Law Commons^™

Rethinking The Theory Of Legal Rights, Jules S. Coleman, Jody S. Kraus

Faculty Scholarship

In the economic approach to law, legal rights are designed, in part, to overcome the conditions under which markets fail. In correcting for market failure, economic analysis endorses two rules for assigning legal rights. The first specifies the allocation of rights under conditions of rational cooperation, full information and zero transaction costs. Provided that exchange is available and that obstacles to exercising it are insignificant, rational cooperators will negotiate around inefficiencies. Under these conditions, legal rights are not assigned in order to establish optimal levels of resource deployment directly; rather, they establish well-defined entitlements or negotiation points which create a …

Error And Rationality In Individual Decisionmaking: An Essay On The Relationship Between Cognitive Illusion And The Management Of Choice, Robert E. Scott

Faculty Scholarship

How do individuals make choices? In recent years, economists, psychologists and legal academics have searched for answers to various aspects of this question. One topic of recent interest, for example, concerns a lingering problem in information theory: Does consumer inability to process "too much" information cause market failure? The normative implications of this question raise significant policy issues. If consumers' cognitive circuits can become overloaded, then information disclosure is less appealing than direct regulation as a solution to problems of market failure.

Takeover Defense Tactics: A Comment On Two Models, Jeffrey N. Gordon, Lewis A. Kornhauser

Faculty Scholarship

One of the most important debates of current corporate law practice and scholarship is about the appropriate role of target management confronted with a takeover bid. The controversy turns on the identification of a criterion for evaluating takeovers and target management defensive tactics. An influential body of opinion contends that maximization of shareholder wealth is the appropriate criterion because, first, traditional notions of fiduciary duty generally require managers to act in the shareholders' interest, and, second, shareholder wealth maximization is seen as the best available proxy for social wealth maximization. On this view, takeovers are desirable because they can increase …

A Relational Theory Of Secured Financing, Robert E. Scott

Faculty Scholarship

Despite advances in finance theory, secured debt remains a puzzle. As a consequence, the justification for the current legal regulation of secured financing is similarly unclear. What purposes, whether benign or malignant, does security serve? And what explains the peculiar system of priorities established by Article 9 of the Uniform Commercial Code? These are particularly urgent questions for students of commercial law because legally created priorities among creditors are an apparent aberration. In most legal regimes, equal treatment of those similarly situated is an important normative goal. Indeed, much of federal bankruptcy law seems to reflect a conception of business …

Understanding The Plaintiff's Attorney: The Implications Of Economic Theory For Private Enforcement Of Law Through Class And Derivative Actions, John C. Coffee Jr.

Faculty Scholarship

Probably to a unique degree, American law relies upon private litigants to enforce substantive provisions of law that in other legal systems are left largely to the discretion of public enforcement agencies. This system of enforcement through "private attorneys general" is most closely associated with the federal antitrust and securities laws and the common law's derivative action, but similar institutional arrangements have developed recently in the environmental, "mass tort," and employment discrimination fields. The key legal rules that make the private attorney general a reality in American law today, however, are not substantive but procedural – namely, those rules that …

Negligence, Causation And Information, Stephen G. Marks

Faculty Scholarship

This note suggests a model to unify, in a simple information-based framework, the notion of negligence and the various notions of causation. In effect, the model demonstrates that negligence, probabilistic cause and cause-in-fact represent an identical concept applied to different information sets. This note uses the unified framework to develop a simple algorithm for the practical application of the principles of causation in the law of negligence.

Efficient Markets, Costly Information, And Securities Research, Jeffrey N. Gordon, Lewis A. Kornhauser

Faculty Scholarship

Courts, administrative policy makers and legal scholars have widely embraced the theory that well-developed markets are efficient. In this Article, Professors Gordon and Kornhauser cast doubt on the wisdom of reliance on the efficient market hypothesis as applied to various areas of corporate law. Their charge is that legal decision makers and scholars have misunderstood the assumptions and limitations of the theory and have neglected recent critical economics scholarship. Professors Gordon and Kornhauser begin by detailing the assertions of the hypothesis in relation to the workings of securities markets, focusing on various asset pricing models used to test the hypothesis …

An Economic Analysis Of The Lost-Volume Retail Seller, Victor P. Goldberg

Faculty Scholarship

Suppose that a customer agrees to buy a boat and before it is delivered, he reneges. The dealer subsequently resells the boat to another customer at the same price. Has the seller suffered damages (aside from incidental damages) and, if so, should he be compensated? This question, dubbed the lost-volume seller problem, has been the subject of considerable legal analysis, usually in the context of explicating section 2-708(2) of the Uniform Commercial Code (U.C.C.). There have been a number of attempts to apply economic analysis to this difficult question, the most recent by Professors Goetz and Scott. Unfortunately, the economic …

The Free Rider Problem, Imperfect Pricing, And The Economics Of Retailing Services, Victor P. Goldberg

Faculty Scholarship

In GTE Sylvania, the Supreme Court acknowledged what a group of law and economics scholars had been arguing for the previous two decades: vertical restrictions that limit intrabrand competition can have a desirable effect on interbrand competition. The Court approvingly accepted the argument that the free rider problem might justify a manufacturer's use of vertical restrictions. The argument, in its simplest form, is that if a retailer provides services such as advice and demonstrations to consumers, a consumer could make use of the service and then buy the product from a "no- frills" retailer. If the manufacturer cannot control the …

Federal Jurisdiction Over Preemption Claims: A Post-Franchise Tax Board Analysis, Ronald J. Mann

Faculty Scholarship

As Congress uses the commerce power to regulate areas of the economy previously controlled by the states, federal statutes conflict with state law with increasing frequency. When such conflicts occur, federal law "preempts" the state law under the supremacy clause of the United States Constitution. Litigants who foresee a preemption issue often seek a declaratory judgment of preemption or nonpreemption in order to clarify their rights and duties. This Note addresses the scope of federal question jurisdiction over declaratory judgment actions in which preemption is the only federal question raised.

Market Failure And The Economic Case For A Mandatory Disclosure System, John C. Coffee Jr.

Faculty Scholarship

Recent academic commentary on the securities laws has much in common with the battles fought in historiography over the origins of the First World War. The same progression of phases is evident. First, there is an orthodox school, which tends to see historical events largely as a moral drama of good against evil. Next come the revisionists, debunking all and explaining that the good guys were actually the bad. Eventually, a new wave of more professional, craftsmanlike scholars arrives on the scene to correct the gross overstatements of the revisionists and produce a more balanced, if problematic, assessment.

Regulating The Market For Corporate Control: A Critical Assessment Of The Tender Offer's Role In Corporate Governance, John C. Coffee Jr.

Faculty Scholarship

Better answers often await better questions. In the wake of a recent series of provocative articles dealing with contested tender offers, several questions have been vigorously debated:

(1) Should management of the target company be allowed to resist a hostile tender offer in order to remain an independent company? Which, if any, of the various "shark repellent" measures by which a potential target can make itself unattractive to a bidder are justified?;

(2) If defensive tactics were generally forbidden, should the target company's management still be permitted to encourage competing bids thereby creating an auction?; and

(3) Do hostile takeovers …

An Economic Analysis Of Royalty Terms In Patent Licenses, Michael J. Meurer

Faculty Scholarship

Efficient exploitation of a patent often requires patentees to license users of their inventions. The courts, on the other hand, have proscribed many forms of license agreements and discouraged patent licensing in general, thereby diminishing the efficacy of the patent system as a stimulus to R & D. This negative attitude is attributable to fears that licensing will be used to protect invalid patents and secure illegitimate extensions of monopoly power. Part I of this Note reviews judicial treatment of certain royalty terms in patent licenses, describing the restraints the courts have imposed on the freedom of patentees to license …

The Justice Of Economics: An Analysis Of Wealth Maximization As A Normative Goal (Review Essay), Richard L. Schmalbeck

Faculty Scholarship

Reviewing, R. Posner,The Economics of Justice (1981).

Bargaining In The Shadow Of The Law: A Testable Model Of Strategic Behavior, Robert Cooter, Stephen G. Marks, Robert Mnookin

Faculty Scholarship

Part I describes the framework of the model. Part II discusses the domination of psychological effects by tangible variables, which is the basis for comparative statics. Part III explains the table of predictions, and Part IV applies the predictions to externalities and rules for real-locating payoffs from trial. There is little mathematics in the text. The mathematical reader can refer to the Appendix for a brief presentation of our model, or to a companion paper on file with this Journal which develops the mathematics at length.

Double Jeopardy Of Corporate Profits, The , Constantine N. Katsoris

Faculty Scholarship

The more one reads about our economy, the more one is baffled and alarmed. Permanent solutions to economic problems are elusive. Treating one financial malaise often aggravates another sector of the economy, necessitating a delicate balancing of conflicting interests. Furthermore, the problems are complicated by the constant influence of foreign forces. Nevertheless, most economists agree that any solution will require enormous funding. Unfortunately, the public has little, if any, confidence in our tax system. Indeed, some tax laws and proposals have been referred to as "obscene" and a "disgrace to the human race." Few quarrel with the aptness of such …

Corporate Crime And Punishment: A Non-Chicago View Of The Economics Of Criminal Sanctions, John C. Coffee Jr.

Faculty Scholarship

In this article, Professor Coffee argues that fines are an inefficient means by which to deter organizational crimes. Instead, he urges a focus on the individual decision-maker and a system of competitive bids with respect to the choice of a fine as an alternative punishment.

An Inadequate Basis For Health, Safety, And Environmental Regulatory Decisionmaking, Michael S. Baram

Faculty Scholarship

The use of cost-benefit analysis in agency decisionmaking has been hailed as the cure for numerous dissatisfactions with governmental regulation. Using this form of economic analysis arguably promotes rational decisionmaking and prevents health, safety, and environmental regulations from having inflationary and other adverse economic impacts. Closer analysis, however, reveals that the cost-benefit approach to regulatory decisionmaking suffers from major methodological limitations and institutional abuses. In practice, regulatory uses of cost-benefit analysis stifle and obstruct the achievement of legislated health, safety, and environmental goals.

This Article critically reviews the methodological limitations of cost-benefit analysis, current agency uses of cost-benefit analysis under …

Implementing A Progressive Consumption Tax, Michael J. Graetz

Faculty Scholarship

Much scholarly debate has been devoted to the theoretical merits of using an individual's consumption expenditures as the basis for measuring ability to pay tax. In this Article, Professor Graetz examines the practical problems of implementing and administering a progressive consumption tax as an alternative to the income tax. He concludes that although a consumption tax is feasible, practical implementation difficulties, together with the political unlikelihood of enacting a tax which is both administratively workable and retains the alleged theoretical advantages of a consumption-based tax, argue against its adoption.

The Law And Economics Of Vertical Restrictions: A Relational Perspective, Victor P. Goldberg

Faculty Scholarship

Vertical restrictions between franchisors and their dealers have long been a thorny problem in antitrust law. Richard Posner's characterization of the case law as a "fiasco" and a "doctrinal shambles" is echoed by many other commentators. Perhaps partly because of the intellectual confusion in the area, the Supreme Court recently made an apparently sharp change in direction. In Continental T.V., Inc. v. GTE Sylvania Inc. the Court reversed the decade-old Schwinn per se doctrine, holding that at least some vertical restrictions deserve a rule of reason test. Whether this decision will prove a more durable precedent than Schwinn remains …

The "Stationarity" Of Shadow Prices Of Factors In Project Evaluation, With And Without Distortions, Jagdish N. Bhagwati, Henry Wan Jr.

Faculty Scholarship

Until recently, the literature on cost-benefit analysis for projects has been largely within the domain of research on "public monopoly," literature currently reviewed by Jacques Lesourne, (ch. 3), and the work of public finance theorists as typified in the celebrated practical work of Ian Little and James Mirrlees in their Manual, and in the recent theoretical contribution of Peter Diamond and Mirrlees. International trade theorists have, however, turned now to the analysis of these problems, starting with the early work of Vijay Joshi and Deepak Lai, then that of W. M. Corden, and most recently culminating in the contributions of …

Measuring Sellers' Damages: The Lost-Profits Puzzle, Charles J. Goetz, Robert E. Scott

Faculty Scholarship

A buyer repudiates a fixed-price contract to purchase goods, and the seller sues for damages. How should a court measure the seller's loss? The answer seems simple: The seller should be awarded damages sufficient to place it in the same economic position it would have enjoyed had the buyer performed the contract. But the seductive conceptual simplicity of the compensation principle disguises substantial practical problems in measuring seller's damages.

Contract law has traditionally minimized measurement difficulties by basing damages in most cases on the difference between the contract price and market value of the repudiated goods. The common law courts …

Constitutional Regulation Of Provisional Creditor Remedies: The Cost Of Procedural Due Process, Robert E. Scott

Faculty Scholarship

In recent years a series of Supreme Court decisions has purported to envelop the rights of defaulting debtors in an enlarged concept of procedural due process. The central theme underlying this development is clearly an attempt by the Court to impose some degree of constitutional control on the exercise of provisional creditor remedies. The path that leads from Sniadach v. Family Finance Corp. to North Georgia Finishing, Inc. v. Di-Chem, Inc., is however, far from clear and the cases have provoked serious questioning of the meaning and impact of this doctrine. Due process as reflected in Sniadach and Fuentes …

Institutional Change And The Quasi-Invisible Hand, Victor P. Goldberg

Faculty Scholarship

The fundamental principle of economics is that people will pursue their own self-interest within a given institutional framework. The economist's basic policy premise is that (so long as certain "market failures" do not arise) this self-interest will, like an Invisible Hand, guide resources to their proper usage; when market failures arise the usual policy prescription is to amend the rules (for example, by breaking up monopolies, placing an "optimal" tax on pollution, or redefining property rights) to make the marginal private costs and benefits equal to the marginal social costs and benefits so that the free play on self-interest will …

Book Review, Paul D. Carrington

Faculty Scholarship

No abstract provided.

Marginal Cost Pricing, Investment Theory And Catv, Victor P. Goldberg

Faculty Scholarship

In his article, Marginal Cost Pricing, Investment Theory and CATV, James Ohls makes a number of erroneous assertions concerning the optimum pricing of CATV. Most of his problems stem from a failure to properly define the environment in which the optimum price is to be set and the role that an optimum price should play. If one alters Ohls' implicit (and sometimes contradictory) assumptions and if one keeps in mind the purpose prices should serve in an economic system, a number of Ohls' conclusions are altered.