Digital Commons Network^™

Mome In Hindsight, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Two decades ago, the Virginia Law Review published our article “The Mechanisms of Market Efficiency” (MOME), in which we tried to discern the institutional underpinnings of financial market efficiency. We concluded that the level of market efficiency with respect to a particular fact depends on which of several market mechanisms — universally informed trading, professionally informed trading, derivatively informed trading, and uninformed trading (each of which we explain below) — operates to reflect that fact in market price. Which mechanism is operative, in turn, depends on how widely the fact is distributed among traders, which, I turn, depends on the …

Marriage, Cohabitation, And Collective Responsibility For Dependency, Elizabeth S. Scott

Faculty Scholarship

Marriage has fallen on hard times. Although most Americans say that a lasting marriage is an important part of their life plans, the institution no longer enjoys its former exclusive status as the core family form. This is so largely because social norms that regulate family life and women's social roles have changed. A century (or even a couple of generations) ago, marriage was a stable economic and social union that, for the most part, lasted for the joint lives of the spouses. It was the only option for a socially sanctioned intimate relationship and was the setting in which …

Corporate Governance, Executive Compensation And Securities Litigation, Eric L. Talley, Gudrun Johnsen

Faculty Scholarship

It is generally accepted that good corporate governance, executive compensation and the threat of litigation are all important mechanisms for incentivizing managers of public corporations. While there are significant and robust literatures analyzing each of these policy instruments in isolation, their mutual relationship and interaction has received somewhat less attention. Such neglect is mildly surprising in light of a strong intuition that the three devices are structurally related to one another (either as complements or substitutes). In this paper, we construct an agency cost model of the firm in which corporate governance protections, executive compensation levels, and litigation incentives are …

Credit Card Policy In A Globalized World, Ronald J. Mann

Faculty Scholarship

This paper relies on data from countries around the world to present a comprehensive analysis of policy issues related to credit cards. The first part discusses the rise of credit cards and debit cards and how their uses differ from country to country. It closes with a framework for explaining why cards are more and less successful in different countries, focusing in large part on the ready availability of detailed consumer credit information. The second part considers the relation between credit card use and bankruptcy. Relying on a time series of data from the United States, Canada, Great Britain and …

Managing A Correctional Marketplace: Prison Privatization In The United States And The United Kingdom, David Pozen

Faculty Scholarship

This paper traces the recent history and development of privately operated prisons in the United States and the United Kingdom, and it compares their current role in the countries' correctional systems. The privatization movements of the U.S. and the U.K. were driven by similar factors, but the relative weight of these factors varied between the two. In the U.S., legal pressures to alleviate prison overcrowding and fiscal incentives to contract out prison construction were stronger, while in the U.K. the ideological and political aims of the governing party exerted more influence in stimulating privatization. America's experience with private prisons in …

The Alien Tort Statute, Civil Society, And Corporate Responsibility, Sarah H. Cleveland

Faculty Scholarship

The topic of this panel is civil participation in the global trading system, with a particular focus on Doe v. Unocal Corp. and use of the Alien Tort Statute (ATS) to enforce fundamental human rights norms against multinational corporations. These comments will therefore attempt to locate Doe v. Unocal and other ATS litigation in the broader efforts of civil society to establish and maintain normative principles for corporate responsibility in the global trading regime. This comment first explains the role of ATS litigation in the broader civil society context and the contribution of ATS cases to the development and enforcement …

Scrubbing The Wash Sale Rules, David M. Schizer

Faculty Scholarship

Loss limitations are an ugly but inevitable feature of any realization-based income tax. In essence, because the system mismeasures gains, it also has to mismeasure losses. Otherwise, the "timing option" inherent in the realization rule would allow taxpayers to defer gains (thereby reducing the tax's present value) while accelerating losses (thereby preserving the deduction's present value). This "strategic trading" would erode the tax on risky positions, leading to inefficiencies as taxpayers developed a taste for risky positions, became "locked in" to appreciated positions, and sold loss positions they otherwise would keep. Distributional issues also would arise as the effective tax …

"You Are Entering A Gay And Lesbian Free Zone": On The Radical Dissents Of Justice Scalia And Other (Post-) Queers – [Raising Questions About Lawrence, Sex Wars, And The Criminal Law], Bernard Harcourt

Faculty Scholarship

The most renowned substantive criminal law decision of the October 2002 Term, Lawrence v. Texas, will go down in history as a critical turning point in criminal law debates over the proper scope of the penal sanction. For the first time in the history of American criminal law, the United States Supreme Court has declared that a supermajoritarian moral belief does not necessarily provide a rational basis for criminalizing conventionally deviant conduct. The Court's ruling is the coup de grâce to legal moralism administered after a prolonged, brutish, tedious, and debilitating struggle against liberal legalism in its various criminal …

Understanding Macs: Moral Hazard In Acquisitions, Ronald J. Gilson, Alan Schwartz

Faculty Scholarship

The standard contract that governs friendly mergers contains a material adverse change clause (a "MAC") and a material adverse effect clause (a "MAE"); these clauses permit a buyer costlessly to cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like MAC and MAE term has been restricted by a detailed set of exceptions that curtails the buyer's ability to exit. The term today engenders substantial litigation and occupies center stage in the negotiation of merger agreements. This paper asks what functions the MAC and MAE term serve, what function the exceptions …

The Economics Of Form And Substance In Contract Interpretation, Avery W. Katz

Faculty Scholarship

For over a century, legal commentators have debated the relative merits of formal and substantive approaches to the interpretation of contracts; in recent years, the debate has increasingly been conducted in the language of the economic approach to contract law. While this new wave of scholarship has been relatively successful in relating the traditional debates over formalism to specific transactional and institutional problems such as imperfect information, it has been less productive in terms of generating useful legal or policy recommendations. This Essay proposes a different approach: one that focuses on private rather than public legal decisionmakers as its primary …

Be Careful What You Wish For: Legal Sanctions And Public Safety Among Adolescent Offenders In Juvenile And Criminal Court, Jeffrey Fagan, Aaron Kupchik, Akiva Liberman

Faculty Scholarship

Three decades of legislative activism have resulted in a broad expansion of states' authority to transfer adolescent offenders from juvenile to criminal (adult) courts. At the same time that legislatures have broadened the range of statutes and lowered the age thresholds for eligibility for transfer, states also have reallocated discretion away from judges and instituted simplified procedures that permit prosecutors to elect whether adolescents are prosecuted and sentenced in juvenile or criminal court. These developments reflect popular and political concerns that relatively lenient or attenuated punishment in juvenile court violates proportionality principles for serious crimes committed by adolescents, and is …

Against Separation, Philip A. Hamburger

Faculty Scholarship

In 1802, in a letter to the Danbury Baptist Association, Thomas Jefferson wrote that the First Amendment had the effect of "building a wall of separation between Church & State." As it happens, when Congress drafted the First Amendment in 1789, Jefferson was enjoying Paris. Nonetheless, his words about separation are often taken as an authoritative interpretation of the First Amendment's establishment clause. Indeed, in the 1947 Everson v. Board of Education decision, the Supreme Court quoted Jefferson's pronouncement to justify its conclusion that the First Amendment guarantees a separation of church and state. Not only the justices but …

What Caused Enron? A Capsule Social And Economic History Of The 1990s, John C. Coffee Jr.

Faculty Scholarship

The sudden explosion of corporate accounting scandals and related financial irregularities that burst over the financial markets between late 2001 and the first half of 2002 – Enron, WorldCom, Tyco, Adelphia and others – raises an obvious question: Why now? What explains the concentration of financial scandals at this moment in time? Much commentary has rounded up the usual suspects and placed the blame on a decline in business morality, an increase in "infectious greed," or other similarly subjective trends that cannot be reliably measured. Although none of these possibilities can be dismissed out of hand, approaches that simply reason …

Private Property And The Politics Of Environmental Protection, Thomas W. Merrill

Faculty Scholarship

Private property plays two opposing roles in stories about the environment. In the story favored by most environmentalists, private property is the bad guy. It balkanizes an interconnected ecosystem into artificial units of individual ownership. Owners of these finite parcels have little incentive to invest in ecosystem resources and every incentive to dump polluting wastes onto other parcels. Only by relocating control over natural resources in some central authority like the federal government, can we make integrated decisions designed to preserve the health of the entire ecosystem. For these traditional environmentalists, private property is the problem; public control is the …

Marbury V. Madison And European Union "Constitutional" Review, George A. Bermann

Faculty Scholarship

The U.S. Supreme Court's decision in Marbury v. Madison specifically raises the question of the legitimacy of a "horizontal" species of judicial review, that is, review by courts of the exercise of powers by the coordinate branches of government. The same question could be asked with respect to judicial review in the European Union. More particularly, how problematic or contestable has "horizontal" judicial review been within the European Union as a matter of principle? And, irrespective of its contestability, how have the courts of the European Union exercised "horizontal" review? We will find, however, that it is not the "horizontal" …

Market Bubbles And Wasteful Avoidance: Tax And Regulatory Constraints On Short Sales, Michael R. Powers, David M. Schizer, Martin Shubik

Faculty Scholarship

In recent years, a speculative bubble in Internet stocks has burst and several "blue chip" firms have failed amidst high profile allegations of corporate misconduct. Why did high-tech start-ups with no earnings attain such lofty valuations? Why didn't sophisticated investors keep prices at saner levels? And why didn't more sophisticated investors look past accounting gimmicks much earlier to uncover problems at Enron and other firms? More generally, why did the mechanisms of market efficiency prove inadequate? While there obviously is no single answer to these complex questions, this Article focuses on one piece of the problem: U.S. tax and regulatory …

Destabilization Rights: How Public Law Litigation Succeeds, Charles F. Sabel, William H. Simon

Faculty Scholarship

"Public law litigation" – civil rights advocacy seeking to restructure public agencies - has changed course over the last three decades. It has moved away from remedial intervention modeled on command-and-control bureaucracy toward a kind of intervention that can be called "experimentalist." Instead of top-down, fixed-rule regimes, the experimentalist approach emphasizes ongoing stakeholder negotiation, continuously revised performance measures, and transparency. Experimentalism is evident in all the principal areas of public law intervention – schools, mental health institutions, prisons, police, and public housing. This development has been substantially unanticipated and unnoticed by both advocates and critics of public law litigation. In …

Requiem, Henry Paul Monaghan

Faculty Scholarship

Besides being brief, it is not apparent what one should say. No doubt due to my own upbringing, I cannot view this an occasion for a celebration of a life that ended just a handful of hours ago. Nor do I view this an occasion for a discussion of John's work. The New York Times provided a splendid account of that. I would add only that John received an honorary LL.D. from Yale six months ago. The opening sentence of the accompanying citation said it all: "Your work set the standard for constitutional law scholarship for our generation." I am …

John Ely: The Harvard Years, Henry Paul Monaghan

Faculty Scholarship

John Ely's life ended too soon, on October 25, a few weeks before his sixty-fifth birthday. Six months earlier, Yale had awarded him an honorary Doctor of Laws. The citation accompanying the award stated, "Your work set the standard for constitutional scholarship for our generation." It is, I believe, particularly appropriate that this Law Review dedicate an issue to John's memory. John taught at Harvard Law School from 1973 to 1982. During that time he produced his signature work, Democracy and Distrust, and the articles most closely associated with his name, several of which appeared in this Review.

Marbury V. Madison As The First Great Administrative Law Decision, Thomas W. Merrill

Faculty Scholarship

Marbury v. Madison is our foremost symbol of judicial power. Not only is the decision regarded as the root of judicial authority to strike down statutes as violating the Constitution; it is also taken to mean that "the federal judiciary is supreme in the exposition of the Constitution." In other words, Marbury has come to stand for the proposition that courts should enforce their own understanding of the meaning of the Constitution, without deferring or even paying much attention to the views of the other branches.

I will not in this essay engage in yet another analysis of Marbury's …

Solving Problems Vs. Claiming Rights: The Pragmatist Challenge To Legal Liberalism, William H. Simon

Faculty Scholarship

Recent developments in both theory and practice have inspired a new understanding of public interest lawyering. The theoretical development is an intensified interest in Pragmatism. The practical development is the emergence of a style of social reform that seeks to institutionalize the Pragmatist vision of democratic governance as learning and experimentation. This style is reflected in a variety of innovative responses to social problems, including drug courts, ecosystem management, and "new accountability" educational reform. The new understanding represents a significant challenge to an influential view of law among politically liberal lawyers over the past fifty years. That view, Legal Liberalism, …

Embedded Options In The Case Against Compensation In Contract Law, Robert E. Scott, George G. Triantis

Faculty Scholarship

Although compensation is the governing principle in contract law remedies, it has tenuous historical, economic, and empirical support. A promisor's right to breach and pay damages is only a subset of a larger family of termination rights that do not purport to compensate the promisee for losses suffered when the promisor walks away from the contemplated exchange. These termination rights can be characterized as embedded options that serve important risk management functions. We show that sellers often sell insurance to their buyers in the form of these embedded call options, and that termination fees, including damages, are in essence option …

Balance In The Taxation Of Derivative Securities: An Agenda For Reform, David M. Schizer

Faculty Scholarship

It is well understood that aggressive tax planning with derivatives threatens the U.S. income tax system. The conventional solution to this threat has been consistency, meaning that the same tax treatment should apply to all economically comparable bets, regardless of the form used. Yet familiar political and administrative barriers stand in the way of achieving this lofty goal.

This Article develops a reform agenda to eliminate tax planning without requiring consistency. Policymakers should strive instead for a new goal, which this Article calls "balance": For each risky position, the treatment of gains should match the treatment of losses. For example, …

Incorporation By Law, Joseph Raz

Faculty Scholarship

My purpose here is to examine the question of how the law can be incorporated within morality and how the existence of the law can impinge on our moral rights and duties, a question (or questions) which is a central aspect of the broad question of the relation between law and morality. My conclusions cast doubts on the incorporation thesis, that is, the view that moral principles can become part of the law of the land by incorporation.

Regulating Teenage Abortion In The United States: Politics And Policy, Carol Sanger

Faculty Scholarship

Thirty-four US states currently require pregnant minors either to notify their parents or get their consent before having a legal abortion. The Supreme Court has upheld the constitutionality of theses statutes provided that minors are also given an alternative mechanism for abortion approval that does not involve parents. The mechanism used is the 'judicial bypass hearing' at which minors persuade judges that they are mature and informed enough to make the abortion decision themselves. While most minors receive judicial approval, the hearings intrude into the most personal aspects of a young woman's life. The hearings, while formally civil in nature, …

Mome In Hindsight, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Two decades ago, the Virginia Law Review published our article “The Mechanisms of Market Efficiency” (MOME), in which we tried to discern the institutional underpinnings of financial market efficiency. We concluded that the level of market efficiency with respect to a particular fact depends on which of several market mechanisms — universally informed trading, professionally informed trading, derivatively informed trading, and uninformed trading (each of which we explain below) — operates to reflect that fact in market price. Which mechanism is operative, in turn, depends on how widely the fact is distributed among traders, which, I turn, depends on the …

The Role Of Well-Being, Joseph Raz

Faculty Scholarship

"Well-being" signifies the good life, the life which is good for the person whose life it is. I have argued that well-being consists in a wholehearted and successful pursuit of valuable relationships and goals. This view, a little modified, is defended , but the main aim of the article is to consider the role of well-being in practical thought. In particular I will examine a suggestion which says that when we care about people, and when we ought to care about people, what we do, or ought to, care about is their well-being. The suggestion is indifferent to who cares …

The Broadband Debate, A User's Guide, Tim Wu

Faculty Scholarship

Back in the 1990s, Internet communications policy was easier. It was easy to agree that the network's growth ought not be impended by excessive government regulation. It was easy to hope that the Internet would solve all of its own problems. Yet it turned out that the success of the network was hiding strong differences of opinion. Today, the euphoria is gone, and the divide in Internet communications policy has become clear and unmistakable. It most clearly a divide between two distinct groups: the self-proclaimed "Openists" and "Deregulationists."

This divide will do much to inform the reform of the Telecommunications …

Editorial: The European Union As A Constitutional Experiment, George Bermann

Faculty Scholarship

In the constellation of international governance regimes, the European Union occupies a singular place, and not merely because it has recently engaged in the process of drafting a document whose title includes the words A Constitution for Europe'. Even if that particular document, or any such document, were never to see the light of day as a fully adopted and ratified instrument (an eventuality I consider to be unlikely), the EU will already have been constitutionalised, albeit in a fashion unfamiliar to those who, like most of us, are accustomed to the constitutions of Nation States. To claim that the …

Uncorporated Professionals, John Romley, Eric L. Talley

Faculty Scholarship

Professional service providers who wish to organize as multi-person firms have historically been limited to the partnership form. Such organizational forms trade the benefit of risk diversification off against the costs of diluted incentives and liability exposure in choosing their optimal size. More recently, states have permitted limited-liability entities that combine the simplicity, flexibility and tax advantages of a partnership with the liability shield of a corporation. We develop a game theoretic model of professional-firm organization that integrates the provision of incentives in a multi-person firm with the choice of business form. We then test the model's predictions with a …