Law Commons^™

Contractual Landmines, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

Conventional wisdom is that the standardized boilerplate terms used in large commercial markets survive unchanged because they are an optimal solution to the contracting problems facing parties in these markets. As Smith and Warner explained, “harmful heuristics, like harmful mutations, will die out.” But an examination of a sample of current sovereign bond contracts reveals numerous instances of harmful landmines — some are deliberate changes to standard language that increase a creditor’s nonpayment risk, others are blatant drafting errors, and yet others are inapt terms that have been carelessly imported from corporate transactions. Moreover, these landmines differ from each other …

The Logic And Limits Of The Federal Reserve Act, Lev Menand

Faculty Scholarship

The Federal Reserve is a monetary authority subject to minimal executive and judicial oversight. It also has the power to create money, which permits it to disburse funds without drawing on the U.S. Treasury. Since 2008, it has leveraged this power to an unprecedented extent. It has rescued teetering financial conglomerates, purchased trillions of dollars of mortgage-backed securities, and opened numerous ad hoc lending facilities to support ordinary businesses, nonprofits, and municipalities.

This Article identifies the causes and consequences of the Federal Reserve's expanded footprint by recovering the logic and limits of its enabling act. It argues that to understand …

Common Ownership: Do Managers Really Compete Less?, Merritt B. Fox, Manesh S. Patel

Faculty Scholarship

This Article addresses an important question in modern antitrust: when large investment funds have holdings across an industry, is competition depressed?

The question of the impact of common ownership on competition has gained much attention as the role of institutional shareholding has grown, with the funds of the three largest management companies holding in aggregate approximately 21% of the shares of a typical S&P 500 firm. It is a source of acute disagreement among scholars and policymakers, with some who believe common ownership does depress competition seeking antitrust law reforms that would significantly constrain how investment funds operate. Neglected in …

Defining Crime, Delegating Authority – How Different Are Administrative Crimes?, Daniel C. Richman

Faculty Scholarship

As the Supreme Court reconsiders whether Congress can so freely provide for criminal enforcement of agency rules, this Article assesses the critique of administrative crimes though a federal criminal law lens. It explores the extent to which this critique carries over to other instances of mostly well-accepted, delegated federal criminal lawmaking – to courts, states, foreign governments, and international institutions. By considering these other delegations through the lens of the administrative crime critique, the Article destabilizes the critique’s doctrinal foundations. It then suggests that if one really cares about liberty – not the abstract “liberty” said to be protected by …

Taking Compliance Seriously, John Armour, Jeffrey N. Gordon, Geeyoung Min

Faculty Scholarship

How can we ensure corporations play by the “rules of the game” – that is, laws encouraging firms to avoid socially harmful conduct? Corporate compliance programs play a central role in society’s current response. Prosecutors give firms incentives – through discounts to penalties – to implement compliance programs that guide and monitor employees’ behavior. However, focusing on the incentives of firms overlooks the perspective of managers, who decide how much firms invest in compliance.

We show that stock-based pay, ubiquitous for corporate executives, creates systematic incentives to short-change compliance. Compliance is a long-term investment for firms, whereas managers’ time horizon …

What Do Lawyers Contribute To Law & Economics?, Robert E. Scott, George G. Triantis

Faculty Scholarship

The law-and-economics movement has transformed the analysis of private law in the United States and, increasingly, around the world. As the field developed from 1970 to the early 2000s, scholars have developed countless insights about the operation and effects of law and legal institutions. Throughout this period, the discipline of law-and-economics has benefited from a partnership among trained economists and academic lawyers. Yet the tools that are used derive primarily from economics and not law. A logical question thus demands attention: what role do academic lawyers play in law-and-economics scholarship? In this Essay, we offer an interpretive theory of the …

Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Faculty Scholarship

More than eighty years after federal law first addressed stock market manipulation, federal courts remain fractured by disagreement and confusion about manipulation law's most foundational questions. Only last year, plaintiffs petitioned the Supreme Court to resolve a sharp split among the federal circuits concerning manipulation law's central question: whether trading activity alone can ever be considered illegal manipulation under federal law. Academics have been similarly confused economists and legal scholars cannot agree on whether manipulation is possible in principle; let alone on how, if it is, to address it properly in practice.

This Article offers an analytical framework for understanding …

Probabilistic Compliance, Alex Raskolnikov

Faculty Scholarship

Uncertain legal standards are pervasive but understudied. The key theoretical result showing an ambiguous relationship between legal uncertainty and optimal deterrence remains largely undeveloped, and no alternative conceptual approaches to the economic analysis of legal uncertainty have emerged. This Article offers such an alternative by shifting from the well-established and familiar optimal deterrence theory to the new and unfamiliar probabilistic compliance framework. This shift brings the analysis closer to the world of legal practice and yields new theoretical insights. Most importantly, lower uncertainty tends to lead to more compliant positions and greater private gains. In contrast, the market for legal …

The Duty Of Responsible Administration And The Problem Of Police Accountability, Charles F. Sabel, William H. Simon

Faculty Scholarship

Many contemporary civil rights claims arise from institutional activity that, while troubling, is neither malicious nor egregiously reckless. When law-makers find themselves unable to produce substantive rules for such activity, they often turn to regulating the actors’ exercise of discretion. The consequence is an emerging duty of responsible administration that requires managers to actively assess the effects of their conduct on civil rights values and to make reasonable efforts to mitigate harm to protected groups. This doctrinal evolution partially but imperfectly converges with an increasing emphasis in public administration on the need to reassess routines in the light of changing …

When Extrinsic Incentives Displace Intrinsic Motivation: Designing Legal Carrots And Sticks To Confront The Challenge Of Motivational Crowding-Out, Kristen Underhill

Faculty Scholarship

The rise of “nudges” has inspired countless efforts to encourage individual choices that maximize personal and collective welfare, with a preference for less restrictive tools such as setting default options or reordering choice sets. As part of this trend, there has been renewed interest in the behavioral impacts of incentives – namely, rewards or penalties for shaping individual choices, including but not limited to financial incentives. Explicit incentives are pervasive in the law, including carrots offered by governments (for example, tax deductions for charitable contributions, rebates for recycling, sentence reductions for prisoners who complete drug rehabilitation programs, and incentives for …

Three Proposals For Regulating The Distribution Of Home Equity, Ian Ayres, Joshua Mitts

Faculty Scholarship

The Consumer Financial Protection Bureau’s recently-released “qualified mortgage” rules effectively discourage predatory lending but miss an equally important source of systemic risk: low-equity clustering. Specific “volatility-inducing” mortgage terms, when present in a substantial cluster of mortgage contracts, exacerbate macroeconomic risk by increasing the chance that the housing and lending markets will have to absorb a wave of simultaneous defaults after a downturn in housing prices. This Article shows that these terms became prevalent in a substantial proportion of residential mortgages in the years leading up to the home mortgage crisis. In contrast, during the earlier “amortization era” (when mortgagors were …

Confronting Financial Crisis: Dodd-Frank's Dangers And The Case For A Systemic Emergency Insurance Fund, Jeffrey N. Gordon, Christopher Muller

Faculty Scholarship

Inherent tensions in the financial sector mean that episodes of extreme stress are inevitable, if unpredictable. This is true even when financial regulatory and supervisory regimes are effective in many respects. The government's capacity to intervene may determine whether distress is confined to the financial sector or breaks out into the real economy Although adequate resolution authority to address a failing financial firm is a necessary objective of the current regulatory reforms, a firm-by-firm approach cannot address a major systemic failure. Major blows to the financial system, such as the financial crisis of 2007-2009, may require capital support of the …

Energy Policy For An Economic Downturn: A Proposed Petroleum Fuel Price Stabilization Plan, Thomas W. Merrill, David M. Schizer

Faculty Scholarship

A compelling case can be made for reducing America's consumption of petroleum fuels. Nearly all analysts think that the way to slash consumption of petroleum fuels is through an end-user tax. There is, however, widespread public opposition to higher gasoline taxes. Furthermore, in a recession the appropriate fiscal policy is to cut taxes, not to raise them. This paper proposes a method of stabilizing petroleum fuel prices at a sufficiently high level, without reducing aggregate consumer purchasing power. We introduce a revenue-neutral petroleum fuel price stabilization plan, called the "PFPS" plan for short Under this plan, a government surcharge on …

A New Proposal For Loan Modifications, Christopher J. Mayer, Edward R. Morrison, Tomasz Piskorski

Faculty Scholarship

We propose a new three-pronged plan to address the recent harmful flood of foreclosures. Our plan would address the major barriers that inhibit the ability of third-party servicers to modify mortgages the way portfolio lenders are now doing with greater success. The plan provides greater compensation for servicers to perform their duties, removes legal constraints that inhibit modification, and addresses critical second liens that often get in the way of effective mortgage modifications. Our plan has more modest costs than competing plans and is likely to be the most effective while still protecting the rights of investors in mortgage-backed securities.

Network Neutrality And The False Promise Of Zero-Price Regulation, C. Scott Hemphill

Center for Contract and Economic Organization

This Article examines zero-price regulation, the major distinguishing feature of many modern "network neutrality" proposals. A zero-price rule prohibits a broadband Internet access provider from charging an application or content provider (collectively, "content provider") to send information to consumers. The Article differentiates two access provider strategies thought to justify a zero-price rule. Exclusion is anticompetitive behavior that harms a content provider to favor its rival. Extraction is a toll imposed upon content providers to raise revenue. Neither strategy raises policy concerns that justify implementation of a broad zero-price rule. First, there is no economic exclusion argument that justifies the zero-price …

The Une Anticommons: Why The 1996 Telecom Reforms Blocked Innovation And Investment, Michael A. Heller

Faculty Scholarship

The United States is losing its competitive edge in telecommunications partly because of FCC mistakes in fragmenting property rights in, and in the regulatory oversight of local telephone facilities and services. As with postsocialist transition, reformers created a "tragedy of the anticommons" in which too many owners and regulators each can block the others' investments and all players forego innovation. By forcing existing companies to unbundle network elements (UNEs) and sell them too cheaply, the FCC has created an industry where the players cannibalize the legacy network, divert resources to regulatory arbitrage, and have little incentive for bold new investments.

Wrongs Of Ignorance And Ambiguity: Lawyer Responsibility For Collective Misconduct, William H. Simon

Faculty Scholarship

Deliberate ignorance and calculated ambiguity are key recurring themes in modern scandals from Watergate to Enron. Actors, especially lawyers, seek to limit responsibility by avoiding knowledge and clear articulation. This essay considers this phenomenon from the point of view of both business organization and legal doctrine. Evasive ignorance and ambiguity seem endemic to a particular organizational model and to a traditional model of legal responsibility. Developments in both law and business, however, suggest that these models are being superceded. Many of the most dynamic businesses now emphasize practices of "transparency" designed to inhibit evasive ignorance and calculated ambiguity. A major …

Derivatives And The Bankruptcy Code: Why The Special Treatment?, Franklin R. Edwards, Edward R. Morrison

Faculty Scholarship

The collapse of Long Term Capital Management (LTCM) in Fall 1998 and the Federal Reserve Bank's subsequent efforts to orchestrate a bailout raise important questions about the structure of the Bankruptcy Code. The Code contains numerous provisions affording special treatment to financial derivatives contracts, the most important of which exempts these contracts from the "automatic stay" and permits counterparties to terminate derivatives contracts with a debtor in bankruptcy and seize underlying collateral. No other counterparty or creditor of the debtor has such freedom; to the contrary, the automatic stay prohibits them from undertaking any act that threatens the debtor's assets. …

Tax Policy At The Beginning Of The Clinton Administration, Michael J. Graetz

Faculty Scholarship

Ten years ago, in 1983, the Yale Journal on Regulation was started by students at the Yale Law School to foster scholarship and debate on issues of regulatory policy. Today the Journal staff consists of students from Yale University graduate and professional programs in law, management, forestry, and public health. One of the Journal's primary missions was to track the regulatory/deregulatory developments under the Reagan Administration and later the Bush Administration. Since our tenth anniversary coincided with the installment of a Democratic Administration under President Clinton, we have asked two professors at the Yale Law School to submit an essay …