidates to disclose the identity of contributors. A growing group of scholars and advocates believe that mandated disclosure should be the only campaign finance regulation; they argue that other restrictions are counterproductive because they tend to shift money to less accountable forms of political speech such as "independent expenditures" and "issue advocacy." Representative John T. Doolittle (R-Calif.) has proposed the "Citizen Legislature and Political Freedom Act" that essentially would repeal all limits on political campaign contributions and merely require immediate disclosure by candidates when they do receive contributions. This type of "pure disclosure" reform has garnered support from a wide spectrum of political activists, from Sen. Mitch McConnell (R-Ky.) to Stanford Law School dean Kathleen Sullivan. But there exists in our polity a counter-image--the voting booth--that stands against the cult of disclosure. Ballot secrecy was adopted toward the end of the nineteenth century to deter political corruption. Voting booth privacy disrupted the economics of vote buying, making it much more difficult for candidates to buy votes because, at the end of the day, they could never know for sure who voted for them. A similar pro-anonymity argument can be applied to campaign finance. We could harness similar anonymity benefits by creating a "donation booth": a screen that forces donors to funnel campaign contributions through blind trusts that would keep candidates from learning the identity of their supporters. Just as the secret ballot makes it more difficult for candidates to buy votes, mandating anonymous donations through a system of blind trusts might make it harder for candidates to sell access or influence because they would never know which donors had paid the price. Knowledge about whether the other side actually fulfills his or her promise is an important prerequisite for trade. People--including political candidates--are less likely to deal if they are uncertain whether the other side performs.