Law and Economics Commons^™

Different Contexts, Different Risk Preferences?, Levon Barseghyan, Joshua C. Teitelbaum, Lin Xu

Georgetown Law Faculty Publications and Other Works

We examine the stability of risk preferences across contexts involving different stakes. Using data on households' deductible choices in three property insurance coverages and their limit choices in two liability insurance coverages, we assess the stability across the five contexts in the ordinal ranking of the households' willingness to bear risk. We find evidence of stability across contexts involving stakes of the same magnitude, but not across contexts involving stakes of very different magnitudes. Our results appear to be robust to heterogeneity in wealth and access to credit, complicating seemingly ready explanations.

Adolf Berle During The New Deal: The Brain Truster As An Intellectual Jobber, Robert Thompson

Georgetown Law Faculty Publications and Other Works

Thirty-seven year old law professor Adolf Berle had a career year in 1932. His book published that year, The Modern Corporation and Private Property (written with Gardiner Means), framed the fundamental twentieth century change in understanding modern corporations. Berle’s exchange with Merrick Dodd on the purpose of the corporation that played out that spring on the pages of the Harvard Law Review launched a still fierce debate over the role of shareholders and other stakeholders. His service as a brain truster for Franklin Roosevelt during the fall election gave voice to the transformative economic policies of the New Deal. This …

User Participation In Value Creation, Itai Grinberg

Georgetown Law Faculty Publications and Other Works

This article examines HM Treasury’s proposal to account for the active participation of users in value creation in certain digital platforms. The first key question is whether there is any reason to believe, as HM Treasury suggests, that users only meaningfully or actively contribute to value creation in the context of certain digital platforms. The article accordingly explores the factors HM Treasury sets out for the attribution of income to active user participation, including features such as network effects, multisided business models, and a lack of physical presence in the jurisdiction of the user. It concludes that if a user …

A Destination-Based Cash Flow Tax Can Be Structured To Comply With World Trade Organization Rules, Itai Grinberg

Georgetown Law Faculty Publications and Other Works

This paper briefly outlines alternative approaches to enacting a destination-based cash flow tax that are more clearly compatible with the World Trade Organization rules than the approach that has previously been described in the literature. The first structural alternative involves expanding the universe of businesses subject to the tax by clearly defining both the base of the new U.S. business tax and its tax nexus requirement as domestic consumption, and thereafter treating foreign importers and other sellers equivalently, rather than imposing a deduction disallowance or an import tax. The second alternative involves adopting a business activities tax, and then enacting …

Macroeconomic Modeling Of Tax Policy: A Comparison Of Current Methodologies, Itai Grinberg, Alan J. Auerbach, Thomas A. Barthold, Nicholas Bull, W. Gavin Elkins, Pamela J. Moomau, Rachel Moore, Benjamin Page, Brandon Pecoraro, Kyle Pomerleau

Georgetown Law Faculty Publications and Other Works

The macroeconomic effects of tax reform are a subject of significant discussion and controversy. In 2015, the House of Representatives adopted a new “dynamic scoring” rule requiring a point estimate within the budget window of the deficit effect due to the macroeconomic response to certain proposed tax legislation. The revenue estimates provided by the staff of the Joint Committee on Taxation (JCT) for major tax bills often play a critical role in Congressional deliberations and public discussion of those bills. The JCT has long had macroeconomic analytic capability, and in recent years, responding to Congress’ interest in macrodynamic estimates for …

Do Credit-Based Insurance Scores Proxy For Income In Predicting Auto Claim Risk?, Darcy Steeg Morris, Daniel Schwarcz, Joshua C. Teitelbaum

Georgetown Law Faculty Publications and Other Works

Auto insurers often use credit-based insurance scores in their underwriting and rating processes. The practice is controversial—many consumer groups oppose it, and most states regulate it, in part out of concern that insurance scores proxy for policyholder income in predicting claim risk. We offer new evidence on this issue in the context of auto insurance. Prior studies on the subject suffer from the limitation that they rely solely on aggregate measures of income, such as the median income in a policyholder's census tract or zip code. We analyze a panel of households that purchased auto and home policies from a …

Pay It Forward? Law And The Problem Of Restricted-Spending Philanthropy, Brian Galle

Georgetown Law Faculty Publications and Other Works

American foundations and other philanthropic giving entities hold about $1 trillion in investment assets, and that figure continues to grow every year. Even as urgent contemporary needs go unmet, philanthropic organizations spend only a tiny fraction of their wealth each year, mostly due to restrictive terms in contracts between donors and firms limiting the rate at which donations can be distributed. Law has played a critical role in underwriting and encouraging this build-up of philanthropic wealth. For instance, contributors can typically take a full tax deduction for the value of their contribution today, no matter when the foundation spends their …

Behavioral Ethics, Behavioral Compliance, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

The design of an effective legal compliance system for an organization fearing prosecution for white-collar crime or regulatory violations requires skill at predicting human behavior. It is entirely plausible to use the economist’s simplifying assumptions of rational choice and pecuniary self-interest in making these predictions. But the realism of these assumptions has been under attack for decades now, suggesting that we should at least consider more nuanced behavioral possibilities when designing and implementing compliance programs. The label “behavioral compliance” can be attached to the design and management of compliance that draws from this wider range of behavioral predictions about individual …

The Evolution And Vitality Of Merger Presumptions: A Decision-Theoretic Approach, Steven C. Salop

Georgetown Law Faculty Publications and Other Works

This article reviews the formulation and evolution of the Philadelphia National Bank anticompetitive presumption through the lens of decision theory and Bayes Law. It explains how the economic theory, empirical evidence and experience are used to determine a presumption and how that presumption interacts with the reliability of relevant evidence to rationally set the appropriate burden of production and burden of persuasion to rebut the presumption. The article applies this reasoning to merger presumptions. It also sketches out a number of non-market share structural factors that might be used to supplement or replace the current legal and enforcement presumptions for …

Inference Under Stability Of Risk Preferences, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum

Georgetown Law Faculty Publications and Other Works

We leverage the assumption that preferences are stable across contexts to partially identify and conduct inference on the parameters of a structural model of risky choice. Working with data on households' deductible choices across three lines of insurance coverage and a model that nests expected utility theory plus a range of non-expected utility models, we perform a revealed preference analysis that yields household-specific bounds on the model parameters. We then impose stability and other structural assumptions to tighten the bounds, and we explore what we can learn about households' risk preferences from the intervals defined by the bounds. We further …

In Praise Of Ex Ante Regulation, Brian Galle

Georgetown Law Faculty Publications and Other Works

Timing is an important consideration in regulatory design. Corrective taxes are usually imposed before or contemporaneously with the harmful activity they are aimed at preventing, while tort awards are assessed ex post, in its aftermath. Patents and research grants both can encourage innovation, but patents pay off only after the invention is marketed. In a world of perfect information, fully rational actors, and complete credit or insurance markets, time would not matter. In the real world, though, the failure of one or more of these assumptions can change dramatically the impact of a regulatory option. For example, prior commentators have …

The Appropriate Legal Standard And Sufficient Economic Evidence For Exclusive Dealing Under Section 2: The Ftc’S Mcwane Case, Steven C. Salop, Sharis A. Pozen, John R. Seward

Georgetown Law Faculty Publications and Other Works

The FTC recently found McWane, Inc. liable for unlawful monopoly maintenance by a 3-1 majority. The dispute among the FTC Commissioners raises important and interesting issues regarding the law and economics of exclusive dealing and the proper evaluation of the competitive effects of exclusionary conduct. Commissioner Wright’s Dissent proposes and utilizes a new legal standard that requires the plaintiff to show “clear evidence” of harm to competition before shifting the burden to the defendant to show procompetitive efficiency benefits. This burden of proof and production on the plaintiff is much higher than showing “probable effect” based on a preponderance of …

Common Capital: A Thought Experiment In Cross-Border Resolution, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

Cross-border bank resolution efforts focus on burden-sharing between bank owners, private creditors and the public. There is little talk of burden-sharing among governments, despite the rich history of governments trying to stick one another with the cost of financial conglomerate failures. There is an unspoken fear that acknowledging the need to allocate losses among governments would undermine post-crisis pledges of No More Bailouts. This symposium essay argues for making government stakes in private financial firms more transparent, and for using the contingent public share as a key to loss allocation among governments in cross-border banking crises.

Efficient Breach, Gregory Klass

Georgetown Law Faculty Publications and Other Works

The theory of efficient breach is the best known, and the most controversial, product of nearly half a century of economic analysis of contract law. In its simplest form, which is the one that dominates the legal imagination, the theory argues that expectation damages are good because they allow, even encourage, a party to breach when performance becomes inefficient, thereby increasing social welfare. Many noneconomists assume the theory is well supported by principles of neoclassical economics. Thus critics commonly focus on the theory’s moral failings, or on problems with the neoclassical approach more generally. But today no economic thinker defends …

Introduction To Philosophical Foundations Of Contract Law, Gregory Klass

Georgetown Law Faculty Publications and Other Works

This Introduction to Philosophical Foundations of Contract Law (Gregory Klass, George Letsas & Prince Saprai eds., Oxford University Press, forthcoming) describes the field of contract theory and locates the essays in the volume within that field. The volume includes chapters from Aditi Bagchi, Randy Barnett, Lisa Bernstein, Mindy Chen-Wishart, Charles Fried, Avery Katz, Dori Kimel, Gregory Klass, George Letsas and Prince Saprai, Daniel Markovits, Liam Murphy, David Owens, J.E. Penner, Margaret Jane Radin, Joseph Raz, Stephen Smith, and Charlie Webb.

Inside The Blackwall Box: Explaining U.S. Marine Salvage Awards, Joshua C. Teitelbaum

Georgetown Law Faculty Publications and Other Works

Under U.S. maritime law, a salvor of imperiled maritime property on navigable waters is entitled to a monetary award from the owner. When the salvage service is rendered voluntarily in the absence of a contract, the court determines the salvage award according to six factors enumerated by the Supreme Court in The Blackwall, 77 U.S. 1 (1869). The law, however, does not specify a precise formula or rule for calculating awards on the basis of the Blackwall factors. How do courts turn their findings on the Blackwall factors into salvage awards? This article addresses this question by examining the …

Household Regulation And European Integration: The Family Portrait Of A Crisis, Philomila Tsoukala

Georgetown Law Faculty Publications and Other Works

This article develops a theoretical framework for analyzing the regulation of the household and its effects on the economy. Incorporating insights from family economics, comparative family law, legal realism, political economy and feminism, it describes the array of different legal regimes that can affect household composition and function. The article then analyzes the case of Greece using this framework. It argues that the role of households organized as families was a central element in the Greek debt crisis, overlooked by scholars and policymakers alike. It identifies the host of legal regimes that helped consolidate families as the main providers of …

What Consensus? Ideology, Politics And Elections Still Matter, Steven C. Salop

Georgetown Law Faculty Publications and Other Works

This article, which was prepared for an ABA Antitrust Section Panel, discusses the role of ideology and politics in antitrust enforcement and the impact of elections in the last twenty year on enforcement and policy at the federal antitrust agencies. The article explains the differences in antitrust ideologies and their impact on policy preferences. The article then uses a database of civil non-merger complaints by the DOJ and FTC over the last three Presidential administrations to analyze changes in the number, type and other characteristics of antitrust enforcement. It also discusses change in vertical merger enforcement and other antirust policies …

Guiding Section 5: Comments On The Commissioners, Steven C. Salop

Georgetown Law Faculty Publications and Other Works

FTC Commissioners Joshua Wright and Maureen Ohlhausen have proposed that the Commission adopt Guidelines for the application of Section 5 to Unfair Methods of Competition. This short note comments on the role of Section 5 distinct from the Sherman Act. It suggests that Section 5 be used to attack and deter certain conduct that falls into gaps of the Sherman Act. This includes exclusionary unilateral conduct that likely leads to the achievement, enhancement, or maintenance of market power (as opposed to monopoly power). It also includes unilateral conduct such as invitations to collude and other practices that facilitate conscious …

Conditional Spending After Nfib V. Sebelius: The Example Of Federal Education Law, Eloise Pasachoff

Georgetown Law Faculty Publications and Other Works

In NFIB v. Sebelius, the Supreme Court’s recent case addressing the constitutionality of the Affordable Care Act, the Court concluded that the expansion of Medicaid in that Act was unconstitutionally coercive and therefore exceeded the scope of Congress’s authority under the Spending Clause. This was the first time that the Court treated coercion as an issue of more than mere theoretical possibility under the Spending Clause. In the wake of the Court’s decision, commentators have expressed either the concern or the hope that NFIB’s coercion analysis may lead to the undoing of much of the federal regulatory state, …

Distinguishing Probability Weighting From Risk Misperceptions In Field Data, Levon Barseghyan, Francesca Molinari, Ted O'Donoghue, Joshua C. Teitelbaum

Georgetown Law Faculty Publications and Other Works

The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data.

Overview And Operation Of U.S. Financial Sanctions, Including The Example Of Iran, Barry E. Carter, Ryan Farha

Georgetown Law Faculty Publications and Other Works

Financial sanctions are increasingly being used in the mix of international economic sanctions being employed by the United Nations, regional entities, and individual countries, including the United States. These financial sanctions have become more focused and effective as the tools and techniques have improved significantly for tracing and identifying the financial transactions of terrorists, weapons proliferators, human rights violators, drug cartels, and others. These sanctions can not only freeze financial assets and prohibit or limit financial transactions, but they also impede trade by making it difficult to pay for the export or import of goods and services.

In spite of …

The Electronic Silk Road: How The Web Binds The World In Commerce, Anupam Chander

Georgetown Law Faculty Publications and Other Works

On the ancient Silk Road, treasure-laden caravans made their arduous way through deserts and mountain passes, establishing trade between Asia and the civilizations of Europe and the Mediterranean. Today’s electronic Silk Roads ferry information across continents, enabling individuals and corporations anywhere to provide or receive services without obtaining a visa. But the legal infrastructure for such trade is yet rudimentary and uncertain. If an event in cyberspace occurs at once everywhere and nowhere, what law applies? How can consumers be protected when engaging with companies across the world?

In this accessible book, cyber-law expert Anupam Chander provides the first thorough …

“Publicness” In Contemporary Securities Regulation After The Jobs Act, Donald C. Langevoort, Robert B. Thompson

Georgetown Law Faculty Publications and Other Works

The JOBS Act of 2012 reflects the largest deregulatory change to the Securities Exchange Act of 1934 over its more than 75 year history. It contracts the coverage of those companies subject to the obligations of ‘publicness” and it introduces an “on ramp” that will permit most newly-public companies to meet a lesser set of disclosure, internal control and governance obligations for up to five years. We set these changes against a larger discussion of when a private enterprise should be forced to take on public status in securities regulation, a topic that has been entirely under theorized. We conclude …

Lies Without Liars? Janus Capital And Conservative Securities Jurisprudence, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

The Supreme Court’s recent Janus Capital case offers a reading of the word “make” in Rule 10b-5 that speaks to ultimate legal authority over the communication in question. This creates the real possibility that we can have lies without liars, an entirely perplexing result in terms of any purposive meaning of the rule. In so holding, Justice Thomas joined a seemingly short list of judges who suggest that legal formalism is a particularly good weapon with which to fight securities fraud. This paper exploresJanus through the lens of conservative textualism, which takes us through a much longer intellectual history …

The Nature Of Risk Preferences: Evidence From Insurance Choices, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum, Ted O'Donoghue

Georgetown Law Faculty Publications and Other Works

The authors use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. They find that probability distortions--characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes--play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. They demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.

Community Economic Development And The Paradox Of Power, Michael R. Diamond

Georgetown Law Faculty Publications and Other Works

This article starts from the premise that poverty is a growing problem in the United States. Intergenerational poverty, the entrenchment of a class of very poor people, is a major sub set of that problem and is tied very closely to the issue of race. The author claims that missing in the fight by the poor and their allies against stratified poverty is the creation and utilization of power. This paper examines the disparate ways in which commentators have defined power. It suggests that those seeking to obtain power must understand the concept’s varying meanings and direct their activities to …

The Cathedral Engulfed: Sea-Level Rise, Property Rights, And Time, J. Peter Byrne

Georgetown Law Faculty Publications and Other Works

Sea-level rise will require many new initiatives in land use regulation to adapt to unprecedented climate conditions. Such government actions will prompt regulatory and other takings claims, and also will be shaped by apprehension of such claims. This article analyzes the categories of land use regulations and other government initiatives likely to be enacted to adapt to sea-level rise and anticipates the takings claims that may be brought against them. In addition to hard and soft coastal armoring, the article considers regulations intended to force or induce development to retreat from rising waters. Retreat regulations present difficult takings problems, because …

De-Concentrating Poverty: De-Constructing A Theory And The Failure Of Hope, Michael R. Diamond

Georgetown Law Faculty Publications and Other Works

Since the late 1980s, led by William Julius Wilson’s The Truly Disadvantaged, scholars have been writing about the social problems caused by the concentration in residential communities of high levels of poverty. Even before Wilson’s book, government policy, which previously had resulted in racially and economically segregated communities, had begun to shift towards de-concentration. The consent decree in Hills v Gautreaux, and the HOPE VI and Moving to Opportunity Programs all pointed towards de-concentration of poverty. Commentators have suggested both benign and not-so-benign reasons for the policy shift.

There were a variety of quite hopeful goals promoted by …

Are Risk Preferences Stable Across Contexts? Evidence From Insurance Data, Levon Barseghyan, Jeffrey Prince, Joshua C. Teitelbaum

Georgetown Law Faculty Publications and Other Works

Using a unique data set, the authors test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Their test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household-coverage specific Poisson processes. They find that the hypothesis of stable risk preferences is rejected by the data. Their analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices. They find that their results are robust to several alternative modeling assumptions.