Law and Economics Commons^™

Informality As A Bilateral Assurance Mechanism: Comments On Ronald Mann's The Role Of Letters Of Credit In Payment Transactions, Avery W. Katz

Faculty Scholarship

Ronald Mann's study of documentary defects in the presentation of commercial letters of credit1 is a valuable contribution to the commercial law literature in at least three respects. First, it offers a detailed and thorough empirical survey of an important though specialized aspect of commercial practice. Mann collected and coded a data sample of 500 randomly selected letter-of-credit transactions, personally evaluating each transaction to determine whether the documentary presentation by the beneficiary of the letter of credit (i.e., the seller) complied with the letter's formal terms. Then, for each case in which he found one or more documentary defects, Mann …

Economic Reasoning And The Framing Of Contract Law: Sale Of An Asset Of Uncertain Value, Victor P. Goldberg

Faculty Scholarship

By analyzing two American contract law decisions, the paper illustrates the usefulness of economic analysis in framing the inquiry. The cases have a common feature, unrecognized by the courts: they both deal with the production and transfer of information regarding the sale of an asset of uncertain value. One involves the combination of an option and a lockup to encourage the buyer to produce information. The other involves contingent compensation to convey the seller's assurance of the quality of the assets. Once this is recognized, the outcomes are straightforward.

Trade Secrets And Mutual Investments, Gillian L. Lester, Eric L. Talley

Faculty Scholarship

This paper employs an optimal contracting framework to study the question of how courts should adjudicate disputes over valuable trade secrets (such as customer lists). We focus principally on contexts where trade secrets are formed endogenously, through specific, non-contractible investments that could potentially come from either employers or employees (or both). Within such contexts, we argue, an "optimal" trade secret law diverges in many important respects from existing doctrine. In particular, an optimal doctrine would (1) expressly consider the parties' relative skills at making value enhancing investments rather than the mere existence of a valuable informational asset; (2) tend to …

Ratcheting Labor Standards: Regulation For Continuous Improvement In The Global Workplace, Charles F. Sabel, Dara O'Rourke, Archon Fung

Faculty Scholarship

It is a brute fact of contemporary globalization – unmistakable as activists and journalists catalog scandal after scandal – that the very transformations making possible higher quality, cheaper products often lead to unacceptable conditions of work: brutal use of child labor, dangerous environments, punishingly long days, starvation wages, discrimination, suppression of expression and association. In all quarters, the question is not whether to address these conditions, but how.

That question, however, admits no easy answers. Globalization itself has freed capital from many of its former constraints – national workplace standards, collective bargaining, and supervisory state agencies and courts – designed …

Explaining Market Mechanisms, Thomas W. Merrill

Faculty Scholarship

In recent years, environmental regulation has seen a debate between supporters of traditional command-and-control regulation – a system of uniform pollution control standards – and proponents of a system of fees or permits for individual polluters known as market mechanisms. In this article, Professor Merrill considers two theories, wealth-maximization theory and distributional theory, that have been used to explain the emergence of market mechanisms in American environmental policy. He notes that (1) relatively few American environmental-enforcement programs have adopted market mechanisms; (2) those that exist overwhelmingly use grandfathered transferable permits instead of pollution taxes or auctioned permits; and (3) they …

Corporate Governance Lessons From Russian Enterprise Fiascoes, Merritt B. Fox, Michael A. Heller

Faculty Scholarship

This Article draws on a rich array of deviant behavior in Russian enterprises to craft lessons for corporate governance theory. First, Professors Fox and Heller define corporate governance by looking to the economic functions of the firm. Based on this definition, they develop a typology that comprehensively shows all the channels through which bad corporate governance can inflict damage on a country's real economy. Second, they explain the causes of Russian enterprise fiascoes by looking to the particular initial conditions prevailing at privatization – untenable firm boundaries and insider allocation of firm shares – and the bargaining dynamics that have …

Patterns Of Legal Change: Shareholder And Creditor Rights In Transition Economies, Katharina Pistor

Faculty Scholarship

This paper analyses changes in the legal protection of shareholder and creditor rights in 24 transition economies from 1990 to 1998. It documents differences in the initial conditions and a tendency towards convergence of formal legal rules as the result of extensive legal reforms. Convergence seems to be primarily the result of foreign technical assistance programs as well as of harmonisation requirements for countries wishing to join the European Union. The external supply of legal rules not withstanding, the pattern of legal reforms suggests that law reform has been primarily responsive, or lagging, rather than leading economic development. In comparison, …

The Direction Of Corporate Law: The Scholars' Perspective, John C. Coffee Jr., Richard A. Booth, R. Franklin Balotti, David C. Mcbride, Edward P. Welch

Faculty Scholarship

MR. BALOTTI: Good afternoon. My name is Frank Balotti and I've been asked to be the moderator for this afternoon's program. And one of the privileges that I get is to introduce the panel and to call them up to speak in some kind of order, I hope. And I hope that you and the audience will participate by asking questions towards the end of our panel and get involved in the discussion which we hope to promote.

The topic for this afternoon's panel is a scholar's approach to corporation law. And we are fortunate to have some scholars with …

In Search Of Best Efforts: Reinterpreting Bloor V. Falstaff, Victor P. Goldberg

Faculty Scholarship

When contracting parties cannot quite define their obligations, they often resort to placeholder language, like "best efforts." They (and their counsel) likely have little idea of what they might mean, but, so long as they avoid litigation, it will not matter much. But "best efforts" clauses are on occasion litigated, and courts must read content into them. In Bloor v. Falstaff, a casebook favorite, the court held that Falstaff s lackluster promotional efforts for Ballantine beer violated its best efforts covenant. So far as I can tell, no commentators have questioned this outcome. Indeed, some commentators have found Falstaff …

An Economic Analysis Of The Guaranty Contract, Avery W. Katz

Faculty Scholarship

Guaranty arrangements, in which one person stands as surety for a second person's obligation to a third, are ubiquitous in commercial transactions and in commercial law. In recent years, however, scholarly attention to the topic has been scant; and no one has systematically analyzed this body of law and practice from an economic policy perspective. Accordingly, this Article attempts to outline the basic economic logic underlying the guaranty relationship, and applies the results to a variety of specific issues in government policy and private planning. It poses and answers three main questions: First, why would a creditor prefer to make …

Lessons From Fiascos In Russian Corporate Governance, Merritt B. Fox, Michael Heller

Faculty Scholarship

Bad corporate governance is often invoked to explain poor enterprise performance, but the catch phrase is never precisely defined. Neither its consequences for the real economy, nor its causes in particular countries has been adequately explained. This paper uses Russian enterprise examples to address these open questions in corporate governance theory. We define corporate governance by looking to the economic functions of the firm rather than to any particular set of national corporate laws. Firms exhibit good corporate governance when their managers maximize residuals and, in the case of investor-owned firms, make pro rata distributions to shareholders.

Using this definition, …

The Limits Of Discipline: Ownership And Hard Budget Constraints In The Transition Economies, Roman Frydman, Cheryl W. Gray, Marek P. Hessel, Andrzej Rapaczynski

Faculty Scholarship

This paper, based on a large sample of mid-sized manufacturing firms in the Czech Republic, Hungary and Poland, argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. The study offers three main conclusions. First, we find that state enterprises represent a higher credit risk both because of their inferior economic performance and because of their lesser willingness or propensity to meet their payment obligations. Second, the brunt of the state firms' lower creditworthiness is borne by their state creditors, as state enterprises deflect the higher risk away from private creditors. …

Optimal Timing And Legal Decisionmaking: The Case Of The Liquidation Decision In Bankruptcy, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

Until the firm is sold or a plan of reorganization is confirmed, Chapter 11 entrusts a judge with the decision of whether to keep a firm as a going concern or to shut it down. The judge revisits this liquidation decision multiple times. The key is to make the correct decision at the optimal time. This paper models this decision as the exercise of a real option and shows that it depends critically on particular types of information about the firm and its industry. Liquidations take place too soon if we merely compare the liquidation value of the assets with …

Issue Advocacy: Redrawing The Elections/Politics Line, Richard Briffault

Faculty Scholarship

In the closing weeks of the 1996 election, Montana's airwaves were flooded with the following television advertisement:

Who is Bill Yellowtail? He preaches family values, but he took a swing at his wife. Yellowtail's explanation? He 'only slapped her,' but her nose was broken. He talks law and order, but is himself a convicted criminal. And though he talks about protecting children, Yellowtail failed to make his own child support payments, then voted against child support enforcement. Call Bill Yellowtail and tell him we don't approve of his wrongful behavior. Call (406) 443-3620.

The anti-Yellowtail ad, financed by an organization …

Japan's Experience With Deposit Insurance And Failing Banks: Implications For Financial Regulatory Design?, Curtis J. Milhaupt

Faculty Scholarship

This Article examines three decades of Japanese experience with deposit insurance andfailing banks, and analyzes the implications of that experience for bank safety net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and have focused almost exclusively on explicit deposit protection schemes. Analysis of Japan's safety net experience suggests that (a) deposit insurance, for all its flaws, is superior to the real-world alternative-implicit government protection of depositors and discretionary regulatory intervention in bank distress, (b) a well-designed explicit deposit insurance system that includes a credible bank …

Revaluing Restitution: From The Talmud To Postsocialism, Michael A. Heller, Christopher Serkin

Faculty Scholarship

Whatever happened to the study of restitution? Once a core private law subject along with property, torts, and contracts, restitution has receded from American legal scholarship. Few law professors teach the material, fewer still write in the area, and no one even agrees what the field comprises anymore. Hanoch threatens to reverse the tide and make restitution interesting again. The book takes commonplace words such as "value" and "gain" and shows how they embody a society's underlying normative principles. Variations across cultures in the law of unjust enrichment reflect differences in national understandings of sharing, property, and even personhood. As …

Economic Development, Legality, And The Transplant Effect, Katharina Pistor, Daniel Berkowitz, Jean-Francois Richard

Faculty Scholarship

This paper analyzes the determinants of effective legal institutions (legality) and their impact on economic development today using data from 49 countries. We show that the way the law was initially transplanted and received is a more important determinant than the supply of law from a particular legal family (i.e. English, French, German, or Scandinavian). Countries that have developed legal orders internally, adapted the transplanted law to local conditions, and/or had a population that was already familiar with basic legal principles of the transplanted law have more effective legality than "transplant effect" countries that received foreign law without any similar …

Does The Constitution Require That We Kill The Competitive Goose? Pricing Local Phone Services To Rivals, William J. Baumol, Thomas W. Merrill

Faculty Scholarship

This Article concludes a series by these authors and Professors J. Gregory Sidak and Daniel F. Spulber, published last year in this journal. Here, Professors Baumol and Merrill address the issues surrounding the pricing of local phone services to long distance rivals, clarifying their points of agreement and disagreement with Sidak and Spulber. In their previous articles, Sidak and Spulber argued that the movement toward competition in local telephone service should be accompanied by substantial compensation to existing local telephone carriers, a view that Baumol and Merrill do not share. Rather, they note three points of disagreement between Sidak and …

Judicial Review Of Discount Rates Used In Regulatory Cost-Benefit Analysis, Edward R. Morrison

Faculty Scholarship

Executive orders, statutes, and precedent increasingly require cost-benefit analysis of regulations. Presidential executive orders have long required executive agencies to submit regulatory impact analyses to the Office of Management and Budget ("OMB") before issuing regulations, and recent federal legislation exhibits a trend toward mandatory cost-benefit analysis. For example, the Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the recent Safe Drinking Water Act Amendments require the Environmental Protection Agency to balance costs and benefits in regulating chemicals and pesticides. In 1995, Congress passed the Unfunded Mandates Act, requiring cost-benefit analysis of all significant federal regulations that …

Careers And Contingency, Gillian Lester

Faculty Scholarship

Disagreement among legal scholars over the phenomenon of "contingent employment" – work having limited hours, duration, or security – has led to disparate prescriptions for legal reform. For some, the best solution would be to either leave the market alone, or eliminate existing regulations that drive employers to create contingent jobs. Others believe current regulations do not go far enough and advocate reforms ranging from expanding mandatory benefits and protections to facilitating collective bargaining among contingent workers in order to restore such benefits as long-term security, training, and career advancement. The debate about law reform has centered partly on disputes …

The Political Economy Of Statutory Reach: U.S. Disclosure Rules In A Globalizing Market For Securities, Merritt B. Fox

Faculty Scholarship

This Article addresses the appropriate reach of the U.S. mandatory securities disclosure regime. While disclosure obligations are imposed on issuers, they are triggered by transactions: the public offering of, or public trading in, the issuers' shares. Share transactions are taking on an increasingly transnational character. The barriers to a truly global market for equities continue to lessen: financial information is becoming increasingly globalized and it is becoming increasingly inexpensive and easy to effect share transactions abroad. There are approximately 41,000 issuers of publicly traded shares in the world. For an ever larger portion of these issuers, there will be significant …

Bloomer Girl Revisited Or How To Frame An Unmade Picture, Victor P. Goldberg

Faculty Scholarship

Nearly all contracts casebooks feature the saga of Shirley MacLaine's suit against Twentieth Century Fox arising from the cancellation of the proposed film Bloomer Girl. None really get the story right. To be fair, none try. The case is a vehicle for exploring the obligation of the victim of the breach of an employment contract to take alternative employment. If MacLaine refused an offer of alternative employment that was not "different and inferior," her failure to mitigate would mean that the earnings she would have received would be offset against the damages; so, asked the court, was the alternative …

International Aspects Of Fundamental Tax Reconstructing: Practice Or Principle, Michael J. Graetz

Faculty Scholarship

The globalization of economic activity, including the expansion of international trade, the amazing ability of international capital markets to transfer capital rapidly across borders, and the movement in Europe toward greater economic unification, have made it more difficult for nations independently to fashion tax laws that properly balance their own equity, economic efficiency and simplicity goals. This is what makes this conference to analyze the international aspects of recent proposals to replace the federal income tax with some form of consumption tax, with particular emphasis on the Nunn-Domenici "USA" tax and the Armey-Shelby flat tax ("flat tax"), so important. As …

Explaining The Pattern Of Secured Credit, Ronald J. Mann

Faculty Scholarship

Granting collateral to secure loans is a prominent feature of the U.S. economy, but, surprisingly, we do not understand how borrowers and lenders decide whether to engage in a secured or an unsecured transaction. In this Article, Professor Mann argues that existing theories of secured lending are inadequate because the theories' predictions have not been tested against empirical data. To understand the actual pattern of secured credit, Professor Mann interviewed more than twenty borrowers and lenders in various sectors of the economy. Based on the evidence gathered in these interviews, as well as on preexisting empirical studies, this Article develops …

The Bylaw Battlefield: Can Institutions Change The Outcome Of Corporate Control Contests?, John C. Coffee Jr.

Faculty Scholarship

What, if anything, can institutional investors do to influence the course and outcome of corporate control contests? The traditional answer was relatively little. To be sure, institutions could tender their shares in a tender offer or vote in a proxy contest to oust the incumbent board, but such a role was essentially reactive and contingent. It required that an offer actually be made before institutions could respond on an after-the-fact basis. Similarly, institutions have occasionally conducted precatory proxy campaigns calling upon the board to redeem its poison pill, but management was free to ignore these requests (and has done so).

Private Ownership And Corporate Performance: Some Lessons From Transition Economies, Roman Frydman, Cheryl W. Gray, Marek P. Hessel, Andrzej Rapaczynski

Faculty Scholarship

Data on mid-sized firms in three transition economies provide strong evidence that private ownership – for worker ownership – improves corporate performance. And the privatized firms' superior ability to generate revenues allows those firms to sustain or expand employment.

Using a large sample of data on mid-sized firms in the Czech Republic, Hungary, and Poland, Frydman, Gray, Hessel, and Rapacynski compare the performance of privatized and state firms in the environment of the postcommunist transition.

They find strong evidence that private ownership – for worker ownership – improves corporate performance. They find no evidence of the privatization shock that was …

Standard Form Contracts, Avery W. Katz

Faculty Scholarship

Among legal commentators, standard form contracts have long been received with distrust, and the rules governing their interpretation have engendered considerable controversy. While economic analysis has little to say regarding the libertarian objection to standard form contracts or their relationship to personal autonomy, it can help evaluate their effects on efficiency and the distribution of the gains from trade. From such a perspective, standard forms should be analyzed like any other productive input, comparable to design, marketing, and technical support. Whether their use raises any special regulatory or policy concerns, therefore, depends on their implications for the standard litany of …

Contract Formation And Interpretation, Avery W. Katz

Faculty Scholarship

Much research in law and economics, following Coase's insight that the effects of a legal rule depend on the ability of those whom it governs to bargain around it, has undertaken to explain how substantive entitlements such as property rights influence the bargaining process. Perhaps more important than any substantive rights or duties in this regard, however, is the extensive body of contract doctrine that governs the procedural mechanics of exchange. The formal rules of contract formation, by attaching consequences to the various acts and omissions that bargainers can choose from in a negotiation, affect the parties' incentives to make …

The Rise Of Sublocal Structures In Urban Governance, Richard Briffault

Faculty Scholarship

The dominant law and economics model of local government, based on the work of Charles M. Tiebout, assumes that decentralization of power to local governments promotes the efficient delivery of public goods and services. In his seminal article, A Pure Theory of Local Expenditures, Tiebout contended that the existence of a large number of local governments in any given area permits a "market solution" to the question of how to determine the level and mix of government services that people desire. The multiplicity of local governments in an area means that, as long as each locality is free to …

Indemnity Of Legal Fees, Avery W. Katz

Faculty Scholarship

This article surveys the effects of legal fee shifting on a variety of decisions arising before and during the litigation process. Section 2 provides a brief survey of the practical situations in which legal fee shifting does and does not arise. Section 3 analyzes the effects of indemnification on the incentives to expend resources in litigated cases. Section 4 examines how indemnification influences the decisions to bring and to defend against suit, and Section 5 assesses its effects on the choice between settlement and trial. Section 6 addresses the interaction between the allocation of legal fees and the parties' incentives …