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Did Reform Of Prudent Trust Investment Laws Change Trust Portfolio Allocation?, Max M. Schanzenbach, Robert H. Sitkoff

Law and Economics Papers

This paper investigates the effect of changes in state prudent trust investment laws on asset allocation in noncommercial trusts. The old prudent man rule favored “safe” investments

such as government bonds and disfavored “speculation” in stock. The new prudent investor rule, now widely adopted, relies on modern portfolio theory, freeing the trustee to invest based on risk and return objectives reasonably suited to the trust and in light of the composition of the trust portfolio as a whole. Using state- and institution-level panel data from 1986-1997, we find that after a state’s adoption of the new prudent investor rule, trust …

Judicial Citation To Legislative History: Contextual Theory And Empirical Analysis, Michael B. Abramowicz, Emerson H. Tiller

Law and Economics Papers

Judge Leventhal famously described the invocation of legislative history as "the equivalent of entering a crowded cocktail party and looking over the heads of the guests for one's friends." The volume of legislative history is so great and varied, some contend, that judges cite it selectively to advance their policy agendas. In this article, we employ positive political and contextual theories of judicial behavior to examine how judges use legislative history. We consider whether opinion-writing judges, as Judge Leventhal might suggest, cite legislative history from legislators who share the same political-ideological perspective as the opinion-writing judge? Or do judges make …

The Lurking Rule Against Accumulations Of Income, Robert H. Sitkoff

Law and Economics Papers

The Rule Against Perpetuities is dying an ignoble death. To attract trust business and the lawyers' fees and trustees' commissions that come with it, twenty states have abolished the Rule as applied to interests in trust. But the Rule Against Perpetuities is not the only rule of property law that bears on trust duration. Another is the rule against accumulations of income, which limits the timeframe during which a settlor may direct the trustee to accumulate and retain income in trust. For 200 years, the rule against accumulations of income has lurked in the shadow of its older and more …

Trust As Uncorporation: A Research Agenda, Robert H. Sitkoff

Law and Economics Papers

Trust has long been a competitor of corporation as a form of business organization. Though corporation today dominates trust for operating enterprises, trust dominates corporation in certain specialized niches. The market value of these niches measures in the trillions of dollars. Yet the modern business trust has only recently begun to be subjected to scholarly inquiry. Accordingly, this essay outlines a research agenda for the study of the trust - in particular, the modern statutory business trust - as a form of business organization. Put into the parlance of the conference on which this symposium issue is based, this essay …

God In The Machine: A New Structural Analysis Of Copyright's Fair Use Doctrine, Matthew J. Sag

Law and Economics Papers

This article is a broad reconceptualization of the role of fair use within copyright law. Fair use is commonly thought of as just one of many exceptions limiting copyright, in contrast, this article shows that fair use has actually enabled the expansion of copyright protection. Fair use has an important structural role that is often overlooked. First, copyright necessarily must balance intellectual property incentives with the protection of free speech and innovation; fair use constitutes that balancing mechanism. By establishing the outer limits of copyright, fair use in fact enables an expansive interpretation of author's rights within those bounds. Second, …

Further Reflections On The Guillotine, Ronald Jay Allen, Amy Shavell

Law and Economics Papers

The authors criticize the tone and substance of the current death penalty debate. The authors demonstrate that, as uncomfortable as it may sound, death is the commonality of social planning, and that all social policy decisions, including whether to have capital punishment, determine who will live and who will die. That we may execute some innocent people is an important consideration, but in light of the fact that without the death penalty other innocent people will be killed, it is not necessarily a reason to abandon it. If capital punishment deters crime, the point is obvious, but because the guilty …

The Judicial Signaling Game: How Judges Shape Their Dockets, Tonja Jacobi

Law and Economics Papers

Contrary to traditional wisdom, judges are not passive receivers of their agendas. Instead, many judges attempt to shape their dockets by encouraging potential litigants to bring particular cases. This encouragement takes the form of judges signaling their own positions on an issue as well as their colleagues' expected support. This process is modeled as a signaling game, with both separating and pooling equilibria resulting. The existence of pooling equilibria is of particular interest, as it indicates some judges misrepresent the chances of success of a case in order to induce desired legislation.

Incomplete Contracts With Asymmetric Information: Exclusive V. Optional Remedies, Ronen Avraham, Zhiyong Liu

Law and Economics Papers

Law and economics scholars have always had a strong interest in contract remedies. Perhaps the most explored issue in contract law has been the desirability of various contract remedies, such as expectation damages, specific performance, or liquidated damages, to name the most common. Scholars have been debating for years, from various perspectives, the comparative advantage of these remedies. Yet, most scholars have assumed that each of these remedies is exclusive, and their work has compared a single remedy contract to another single remedy contract. Interestingly, an analysis that assumes these remedies are optional (or cumulative) has not yet been explored, …

Counting Guns In Early America, James T. Lindgren, Justin Lee Heather

Law and Economics Papers

Probate inventories, though perhaps the best prevailing source for determining ownership patterns in early America, are incomplete and fallible. In this Article, the authors suggest that inferences about who owned guns can be improved by using multivariate techniques and control variables of other common objects. To determine gun ownership from probate inventories, the authors examine three databases in detail-Alice Hanson Jones's national sample of 919 inventories (1774), 149 inventories from Providence, Rhode Island (1679-1726), and Gunston Hall Plantation's sample of 325 inventories from Maryland and Virginia (1740-1810). Also discussed are a sample of 59 probate inventories from Essex County, Massachusetts …

Fall From Grace: Arming America And The Bellesiles Scandal, James T. Lindgren

Law and Economics Papers

Before there was a scandal, there was a book - Michael A. Bellesiles's Arming America: The Origins of a National Gun Culture. Arming America is a well-written and compelling story of how early Americans were largely unfamiliar with guns until the approach of the Civil War. It tells a wide-ranging, detailed, but relatively unnuanced story of gunlessness in early America. Bellesiles writes: "The vast majority of those living in British North American colonies had no use for firearms, which were costly, difficult to locate and maintain, and expensive to use." His primary evidence was low counts of guns in probate …

Are Babies Efficient?, Marshall S. Shapo

Law and Economics Papers

This two-page essay is an empirical study of a one-year-old child, observed within the frame of the question asked by the title. Although unlarded with citation to published authority, the essay effectively encompasses some of the most cited economically oriented tests for tort liability. Concluding that the answer to the question in the title is yes, the writer poses a final, philosophical issue.

Commodifying And Banking Pollution Rights, Reducing Innovation, David A. Dana

Law and Economics Papers

This Article represents an attempt to fill a gap in the existing environmental law and policy literature by exploring the interplay between the extent to which, and the conditions under which, polluting firms are allowed to bank excess pollution credits and the strength of the incentives for polluting firms to invest in the development of new pollution reduction and control technologies. The central argument in the Article is this: permitting the banking of pollution credits has both a pro-innovation and anti-innovation incentive effect, and the anti-innovation effect for each firm is a function both of how many credits that firm …

Handcuffing Justice: The Shaky Empirical Foundations Of The Feeney Amendment, Max Matthew Schanzenbach

Law and Economics Papers

The United States Sentencing Guidelines greatly restrict the sentencing discretion traditionally vested in district court judges. Since their adoption in 1987, federal judges have criticized the Guidelines more sharply than any other federal law. In 2003, Congress overwhelmingly passed the PROTECT Act. The Feeney Amendment to the Act, added late in the process, imposed further restrictions on judicial discretion in sentencing. Supporters of the Amendment argued that federal district court judges were increasingly departing below the ranges specified in the Sentencing Guidelines. Using data on all federal criminal sentences between 1993 and 2001, this essay argues that the empirical evidence …

A Positive Theory Of The War Powers Constitution, Jide Nzelibe

Law and Economics Papers

This Article explores the division of war-making authority between the President and Congress through the prism of positive political theory. For the most part, the scholarly treatment of the war-powers debate has been normative with various commentators offering various textual or functional accounts of what the proper allocation of war-making authority should be. This Article provides a positive account of the war-making powers by focusing on the domestic political constraints that the political branches face in the context of an imminent military build-up or troop deployment. This Article assumes that the President has the exclusive ability to influence the scope …

Jurisdictional Competition For Trust Funds: An Empirical Analysis Of Perpetuities And Taxes, Robert H. Sitkoff, Max Matthew Schanzenbach

Law and Economics Papers

This paper presents the results of the first empirical study of the domestic jurisdictional competition for trust funds. In order to open a loophole in the federal estate tax, a rash of states have abolished the Rule Against Perpetuities. Based on reports to federal banking authorities, we find that through 2003 a state's abolition of the Rule increased its trust assets by $6 billion (a 20 percent increase on average) and increased its average trust account size by $200,000. These estimates imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. …

Remedies For Anticipatory Breach Of Contract With Two-Sided Asymmetric Information: A Comparison Of Legal Regimes, Ronen Avraham, Zhiyong Lin

Law and Economics Papers

The Law and economics movement has paid a lot of attention to carefully analyzing various doctrines of contract law. Yet, with few exceptions, the doctrine of anticipatory breach seems to have escaped law and economics scholars' scrutiny. Specifically, the question of optimal choice of remedies has escaped scholars' eyes. While traditionally in England the party who files a law suit can get only damages, in the US the party can not only ask for assurances for performance, but also, in appropriate cases, get specific performance. Which regime is better? Can parties opt in and out of those regimes? Is there …

The Kiodynamic Theory Of Tort, Christopher P. Guzelian

Law and Economics Papers

Increasingly, commentators complain of two major deficiencies in modern tort law: (1) that liability concepts such as "negligence" or "duty" are so vacuously defined as to permit inadvertent subjectivity and error to hinder proper case adjudication; (2) that tort is too slow in recognizing newly discovered risks and properly compensating nascent classes of injury. We accordingly report on the Kiodynamic Theory, an emerging philosophy that overcomes these twin deficiencies and sharpens understanding of poorly articulated tort intuitions. Kiodynamics contends causation is the cornerstone of tort, and that all risks are, at core, causal propositions. Contrary to its many everyday definitions, …

Deregulating Telecommunications In Internet Time, James B. Speta

Law and Economics Papers

The Telecommunications Act of 1996 has yielded more litigation and less local competition than its supporters expected or intended. Calls for its reform are multiplying. The article diagnoses the 1996 Act's failings and prescribes a framework for reform. The successful deregulations of the transportation industries and of long-distance telecommunications (precedents the 1996 Act sought to follow) demonstrate that the Act should have taken additional steps to promote intermodal telecommunications competition. Transportation deregulation successfully prompted competition where (as in the case of airlines and trucking) multiple firms could compete on an intramodal basis or where (as in the case of railroads) …

Supermajority Rules And The Judicial Confirmation Process, John Mcginnis, Michael B. Rappaport

Law and Economics Papers

In this paper we assess the effect of possible supermajority rules on the now contentious Senate confirmation process for judges. We deploy a formula for evaluating supermajority rules that we have developed in other papers. First, we consider a sixty-vote rule in the Senate for the confirmation of federal judges - an explicit version of the supermajority norm that may be emerging from the filibuster. While we briefly discuss how such a rule would affect the project of maximizing the number of originalist judges, for the most part we evaluate the rule on the realist assumption that judges will pursue …

Trigger Happy Or Gun Shy? Dissolving Common-Value Partnerships With Texas Shootouts, Richard R.W. Brooks, Kathryn E. Spier

Law and Economics Papers

Many partnership contracts (and other joint-venture agreements) include so-called "Texas Shootout Clauses" to govern future breakups. In a Texas Shootout, one partner names a single buy-sell price and the other partner has the option to buy or sell at that price. While the prior literature has considered the allocative efficiency of the Texas Shootout, this paper focuses on the incentives of private parties to make these offers to begin with. We consider a model where sole ownership is more efficient than joint ownership. Although both partners are equally capable, one has private information about the common value of the asset. …

Adequacy Of Representation' In Time (Or Why The Result In Stephenson Is Correct), David A. Dana

Law and Economics Papers

This essay sketches a Rawlsian defense of allowing subsequent challenges to class action settlements, as in the Stephenson agent orange case and the Homeside Bank Boston case. My normative claim is that the Rawlsian original position is a helpful way of thinking about what a fair distribution among class members entails that is, we should ask whether a settlement conceivably could have been agreed to by class members standing behind a veil of ignorance as to what their particular position or place within the class would be beyond the veil. Subsequent challenges to settlements should be permitted where no reasonable …

Against Global Governance In The Wto, John Mcginnis, Movsesian L. Movsesian

Law and Economics Papers

This essay argues that the World Trade Organization should not become a forum for global governance in non-trade matters. It responds to those, like Professor Andrew Guzman, who believe that the WTO's success suggests that the organization should be transformed into a forum for "cross-issue" regulatory bargains among member nations on issues, ranging from the environment to human rights, that are not easily resolved in existing international fora. We show that the current focus of the WTO - the reduction of barriers to international trade and the resulting promotion of private contracts - does not require the organization to face …

What'd I Say?: Coase, Demsetz And The Unending Externality Debate, Fred S. Mcchesney

Law and Economics Papers

Economists study various problems referred to as "market failure" - situations that, at least potentially, justify government intervention to solve them. Externalities (or "social costs") are viewed as perhaps the greatest market failure problems. The externality issue has also occasioned much re-thinking of fundamental economic principles, particularly in the context of Ronald Coase's article on "The Problem of Social Cost." Coase explained that externalities manifested a more fundamental issue in economics, the costs of transacting over rights to affect other's welfare. Following Coase's work, economists almost reflexively consider social costs problematic only when transaction costs are relatively high. Yet, Coase's …

A Good Old Habit, Or Just An Old One? Preferential Tax Treatment For Reorganizations, Yariv Brauner

Law and Economics Papers

This article proposes to repeal the preferential tax treatment of certain merger and acquisition transactions known as "reorganizations," and tax them like all other sales or exchanges. In the last 80 years this preference has been a cornerstone of our tax system. It is also one of the most stable rules in the tax code. Nevertheless, its normative justification is weak, and has never been rigorously debated in the legal literature. This article rejects the stated rationale for this rules - that such transactions trigger insufficient realization and therefore it is both unfair and impractical to currently tax them. It …

Politics And The Business Corporation, Robert H. Sitkoff

Law and Economics Papers

This essay explores the policy bases for, and the political economy of, the law's long-standing regulation of corporate political speech. The essay has three parts. First, it contends that the conventional justifications for regulating corporate interventions in politics - that corporate donations unnaturally skew the political discourse (bad politics) and that corporate political donations harm shareholders (agency costs) - assume irrational investors and substantial capital market inefficiency. Drawing on public choice theory, the essay also explores the aim of retarding rent-seeking as an alternative justification for regulating corporate interventions in politics. Second, the essay reexamines the history of the regulation …

Existence Value And Federal Preservation Regulation, David A. Dana

Law and Economics Papers

Conventional economic and political theory predicts that the states will underregulate the degradation or destruction of natural resources within their borders when some or all of the resulting adverse effects fall outside their borders, that is, upon out-of-staters. Academic critics of the federalization of environmental law agree with this conventional view at an abstract level, but, in their view, only the physical effects of the destruction of a natural resource on out-of-staters should count as an interstate externality that can justify federal intervention. The federal courts may be moving toward an even narrower conception of what constitutes an environmental externality …

Trust Law, Corporate Law, And Capital Market Efficiency, Robert H. Sitkoff

Law and Economics Papers

In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual - a control, as it were - for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this …

Irrelevant Internalities, Irrelevant Externalities, And Irrelevant Anxieties, David D. Haddock

Law and Economics Papers

Due to the high transaction cost that would be necessary for large numbers of people to negotiate with each other, even those who are sanguine about private markets become reserved when externalities affect large populations. The distinction between private and societal interest is well understood for pecuniary externalities, but neglect of Buchanan and Stubblebine's article Externality has left the same distinction widely unrecognized for non-pecuniary ones. If only a few parties on either side experience a relevant externality within Buchanan and Stubblebine's relevant/irrelevant distinction, private interactions can appropriately internalize costs and benefits across the entire population. Regardless of the perceptiveness …

Manufacturer Liability For Harms Caused By Consumers To Others, Bruce L. Hay, Kathryn E. Spier

Law and Economics Papers

This paper investigates whether manufacturers should be liable if consumers, through the use of a product, cause harm to others. If consumers have deep pockets then consumer-only liability is socially desirable. With consumer insolvency, however, consumer-only liability leads to inadequate consumer precautions, inadequate safety features, and excessive economic activity. With homogeneous insolvent consumers, the best rule is "residual-manufacturer liability" where the consumer bears primary responsibility and the manufacturer bears the shortfall in damages. When consumers' willingness-to-pay is correlated with social harm they cause then residual-manufacturer liability distorts the market quantity. When consumers differ in their wealth then residual-manufacturer liability creates …

Testing The Focal Point Theory Of Legal Compliance: Expressive Influence In An Experimental Hawk/Dove Game, Richard H. Mcadams, Janice Nadler

Law and Economics Papers

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 …