Law and Economics Commons^™

Controlling Family Shareholders In Developing Countries: Anchoring Relational Exchange, Ronald J. Gilson

Faculty Scholarship

In recent years, corporate governance scholarship has begun to focus on the most common distribution of public corporation ownership: outside of the United States and the United Kingdom, publicly owned corporations often have a controlling shareholder. The presence of a controlling shareholder is especially prevalent in developing countries. In Asia, for example, some two-thirds of public corporations have one, most of whom represent family ownership. The law and finance literature, exemplified by a series of articles by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert Vishny and others, treats the prevalence of controlling shareholders as the result of bad law; …

Controlling Shareholders And Corporate Governance: Complicating The Comparative Taxonomy, Ronald J. Gilson

Faculty Scholarship

Corporate governance scholarship has shifted focus in recent years from hostile takeovers, which occur primarily in the widely held shareholder systems of the United States and the United Kingdom, to the comparative merits of the "controlling shareholder" systems that are the norm most everywhere else in the world. In this emerging debate, the simple dichotomy between controlling shareholder systems and widely held shareholder systems that has largely dominated the discourse is too coarse to allow a deeper understanding of the diversity of ownership structures in different national capital markets and their policy implications. In this Article, Professor Ronald Gilson seeks …

The Regulation Of Labor And The Relevance Of Legal Origin, David E. Pozen

Faculty Scholarship

Arguably the most important social science research of the past decade has centered on comparative law and economics. In a celebrated series of articles, the economists Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and intermittent collaborators have explored empirically how a country's legal origin – English common law, French civil law, Germanic code, Scandinavian law, or Soviet socialist law – affects its subsequent institutional and economic development. The common law emerges as the hero of this analysis: Compared with other countries and especially with civil law countries, common law bearers have, ceteris paribus, better legal protection of shareholders and …

"Contracting" For Credit, Ronald J. Mann

Faculty Scholarship

On a recent day, I used my credit cards in connection with a number of minor transactions. I made eight purchases, and I paid two credit card bills. I also discarded (without opening) three solicitations for new cards, balance transfer programs, or other similar offers to extend credit via a credit card. Statistics suggest that I am not atypical. U.S. consumers last year used credit cards in about 100 purchasing transactions per capita, with an average value of about $70. At the end of the year, Americans owed nearly $500 billion dollars, in the range of $1,800 for every man, …

Remapping The Charitable Deduction, David Pozen

Faculty Scholarship

If charity begins at home, scholarship on the charitable deduction has stayed at home. In the vast legal literature, few authors have engaged the distinction between charitable contributions that are meant to be used within the United States and charitable contributions that are meant to be used abroad. Yet these two types of contributions are treated very differently in the Code and raise very different policy issues. As Americans' giving patterns and the U.S. nonprofit sector grow increasingly international, the distinction will only become more salient.

This Article offers the first exploration of how theories of the charitable deduction apply …

The Law And Economics Of Contracts, Benjamin E. Hermalin, Avery W. Katz, Richard Craswell

Faculty Scholarship

This paper, which will appear as a chapter in the forthcoming Handbook of Law and Economics (A.M. Polinsky & S. Shavell, eds.), surveys major issues arising in the economic analysis of contract law. It begins with an introductory discussion of scope and methodology, and then addresses four topic areas that correspond to the major doctrinal divisions of the law of contracts. These areas include freedom of contract (i.e., the scope of private power to create binding obligations), formation of contracts (both the procedural mechanics of exchange, and rules that govern pre-contractual behavior), contract interpretation (what consequences follow when agreements are …

Learning To Learn: Undoing The Gordian Knot Of Development Today, Charles F. Sabel, Sanjay G. Reddy

Faculty Scholarship

The deep flaw of existing approaches to development is their dirigisme: the assumption, common to nearly all development theory, that there is an expert agent that already sees the future. A common thread connects the emergent alternatives to development orthodoxy: the enhancement of the conditions of individual and collective learning. This approach to development highlights the existence of unresolved problems and the necessity of problem solving in every sphere. The enhancement of the conditions of learning can be the key to improving performance, resolving deadlocks, and overcoming blockages, at every level at which common dilemmas and collective problem solving occur …

Clark's Treatise On Corporate Law: Filling Manning's Empty Towers, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Almost 45 years ago, in an elegantly depressive account of the then current state of corporate law scholarship, Bayless Manning announced the death of corporation law "as a field of intellectual effort." Manning left us with an affecting image of a once grand field long past its prime, rigid with formalism and empty of content:

When American law ceased to take the "corporation" seriously, the entire body of law that had been built upon that intellectual construct slowly perforated and rotted away. We have nothing left but our great empty corporate statutes towering skyscrapers of rusted girders, internally welded together …

Legal Ground Rules In Coordinated And Liberal Market Economies, Katharina Pistor

Faculty Scholarship

This chapter seeks to explain the affinity between the nature of economic systems: coordinated market economies (CMEs) and liberal market economies (LMEs) on the one hand, and legal origin (civil vs common law systems) on the other. It starts with the simple observation that LMEs tend to be common law jurisdictions, and CMEs civil law jurisdictions. It proposes that the affinity between economic and legal system offers important insights into the foundations of different types of market economies and, in particular, differences in the scope of the state vs the powers of the individual. The main argument is that the …

Trade, Law And Product Complexity, Katharina Pistor, Daniel Berkowitz, Johannes Moenius

Faculty Scholarship

How does the quality of national institutions that enforce the rule of law influence international trade? Anderson and Marcouiller argue that bad institutions located in the importer’s country deter international trade because they enable economic predators to steal and extort rents at the importer’s border. We complement this research and show how good institutions located in the exporter’s country enhance international trade, in particular, trade in complex products whose characteristics are difficult to fully specify in a contract. We argue that both exporter and importer institutions affect international as well as domestic transaction costs in complex and simple product markets. …

Credit Cards, Consumer Credit, And Bankruptcy, Ronald J. Mann

Faculty Scholarship

This paper analyzes the effects of credit card use on broader economic indicators, specifically consumer credit, and consumer bankruptcy filings. Using aggregate nation-level data from Australia, Canada, Japan, the United Kingdom, and the United States, I find that credit card spending, lagged by 1-2 years, has a strong positive effect on consumer credit. Finally, I find a strong relation between credit card debt, lagged by 1-2 years, and bankruptcy, and a weaker relation between consumer credit, lagged by 1-2 years, and bankruptcy. The relations are robust across a variety of different lags and models that account for problems of multicollinearity …

Serial Entrepreneurs And Small Business Bankruptcies, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

Chapter 11 is thought to preserve the going-concern surplus of a financially distressed business – the extra value that its assets possess in their current configuration. Financial distress leads to conflicts among creditors that can lead to inefficient liquidation of a business with going-concern surplus. Chapter 11 avoids this by providing the business with a way of fashioning a new capital structure. This account of Chapter 11 fails to capture what is happening in the typical case. The typical Chapter 11 debtor is a small corporation whose assets are not specialized and rarely worth enough to pay tax claims. There …

Risk Management In Long-Term Contracts, Victor P. Goldberg

Faculty Scholarship

Long-term contracts are designed to manage risk. After a brief discussion of why it is unhelpful to invoke risk aversion for analyzing serious commercial transactions between sophisticated entities, this paper focuses on adaptation to changed circumstances. In particular, it considers the options to abandon and the discretion to change quantity. It then analyzes a poorly designed contract between Alcoa and Essex showing how the parties misframed their problem and designed a long-term contract that was doomed to fail.

The Political Economy Of International Sales Law, Clayton P. Gillette, Robert E. Scott

Faculty Scholarship

The United Nations Convention on Contracts for the International Sale of Goods, or CISG, has been adopted by more than 60 countries in an effort to harmonize the law that applies to international sales contracts. In this paper, we argue that the effort to create uniform international sales law (ISL) fails to supply contracting parties with the default terms they prefer, thus violating the normative criterion that justifies the law-making process for commercial actors in the first instance. Our argument rests on three claims. First, we contend that the process by which uniform ISL is drafted will dictate the form …

Going-Private Decisions And The Sarbanes-Oxley Act Of 2002: A Cross-Country Analysis, Ehud Kamar, Pinar Karaca-Mandic, Eric L. Talley

Faculty Scholarship

This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little …

How Law Affects Lending, Rainer F.H. Haselmann, Katharina Pistor, Vikrant Vig

Faculty Scholarship

The paper explores how legal change affects lending behavior of banks in twelve transition economies of Central and Eastern Europe. In contrast to previous studies, we use bank level rather than aggregate data, which allows us to control for country level heterogeneity and analyze the effect of legal change on different types of lenders. Using a differences-in-differences methodology to analyze the within country variation of changes in creditor rights protection, we find that the credit supplied by banks increases subsequent to legal change. Further, we show that collateral law matters more for credit market development than bankruptcy law. We also …

Al Capone's Revenge: An Essay On The Political Economy Of Pretextual Prosecution, Daniel C. Richman, William J. Stuntz

Faculty Scholarship

Most analyses of pretextual prosecutions – cases in which prosecutors target defendants based on suspicion of one crime but prosecute them for another, lesser crime – focus on the defendant's interest in fair treatment. Far too little attention is given to the strong social interest in non-pretextual prosecutions. Charging criminals with their "true" crimes makes criminal law enforcement more transparent, and hence more politically accountable. It probably also facilitates deterrence. Meanwhile, prosecutorial strategies of the sort used to "get" Al Capone can create serious credibility problems. The Justice Department has struggled with those problems as it has used Capone-style strategies …

Some Reflections On Two-Sided Markets And Pricing, Victor P. Goldberg

Faculty Scholarship

We want to join Bob Pitofsky in thanking the participants in this symposium for their thoughtful contributions. The literature on two-sided markets, both analytical and policy oriented, has mushroomed and this timely set of essays represents a significant contribution. The first generation of this literature grew up around the credit card industry, largely as a result of the antitrust litigation that challenged a wide range of standard practices in that industry. However, the theoretical problems that were first uncovered in this context extend to many other activities as well. The full range of papers found in this symposium, which have …

Reading Wood V. Lucy, Lady Duff-Gordon With Help From The Kewpie Dolls, Victor P. Goldberg

Faculty Scholarship

In Wood v. Lucy, Lady Duff-Gordon, Cardozo found consideration in an apparently illusory contract by implying a reasonable effort obligation. Unbeknownst to Cardozo, Wood had agreed to represent Rose O'Neill, the inventory of the kewpie doll in an earlier exclusive contract. Wood sued O'Neill two months prior to entering into the Lucy arrangement. That contract included an explicit best efforts clause. The failure to include such a clause in this contract was, quite likely, deliberate, suggesting that Wood was trying to avoid making a binding commitment to Lucy. The paper examines both the kewpie doll and Lucy contract in some …

Marine-Salvage Law And Marine-Peril-Related Policy: A Second-Best And Third-Best Economic-Efficiency Analysis Of The Problem, The Law, And The Classic Landes And Posner Study, Richard S. Markovits

Faculty Scholarship

This Article (1) delineates the different kinds of allocative costs that marine-peril contingencies can generate and the different kinds of marine-peril-related decisions that can generate allocative inefficiency (marine-salvage-operation investment decisions; decisions about whether to offer to attempt or to actually attempt marine rescues; decisions about the character of the marine-rescue attempts that are made; decisions by potential rescuees to accept or reject offers of marine-rescue attempts; and decisions by potential rescuees to make or reject various marine-peril-avoidance moves); (2) defines the formal meaning of "the most-allocatively-efficient response a State can make to marine-peril contingencies;" (3) explains why, standing alone, judge-prescribed …

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 …

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 …

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 …

Market Design With Endogenous Preferences, Aviad Heifetz, Ella Segev, Eric L. Talley

Faculty Scholarship

This paper explores the interdependence between market structure and an important class of extra-rational cognitive biases. Starting with a familiar bilateral monopoly framework, we characterize the endogenous emergence of preference distortions during bargaining which cause negotiators to perceive their private valuations differently than they would outside the adversarial negotiation context. Using this model, we then demonstrate how a number of external interventions in the structure and/or organization of market interactions (occurring before trade, after trade, or during negotiations themselves) can profoundly alter the nature of these dispositions. Our results demonstrate that many such interventions frequently (though not always) share qualitatively …

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 …

Global Credit Card Use And Debt: Policy Issues And Regulatory Responses, Ronald J. Mann

Faculty Scholarship

The rise of card-based payments has transformed the landscape of payments in the last half century, from one dominated by government-supported paper-based payments to one dominated by wholly private systems. The rise of those payments presents a number of policy problems, the most serious of which is the empirically demonstrable likelihood that use of the cards here and elsewhere contributes to an undue level of consumer credit and that borrowing on the cards contributes to a rise in the level of consumer bankruptcy. Because increasing financial distress imposes substantial externalities on the economies in which it occurs, the global rise …

The Case For Tradable Remedies In Wto Dispute Settlement, Kyle Bagwell, Petros C. Mavroidis, Robert W. Staiger

Faculty Scholarship

In response to concerns over the efficacy of the WTO dispute settlement system, especially in regard to its use by developing countries, Mexico has tabled a proposal to introduce tradable remedies within the Dispute Settlement Understanding. The idea is that a country that has won cause before the WTO, and who is facing non-implementation by the author of the illegal act but feels that its own capacity to exercise its right to impose countermeasures is unlikely to lead to compliance, can auction off that right. The attractiveness of this idea is that it offers an additional possibility to injured WTO …

The Case For Auctioning Countermeasures In The Wto, Kyle Bagwell, Petros C. Mavroidis, Robert W. Staiger

Faculty Scholarship

A major accomplishment of the Uruguay Round of GATT negotiations in creating the World Trade Organization (WTO) was the introduction of new dispute settlement procedures. These procedures were intended to provide a significant step forward, relative to GATT, in the settling of trade disputes, in large part by ensuring that violations of WTO commitments would be met with swift retaliation ("suspension of concessions") by the affected trading partners. While the dispute settlement procedures of the WTO indeed represent a considerable improvement over those in GATT, nine years of experience under the new procedures suggests that significant problems of enforcement remain …

Engineering A Venture Capital Market: Lessons From The American Experience, Ronald J. Gilson

Faculty Scholarship

The venture capital market and firms whose creation and early stages were financed by venture capital are among the crown jewels of the American economy. Beyond representing an important engine of macroeconomic growth and job creation, these firms have been a major force in commercializing cutting-edge science, whether through their impact on existing industries as with the radical changes in pharmaceuticals catalyzed by venture-backed firms' commercialization of biotechnology, or by their role in developing entirely new industries as with the emergence of the Internet and World Wide Web. The venture capital market thus provides a unique link between finance and …

Private Information, Self-Serving Biases, And Optimal Settlement Mechanisms: Theory And Evidence, Seth A. Seabury, Eric L. Talley

Faculty Scholarship

The law and economics literature on suit and settlement has tended to focus on two alternative conceptual models. On the one hand, the "optimism" model of pre-trial negotiation attempts to explain settlement failure as an artifact of unfounded optimism by one or both parties. The idea that bargaining agents can adopt such non-rational biases receives support from experimental evidence. On the other hand, the "private information" model of pre-trial bargaining portrays settlement failures as an artifact of strategic information rent extraction. It finds support in some experimental evidence as well. This paper presents (for the first time) a mechanism-design approach …