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Full-Text Articles in Law and Economics

A Comparative Empirical Investigation Of Agency And Market Theories Of Insider Trading, Laura N. Beny Feb 2004

A Comparative Empirical Investigation Of Agency And Market Theories Of Insider Trading, Laura N. Beny

Law & Economics Working Papers Archive: 2003-2009

The paper summarizes various agency cost and market theories of insider trading propounded over the course of the perennial law and economics debate over insider trading. The paper then suggests three testable hypotheses regarding the relationship between insider trading laws and several measures of financial performance. Using international data and alternative regression specifications, the paper finds that more stringent insider trading laws and enforcement are generally associated with greater ownership dispersion, greater stock price accuracy and greater stock market liquidity. This set of findings provides empirical support to theoretical arguments in favor of more stringent insider trading legislation and enforcement.

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"Agreeing To Disagree": Filling Gaps In Deliberately Incomplete Contracts, Omri Ben-Shahar Jan 2004

"Agreeing To Disagree": Filling Gaps In Deliberately Incomplete Contracts, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

This Article develops a new standard for gap filling in incomplete contracts. It focuses on an important class of situations in which parties leave their agreement deliberately incomplete, with the intent to further negotiate and resolve the remaining issues. In these situations, neither the traditional no-enforcement result nor the usual gap filling approaches accord with the parties’ partial consent. Instead, the Article develops the concept of pro-defendant gap-fillers, under which each party is granted an option to enforce the transaction supplemented with terms most favorable (within reason) to the other party. A deliberately incomplete contract with pro-defendant gap fillers transforms …

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The Illusion Of Law: The Legitimating Schemas Of Modern Policy And Corporate Law, Ronald Chen, Jon Hanson Jan 2004

The Illusion Of Law: The Legitimating Schemas Of Modern Policy And Corporate Law, Ronald Chen, Jon Hanson

Michigan Law Review

This Article is about some of the schemas and scripts that form and define our lives. It is about the knowledge structures that shape how we view the world and how we understand the limitless information with which we are always confronted. This Article is also about the "evolution of ideas" underlying corporate law and all of modern policymaking. It is about the ways in which schemas and scripts have influenced how policy theorists, policymakers, lawyers, and many others (particularly in the West) understand and approach policymaking generally and corporate law specifically. It is about both the invisibility and blinding …

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The Law Of Duress And The Economics Of Credible Threats, Oren Bar-Gill, Omri Ben-Shahar Jan 2004

The Law Of Duress And The Economics Of Credible Threats, Oren Bar-Gill, Omri Ben-Shahar

Articles

This paper argues that enforcement of an agreement, reached under a threat to refrain from dealing, should be conditioned solely on the threat's credibility. When a credible threat exists, enforcement promotes social welfare and the threatened party's interests. If agreements backed by credible threats were not enforceable, the threatening party would not extort them and would instead refrain from deaing-to the threatened party's detriment. The doctrine of duress, which invalidates such agreements, hurts the coerced party. By denying enforcement when a credible threat exists, the duress doctrine precludes the threatened party from making the commitment necessary to reach agreement. Paradoxically, …

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Reparations As Redistribution, Kyle D. Logue Jan 2004

Reparations As Redistribution, Kyle D. Logue

Articles

The most controversial, and most intriguing, remedy sought by proponents of slavery reparations involves massive redistribution of wealth from whites to blacks within the United States. This is not to say that reparations proponents have focused only on racial redistribution. Some have called for an official apology from the U.S. government. Others seek the creation of a foundation or institute, funded by U.S. tax dollars, to be devoted to furthering the interests of African Americans, including the funding of K- 12 educational programs for black children and the funding of general civil rights advocacy to counteract the lingering effects of …

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Revisiting The Roles Of Legal Rules And Tax Rules In Income Redistribution: A Response To Kaplow & Shavell, Ronen Avraham, David Fortus, Kyle D. Logue Jan 2004

Revisiting The Roles Of Legal Rules And Tax Rules In Income Redistribution: A Response To Kaplow & Shavell, Ronen Avraham, David Fortus, Kyle D. Logue

Articles

The debate over whether legal rules should be used to redistribute resources in society or whether redistribution should be left exclusively to the tax-and-transfer system has long occupied philosophers, political theorists, economists, and legal academicians. For many years, the conventional wisdom on this question among legal scholars seemed to be that blanket generalizations were inappropriate. All systems of redistribution distort individuals' choices and entail administrative costs. Therefore, the argument went, a universal preference for using the tax-and-transfer system to redistribute is not justified. Rather, the choice among institutions to accomplish society's redistributive goals was considered to be "an empirical one …

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Politics And The Business Corporation, Robert H. Sitkoff Dec 2003

Politics And The Business Corporation, Robert H. Sitkoff

Law & Economics Working Papers Archive: 2003-2009

This essay explores the policy bases for, and the political economy of, the law's long-standing regulation of corporate political speech. The essay has three parts. First, it contends that the conventional justifications for regulating corporate interventions in politics -- that corporate donations unnaturally skew the political discourse (bad politics) and that corporate political donations harm shareholders (agency costs) -- assume irrational investors and substantial capital market inefficiency. Drawing on public choice theory, the essay also explores the aim of retarding rent-seeking as an alternative justification for regulating corporate interventions in politics. Second, the essay reexamines the history of the regulation …

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Dying To Get Out Of Debt: Consumer Insolvency Law And Suicide In Japan, Mark West Dec 2003

Dying To Get Out Of Debt: Consumer Insolvency Law And Suicide In Japan, Mark West

Law & Economics Working Papers Archive: 2003-2009

This Article explores the complex relation between consumer insolvency law and suicide in Japan, where bankruptcies and suicides have increased dramatically in recent years. The statistical and interview evidence, some of which relates to the creation of a relatively efficient and socially acceptable insolvency mechanism in 2001, suggests that law is at least indirectly relevant to decisions to take one’s own life. Law can bring about debt control and stigma mitigation, each of which can lead to lower levels of stress and depression, each of which can lead to lower suicide rates. Still, responses to the law, even in relatively …

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Employment Market Institutions And Japanese Working Hours, Mark West Dec 2003

Employment Market Institutions And Japanese Working Hours, Mark West

Law & Economics Working Papers Archive: 2003-2009

Why do Japanese workers work such long hours? Beginning with a series of cases in the 1950s, Japanese courts drastically curtailed firms’ abilities to dismiss workers. As a consequence of the inability to dismiss workers legally, large Japanese firms hired a smaller number of workers than were necessary to fulfill capacity without overtime. Employers rely on the working hours of this undersized cadre of workers, carefully screened to rule out the slothful, as a buffer. In bad times, the size of the work force makes dismissal unnecessary. In good times, workers are forced to work long hours. While these court …

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Law, Share Price Accuracy, And Economic Performance: The New Evidence, Merritt B. Fox, Randall Morck, Bernard Yeung, Artyom Durnev Dec 2003

Law, Share Price Accuracy, And Economic Performance: The New Evidence, Merritt B. Fox, Randall Morck, Bernard Yeung, Artyom Durnev

Michigan Law Review

Mandatory disclosure has been at the core of U.S. securities regulation since its adoption in the early 1930s. For many decades, this fixture of our financial system was accepted with little examination. Over the last twenty years, however, mandatory disclosure has been subject to intensifying intellectual crosscurrents. Some commentators hold out the U.S. system as the standard for the world. They argue that adoption by other countries of a U.S.-styled system, with its greater corporate transparency, would enhance their economic performance. Other commentators, in contrast, insist that the U.S. mandatory disclosure regime represents a mistake, not a model. These crosscurrents …

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Trust Law, Corporate Law, And Capital Market Efficiency, Robert H. Sitkoff Nov 2003

Trust Law, Corporate Law, And Capital Market Efficiency, Robert H. Sitkoff

Law & Economics Working Papers Archive: 2003-2009

In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual -- a control, as it were -­ for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this …

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The False Promise Of One Person, One Vote, Grant M. Hayden Nov 2003

The False Promise Of One Person, One Vote, Grant M. Hayden

Michigan Law Review

It has now been four decades since the Supreme Court stepped into the political thicket with its groundbreaking series of reapportionment cases. Those cases rather quickly brought about radical changes in the structure of our national, state, and local governments and, in so doing, reshaped the political landscape of the country in many, mostly beneficial, ways. The reapportionment cases also signaled the beginning of a revolution in the way we view the rights associated with meaningful participation in a democratic society, a revolution that continues to this day. We now enjoy a right to vote that is much more comprehensive …

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Measuring Recovery For Non-Contractual Investment, Omri Ben-Shahar, Robert A. Mikos Sep 2003

Measuring Recovery For Non-Contractual Investment, Omri Ben-Shahar, Robert A. Mikos

Law & Economics Working Papers Archive: 2003-2009

Parties who make investments that generate externalities may sometimes recover from the beneficiaries, even in the absence of contract. Previous scholarship has shown that granting recovery, based on either the cost of the investment or the benefit it confers, can provide optimal incentives to invest. However, this article demonstrates that the law often awards recovery that is neither purely cost-based, nor purely benefit-based, and instead equals either the greater-of or lesser-of the two measures. These hybrid approaches to recovery distort incentives to invest. The article demonstrates the prevalence of these practices, and explores informational and related reasons why they emerge. …

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An Agency Costs Theory Of Trust Law, Robert H. Sitkoff Sep 2003

An Agency Costs Theory Of Trust Law, Robert H. Sitkoff

Law & Economics Working Papers Archive: 2003-2009

This Article develops an agency costs theory of the law of private trusts, focusing chiefly on donative trusts. The agency costs approach offers fresh insights into recurring problems in trust law including, among others, modification and termination, settlor standing, fiduciary litigation, trust-investment law and the duty of impartiality, trustee removal, the role of so-called trust "protectors," and spendthrift trusts. The normative claim is that the law of trusts should minimize the agency costs inherent in locating managerial authority with the trustee and the residual claim with the beneficiaries, but only to the extent that doing so is consistent with the …

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What Counts As Fraud? An Empirical Study Of Motions To Dismiss Under The Private Securities Litigation Reform Act, Adam C. Pritchard, Hillary Sale Sep 2003

What Counts As Fraud? An Empirical Study Of Motions To Dismiss Under The Private Securities Litigation Reform Act, Adam C. Pritchard, Hillary Sale

Law & Economics Working Papers Archive: 2003-2009

This article presents the findings of a study of the resolution of motions to dismiss securities fraud lawsuits since the passage of the Private Securities Litigation Reform Act in 1995. Our sample consists of decisions on motions to dismiss in securities class actions by district and appellate courts in the Second and Ninth Circuits for cases filed after the passage of the Reform Act to the end of 2002. These circuits are the leading circuits for the filing of securities class actions and are generally recognized as representing two ends of the securities class action spectrum. Post-PSLRA, the Second Circuit …

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Following The Man On The Clapham Omnibus: Social Science Evidence In Malpractice Litigation, Richard O. Lempert Jul 2003

Following The Man On The Clapham Omnibus: Social Science Evidence In Malpractice Litigation, Richard O. Lempert

Law & Economics Working Papers Archive: 2003-2009

This article responds to proposals to admit statistical evidence from empirical studies of actual health care practices to prove prevailing health practice standards in malpractice litigation by arguing that the case for doing so has numerous weaknesses that advocates of admitting such data commonly ignore. A fundamental concern is that the standard of practice defense co-evolved with prevailing modes of proof and might have been different had proof through experts not allowed for an aspirational as well as an empirical element to reach the jury. The article also argues that generating reliable statistical evidence of standard medical practice can be …

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Legal Transitions, Rational Expectations, And Legal Progress, Kyle D. Logue Jun 2003

Legal Transitions, Rational Expectations, And Legal Progress, Kyle D. Logue

Law & Economics Working Papers Archive: 2003-2009

This paper was written for a symposium on legal transitions. The central question in the transitions literature is whether or to what extent the government should provide compensation for (or seek in some way to ameliorate) the losses of wealth occasioned by unexpected changes in the law or social policy. This Article argues that the prevailing normative framework for evaluating legal transitions - the consequentialist or economic framework - relies critically on two assumptions: the assumption that private parties (whose incentives are sought to be affected by the choice of transition norm) will behave with rational expectations and the assumption …

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Against Preemption: How Federalism Can Improve The National Legislative Process, Roderick Hills May 2003

Against Preemption: How Federalism Can Improve The National Legislative Process, Roderick Hills

Law & Economics Working Papers Archive: 2003-2009

How easily should courts infer that federal statutes preempt state law? An ongoing debate exists on the question in Congress and among scholars and judges. One side calls for judges to protect federalism by adopting a rule of statutory construction that would bar preemption absent a clear statement of preemptive intent. Opponents argue against such a "clear statement" rule by arguing that state control over preemptable topics is often presumptively inefficient, because common-law juries lack expertise and because states are prone to imposing external costs on their neighbors. This article sidesteps these debates over preemption and instead argues that, quite …

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Insuring Against Terrorism And Crime, Saul Levmore, Kyle D. Logue May 2003

Insuring Against Terrorism And Crime, Saul Levmore, Kyle D. Logue

Law & Economics Working Papers Archive: 2003-2009

The attacks of September 11th produced staggering losses of life and property. They also brought forth substantial private insurance payouts, as well as federal relief for the City of New York and for the families of individuals who perished on that day. The losses suffered in and after the attacks, and the structure of the relief effort, have raised questions about the availability of insurance against terrorism, the role of government in providing for, subsidizing, or ensuring the presence of such insurance, and the interaction between relief and the incentives for future precaution taking. In response to such losses, and …

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What (If Anything) Can Economics Say About Equity?, Daniel A. Farber May 2003

What (If Anything) Can Economics Say About Equity?, Daniel A. Farber

Michigan Law Review

Does economics have anything to teach us about the meaning of fairness? The leading practitioners of law and economics disagree. Judge Richard Posner argues that economics is largely irrelevant to distributive issues. Posner maintains that the most useful economic measure of social welfare is cost-benefit analysis (which he calls wealth maximization). But, he observes, this economic measure "ratifies and perfects an essentially arbitrary distribution of wealth." Given an ethically acceptable initial assignment of wealth, rules based on economic efficiency may have some claim to be considered fair. On the critical issue of distributional equity, however, Posner apparently believes that economics …

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Consuming Government, Richard Schragger May 2003

Consuming Government, Richard Schragger

Michigan Law Review

In his ambitious new book, William Fischel, a Professor of Economics at Dartmouth College, gives us a new political animal: "The Homevoter." The homevoter is simply a homeowner who votes (p. ix). According to Fischel, she is the key to understanding the political economy of American local government. By implication, she is the key to understanding state and national government as well. Homeowners warrant special attention because "residents who own their own homes have a stake in the outcome of local politics that make them especially attentive to the public policies of local government" (p. ix). That is because local …

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Economic Inequality And The Role Of Law, Richard L. Kaplan May 2003

Economic Inequality And The Role Of Law, Richard L. Kaplan

Michigan Law Review

In this ambitious book, famed commentator and analyst Kevin Phillips attempts nothing less than a political history of American economic life with a specific focus on the wealthy. Succeeding far more often than not, Phillips interweaves the development of American technology with the rise and fall of economic fortunes, crafting a compelling tale with significant implications for the formulation of public policy and the laws that implement such policy. Festooned with more than seventy charts and graphs, the book explains how wealth has been accumulated throughout the entire history of the United States. It is full of intriguing insights and …

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Orchestrated Experimentalism In The Regulation Of Work, Orly Lobel May 2003

Orchestrated Experimentalism In The Regulation Of Work, Orly Lobel

Michigan Law Review

Since the advent of the New Deal vision, work and the workplace have undergone dramatic changes. Policies and institutions that were designed to provide good working conditions and voice for workers are no longer fulfilling their promise. In Working in America: A Blueprint for the New Labor Market ("Blueprint"), four MIT economists take on the challenge of envisioning a new regulatory regime that will fit the realities of the new market. The result of several years of deliberation with various groups in business and labor, academia, and government, Blueprint provides a thoughtful yet unsettling vision of the future of work. …

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The New Leviathan, Dennis Patterson May 2003

The New Leviathan, Dennis Patterson

Michigan Law Review

Reputation in any field is an elusive phenomenon: part notoriety, part honor, part fame, part critical assessment. Even in legal scholarship it has an uneven, unpredictable quality. It is hard to imagine a book by a law professor that has had more immediate impact on world leaders than Philip Bobbitt's The Shield of Achilles. Much of the national-security strategy devised by the U.S. administration after the September 11 attacks expresses ideas Bobbitt conceived long before; and from a different point on the political spectrum is the Archbishop of Canterbury, whose televised nationwide address in January explicitly took the book as …

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Appellate Courts Inside And Out, Maxwell L. Stearns May 2003

Appellate Courts Inside And Out, Maxwell L. Stearns

Michigan Law Review

While the United States Supreme Court has been the object of seemingly endless scholarly commentary, the United States Courts of Appeals are just now coming into their own as a subject of independent academic inquiry. This is an important development when one considers that the vast bulk of relevant precedents governing most federal court litigation comes not from the Supreme Court, but rather from the United States Courts of Appeals. Because relatively few courts of appeals decisions are reviewed in the Supreme Court, with rare exception, the federal circuit courts provide the functional equivalent of that Court's proverbial "last word." …

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Should We All Be Welfare Economists?, Richard H. Fallon Jr. Feb 2003

Should We All Be Welfare Economists?, Richard H. Fallon Jr.

Michigan Law Review

On what normative foundation should the edifice of law and public policy be built? What are proper grounds for claims of individual right, and how, generally, do those grounds relate to considerations of individual well-being and social welfare? In this Essay, I argue that individual well-being and a related concept of social welfare should be important considerations in the design of legal rules, but not the exclusive ones. When the notion of well-being receives substantive content, the most plausible and attractive definitions all allow a distinction between what will best promote a person's well-being and what that person might rationally …

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Behavioral Economics And The Sec, Stephen Choi, Adam C. Pritchard Jan 2003

Behavioral Economics And The Sec, Stephen Choi, Adam C. Pritchard

Law & Economics Working Papers Archive: 2003-2009

Investors face myriad investment alternatives and seemingly limitless information concerning those alternatives.Not surprisingly, many commentators contend that investors frequently fall short of the ideal investor posited by the rational actor model. Investors are plagued with a variety of behavioral biases (such as, among others, the hindsight bias, the availability bias, loss aversion, and overconfidence). Even securities market institutions and intermediaries may suffer from biases, led astray by groupthink and overconfidence. The question remains whether regulators should focus on such biases in formulating policy. An omnipotent regulatory decisionmaker would certainly improve on flawed investor decisionmaking. The alternative we face, however, is …

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Pain-And-Suffering Damages In Tort Law: Revisiting The Theoretical Framework And The Empirical Evidence, Ronen Avraham Jan 2003

Pain-And-Suffering Damages In Tort Law: Revisiting The Theoretical Framework And The Empirical Evidence, Ronen Avraham

Law & Economics Working Papers Archive: 2003-2009

Should there be pain-and-suffering damages in tort law? Most legal economists who wrote on the subject that there should not be pain-and-suffering damages in tort law. A minority of scholars thought the decision of whether tort law should provide pain-and-suffering damages is an empirical, or an experimental, question that cannot be armchair-theorized. Yet, all scholars who have done empirical or experimental work to explore the desirability of pain-and-suffering damages reached the conclusion that it is undesirable. In this paper I argue that the majority view cannot serve as a policy-making aid. I side with the minority of scholars who argue …

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Market Fundamentalism's New Fiasco: Globalization As Exhibit In The Case For A New Law And Economics, Steven A. Ramirez Jan 2003

Market Fundamentalism's New Fiasco: Globalization As Exhibit In The Case For A New Law And Economics, Steven A. Ramirez

Michigan Journal of International Law

Review of Globalization and Its Discontents by Joseph E. Stiglitz

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Behavioral Economics And The Sec, Stephen J. Choi, Adam C. Pritchard Jan 2003

Behavioral Economics And The Sec, Stephen J. Choi, Adam C. Pritchard

Articles

Not all investors are rational. Quite apart from the obvious examples of credulity in the face of the latest Ponzi scheme, there is no shortage of evidence that many investors' decisions are influenced by systematic biases that impair their abilities to maximize their investment returns. For example, investors will often hold onto poorly performing stocks longer than warranted, hoping to recoup their losses. Other investors will engage in speculative trading, dissipating their returns by paying larger commissions than more passive investors. And we are not just talking about widows and orphans here. There is evidence that supposedly sophisticated institutional investors-mutual …

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