Law and Economics Commons^™

Fraud On The Market: An Action Without A Cause, Amanda Rose

Vanderbilt Law School Faculty Publications

This is a response to William W. Bratton & Michael L. Wachter, The Political Economy of Fraud on the Market, 160 U. PA. L. REV. 69 (2011). Bratton and Wachter argue that fraud-on-the-market class actions (FOTM) should be eliminated and replaced with stepped-up public enforcement efforts targeted at individual wrongdoers (rather than the corporate enterprise, the FOTM target of choice). In this Response, I do not disagree: My own scholarship has similarly emphasized the benefits of shifting away from FOTM to greater reliance on public enforcement mechanisms. Instead, I take the opportunity to elaborate on the deterrence and corporate governance …

Macro-Risks: The Challenge For Rational Risk Regulation, Michael P. Vandenbergh, Jonathan A. Gilligan

Vanderbilt Law School Faculty Publications

Drawing on the recent financial crisis, we introduce the concept of macro-risk. We distinguish between micro-risks, which can be managed within conventional economic frameworks, and macro-risks, which threaten to disrupt economic systems so much that a different approach is required. We argue that catastrophic climate change is a prime example of a macro-risk. Research by climate scientists suggests disturbingly high likelihoods of temperature increases and sea level rises that could cause the kinds of systemic failures that almost occurred with the financial system. We suggest that macro-risks should be the principal concern of rational risk assessment and management, but they …

Economics, Behavioral Biology, And Law, Owen D. Jones, Erin O'Hara O'Connor, Jeffrey Evans Stake

Vanderbilt Law School Faculty Publications

The article first compares economics and behavioral biology, examining the assumptions, core concepts, methodological tenets, and emphases of the two fields. Building on this, the article then compares the applied interdisciplinary fields of law and economics, on one hand, with law and behavioral biology, on the other - highlighting not only the most important similarities, but also the most important differences.

The article subsequently explores ways that biological perspectives on human behavior may prove useful, by improving economic models and the behavioral insights they generate. The article concludes that although there are important differences between the two fields, the overlaps …

Policy Relevant Heterogeneity In The Value Of Statistical Life: New Evidence From Panel Data Quantile Regressions, W. Kip Viscusi, Thomas J. Kniesner, James P. Ziliak

Vanderbilt Law School Faculty Publications

We examine differences in the value of statistical life (VSL) across potential wage levels in panel data using quantile regressions with intercept heterogeneity. Latent heterogeneity is econometrically important and affects the estimated VSL. Our findings indicate that a reasonable average cost per expected life saved cut-off for health and safety regulations is $7 million to $8 million per life saved, but the VSL varies considerably across the labor force. Our results reconcile the previous discrepancies between hedonic VSL estimates and the values implied by theories linked to the coefficient of relative risk aversion. Because the VSL varies elastically with income, …

The Regulation Of Inchoate Technologies, Daniel J. Gervais

Vanderbilt Law School Faculty Publications

In this Essay, I explain why and how certain technologies I refer to as "inchoate" defeat regulatory interventions. I examine the "law" of unintended consequences and the role of regulatory ideologies. I suggest that traditional policymaking models, when applied to inchoate technologies, do not adequately reflect the risk of regulatory failure, which is proportional to the level of inchoateness of the technology. I also consider whether the regulation of inchoate technologies should take into account that, and may in fact be undesirable because, some technologies (or the use thereof) tend to self-regulate. Finally, I suggest lessons that can be drawn …

Do Class Action Lawyers Make Too Little?, Brian T. Fitzpatrick

Vanderbilt Law School Faculty Publications

Class action lawyers are some of the most frequently derided players in our system of civil litigation. It is often asserted that class action lawyers take too much from class judgments as fees, that class actions are little more than a device for the lawyers to enrich themselves at the expense of the class. In this Article, I argue that some of this criticism of class action lawyers is misguided. In particular, I perform a normative examination of fee percentages in class action litigation using the social-welfarist utilitarian account of litigation known as deterrence-insurance theory. I argue that in perhaps …

Reply To Comments On "The Devaluation Of Life", W. Kip Viscusi

Vanderbilt Law School Faculty Publications

The historical context of benefit–cost analysis provides a useful starting point for understanding why I advocate the policy application of the VSL measure despite the controversy surrounding these figures. Both Carruthers and Fourcade discuss the historical development of benefit–cost analysis, which was introduced as a policy evaluation tool within the context of public works projects. The Army Corps of Engineers and the US Department of the Interior’s Bureau of Reclamation have long assessed the economic benefits and costs of dams and related water resource projects and have used these estimates to justify the efforts, which are required by legislation to …

Discounting Dilemmas: Editors' Introduction, W. Kip Viscusi

Vanderbilt Law School Faculty Publications

Two developments pose dilemmas for well established discounting techniques: (1) The extremely long time horizons associated with recently prominent environmental policy problems, such as climate change and nuclear waste storage, have made it important to take seriously both benefits to future generations and extreme uncertainties in projecting the returns to policies and future well being. (2) Findings in the burgeoning field of behavioral economics have made it clear that individuals routinely depart significantly from rational prescriptions when making choices over time, thus undermining a bulwark of the discounting approach. These two sets of dilemmas are addressed in a series of …

Reforming Securities Litigation Reform: Restructuring The Relationship Between Public And Private Enforcement Of Rule 10b-5, Amanda A. Rose

Vanderbilt Law School Faculty Publications

Commentators have long debated how to reform the controversial Rule 10b-5 class action without pausing to ask whether the game is worth the candle. Is private enforcement of Rule lOb-5 worth preserving, or might we be better off with exclusive public enforcement? This fundamental but neglected question demands attention today more than ever. An academic consensus has emerged that the typical Rule 1Ob-5 class action cannot be defended on compensatory grounds. That leaves the oft-cited, but undertheorized, rationale that private enforcement is a "necessary supplement" to the securities fraud deterrence efforts of the SEC. When this justification is critically examined, …

Adjusting The Value Of A Statistical Life For Age And Cohort Effects, W. Kip Viscusi, Joseph E. Aldy

Vanderbilt Law School Faculty Publications

To resolve the theoretical ambiguity in the effect of age on the value of statistical life (VSL), this article uses a novel, age-dependent fatal risk measure to estimate age-specific hedonic wage regressions. VSL exhibits an inverted-U shaped relationship with age. In the year 2000 cross-section, workers' VSL rises from $3.7 million (ages 18-24), to $9.7 million (35-44), and declines to $3.4 million (55-62). Controlling for birth-year cohort effects in a minimum distance estimator yields a peak VSL of $7.8 million at age 46, and flattens the VSL-age relationship. The value of statistical life-year also follows an inverted-U shape with age.

How To Value A Life, W. Kip Viscusi

Vanderbilt Law School Faculty Publications

The tradeoff between money and small risks of death is the value of statistical life (VSL), which has become the standard for assessing the benefits of risk and environmental regulations. Labor market estimates of the VSL average about $7 million. This valuation amount rises with age and then declines, closely tracking the pattern of consumption over the life cycle. The VSL for those at age 60 is higher than for people in their 20s. Application of this methodology to assess the mortality costs to smokers indicates a personal mortality cost on the order of $200 per pack for men and …

Climate Change: The Equity Problem, Michael P. Vandenbergh, Brooke A. Ackerly

Vanderbilt Law School Faculty Publications

A substantial proportion of the United States population is at or below the poverty level, yet many of the greenhouse gas emissions reduction measures proposed or adopted to date will increase the costs of energy, motor vehicles, and other consumer goods. This essay suggests that although scholarship and policymaking to date have focused on the disproportionate impact of these increased costs on the low-income population, the costs will have two important additional effects. First, the anticipated costs will generate political opposition from social justice groups, reducing the likelihood that aggressive measures will be adopted. Second, to the extent aggressive measures …

Labor Market Estimates Of The Senior Discount For The Value Of Statistical Life, W. Kip Viscusi, Joseph E. Aldy

Vanderbilt Law School Faculty Publications

This article develops the first measures of age–industry job risks to examine the age variations in the value of statistical life. Because of the greater risk vulnerability of older workers, they face flatter wage-risk gradients than younger workers, which we show to be the case empirically. Accounting for this heterogeneity in hedonic market equilibria leads to estimates of the value of statistical life–age relationship that follows an inverted U shape. The estimates of the value of statistical life range from $6.4 million for younger workers to a peak of $9.0 million for those aged 35–44, and then a decline to …

Behavioral Genetics And Crime, In Context, Owen D. Jones

Vanderbilt Law School Faculty Publications

This Article provides an introduction to some of the key issues at the intersection of behavioral genetics and crime.

It provides, among other things, an overview of the emerging points of consensus, scientifically, on what behavioral genetics can and cannot tell us about criminal behavior. It also discusses a variety of important implications (as well as complexities) of attempting to use insights of behavioral genetics in legal contexts.

The Futility Of Appeal: Disciplinary Insights Into The "Affirmance Effect" On The United States Courts Of Appeals, Tracey E. George, Chris Guthrie

Vanderbilt Law School Faculty Publications

In contrast to the Supreme Court, which typically reverses the cases it hears, the United States Courts of Appeals almost always affirm the cases that they hear. We set out to explore this affirmance effect on the U.S. Courts of Appeal by using insights drawn from law and economics (i.e., selection theory), political science (i.e., attitudinal theory and new institutionalism), and cognitive psychology (i.e., heuristics and biases, including the status quo and omission biases).

Bucking The Trend: The Unsupportability Of Index Providers' Imposition Of Licensing Fees For Unlisted Trading Of Exchange Traded Funds, Peter N. Hall

Vanderbilt Law Review

Exchange traded funds (ETFs) are popular investment products that have recently generated substantial investment press, several new regulations, huge earnings for the securities markets, and potential legal conflicts that will likely lead to major litigation. ETFs are derivative securities that represent ownership in funds, unit investment trusts, or depositary receipts with portfolios of securities designed to track the performance and dividends of specific securities indices.' ETFs track indices by holding a representative sampling of securities in the index, thus approximating investment results of the index as a whole. They may or may not hold all the stocks in a particular …

Chicago Man, K-T Man, And The Future Of Behavioral Law And Economics, Robert A. Prentice

Vanderbilt Law Review

Most law is aimed at shaping human behavior, encouraging that which is good for society and discouraging that which is bad.' Nonetheless, for most of the history of our legal system, laws were passed, cases were decided, and academics pontificated about the law based on nothing more than common sense assumptions about how people make decisions. A quarter century or more ago, the law and economics movement replaced these common sense assumptions with a well-considered and expressly stated assumption-that man is a rational maximizer of his expected utilities. Based on this premise, law and economics has dominated interdisciplinary thought in …

Competing For The People's Affection: Federalism's Forgotten Marketplace, Todd E. Pettys

Vanderbilt Law Review

In recent years, the United States Supreme Court frequently has invoked federalism principles when reviewing federal legislation but has failed to articulate an overarching vision of federal-state relations. The Court has relied instead on seemingly disparate premises, including a local-national distinction that some believe is disingenuous, notions of "commandeering" and political accountability that some believe are poorly rationalized, and a conception of state dignity that critics charge is ill suited for a nation in which the people are sovereign. The Court does occasionally recite the perceived benefits of federalism, but those benefits are framed at such a high level of …

Taking The Protection-Access Tradeoff Seriously, Harvey S. Perlman

Vanderbilt Law Review

Law and economics scholarship has contributed much to our understanding of both the nature of intellectual property rights generally and the features of individual intellectual property regimes. Indeed it is hard to imagine a field other than antitrust law that is so explicitly governed by economic thinking. In authorizing the copyright and patent systems, Article I, Section 8 of the United States Constitution expressly incorporates a social welfare imperative as the basis for its grant of power.' Certainly economists and economically oriented legal academics have given the field the attention it is due.

I am far from being a sophisticated …

Comment: The Future Of Behavioral Economic Analysis Of Law, Jennifer Arlen

Vanderbilt Law Review

Behavioral economic analysis of law presents an important challenge to conventional law and economics, strengthened in part by the fact that conventional law and economics is itself a behavioral approach to law. Indeed, conventional law and economics can be viewed as the first widely-adopted behavioral approach to law. A central contribution of Ronald Coase's pathbreaking article was the claim that one cannot determine the effect of a law by simply looking at the law itself--at the conduct the law requires. Instead, one must determine how people will respond to the law.' Legal rules, he argued, do not dictate behavior-they simply …

The Growing Pains Of Behavioral Law And Economics, Thomas S. Ulen

Vanderbilt Law Review

We are at the beginning of behavioral law and economics. We now see only dimly the outlines of the elaborate theory of decision making that is to come. We are like the independent scholars who examined the various parts of a very large animal and then tried to put together their reports to describe that animal; we each have bits and pieces of the elephant but no clear image of the entire beast. But we should not despair. We must remember that this behavioralist discipline is, as scholarly developments go, young. Indeed, the conventional law and economics model, to which …

Putting Rational Actors In Their Place: Economics And Phenomenology, Edward L. Rubin

Vanderbilt Law Review

The model of human behavior that is used in microeconomics is both normative and descriptive. As a normative model, it is an historical successor to the medieval concept of grace and the Renaissance concept of virtue. As a descriptive model, it is a theory of human psychology. Economists tend to deemphasize this point be- cause psychology is a notoriously "soft" science, and economists aspire to the "hard" sciences' precision. Nonetheless, any model that states the way human beings behave under specified circumstances is necessarily a theory of the way the human mind functions, and thus be- longs in the category …

Can There Be A Behavioral Law And Economics?, Samuel Issacharoff

Vanderbilt Law Review

The emergence of the modern law and economics analysis generally is dated to the early 1960s with the publication of seminal work by Ronald Coase' and subsequently by Guido Calabresi and Douglas Melamed. These articles laid the foundation for the relation between legal rules, wealth maximization, and transaction costs, which provided the pivotal application of economic analysis to legal problems. However, the current sweep of law and economics would have been inconceivable without Gary Becker's insight into the application of neoclassical comparisons of marginal utility to the stuff of everyday life. Becker's analysis of routine decision making in terms of …

Auctions In Bankruptcy: Theoretical Analysis And Practical Guidance, Randall S. Thomas, Robert G. Hansen

Vanderbilt Law School Faculty Publications

In academic circles, there are now a myriad of proposals for reform of Chapter 11 of the U.S. bankruptcy law. Many of these proposals call for the replacement of Chapter 11 with market-oriented alternatives, including in some cases, auction of insolvent, publicly held companies. Auctions in bankruptcy initially drew strong support form leading bankruptcy scholars. Recently though, other scholars have been critical of the case for auctions in bankruptcy. Our main purpose in this paper is to argue that these criticisms are both unwarranted and somewhat off the point.

Unfunded Mandates And Fiscal Federalism: A Critique, Robert W. Adler

Vanderbilt Law Review

The term "unfunded federal mandates" is used to challenge federal obligations imposed on states and localities without accompanying funding. Unfunded mandates were alluded to by both the majority and dissenting opinions in Printz v. United States, in which provisions of the Brady Handgun Violence Protection Act were invalidated by the U.S. Supreme Court on Tenth Amendment grounds. In this Article, Professor Adler critiques the fiscal, legal, and policy arguments against unfunded federal mandates. This analysis, in turn, raises two broader issues. First, is the concept of unfunded mandates independently useful to the nation's ongoing debate about federal- ism? Second, does …

Realizing The Re-Emergence Of The Chinese Stock Market: Fact Or Fiction?, Ann P. Vandevelde

Vanderbilt Journal of Transnational Law

The stock market which currently exists in the People's Republic of China (PRC) is a product of the "open door policy" introduced by Deng Xiaoping in 1978, following the death of Mao Zedong, to promote economic development over class struggle. Following limited experimentation with stock issuance at the local level, the Shanghai and Shenzhen stock exchanges opened in 1990 and 1991 respectively. Since its recent inception, China's stock market--which comprises the trading of domestically owned A-Shares and foreign-owned B-Shares--has experienced impressive growth together with periods of volatility as well as lackluster performance. Recent performance of A-Share trading has been strong, …

Economic Foundations Of The Current Regulatory Reform Efforts, W. Kip Viscusi

Vanderbilt Law School Faculty Publications

Almost since the inception of the risk and environmental agencies in the early 1970s, there has been a continuing concern with ensuring that regulations yield societal benefits commensurate with their costs. This recognition of the need for balance, in turn, has led policymakers to seek a greater role for economists, and the principles of economic analysis undoubtedly will continue to play a central role in the debate over the future of regulatory policy.

The Impact Of Poison Pills On Proxy Contests: Reevaluating Moran V. Household International, Randall S. Thomas, Kenneth J. Martin

Vanderbilt Law School Faculty Publications

American corporate management has sought to insulate itself from dissident shareholders’ voting power by enacting “Rights Plans.” Rights Plans reduce a dissident shareholder’s chances of winning a proxy contest by restricting the number of shares that a dissident group can own Most Rights Plans severely penalize a dissident shareholder that owns more than a limited amount, or trigger level, of 15% to 20% of the corporation’s voting common stock. Rights Plans can stop a dissident from forming coalitions with other shareholders if collectively they would own a greater percentage of voting stock than this trigger level.

Incumbent boards have used …

Fee Shifting And Incentives To Comply With The Law, Keith N. Hylton

Vanderbilt Law Review

Law and economics is a top-heavy discipline, in the sense that it is largely theoretical. Empirical tests of its claims have been carried out only recently, and a great deal remains to be done. The larger part of the recent wave of empirical law and economics research, however, examines the litigation process. This research has focused on the frequencies with which lawsuits are brought and with which they are settled. Surprisingly, empirical researchers have given little attention to the theoretical literature that makes predictions concerning incentives to comply with legal rules and the optimality of compliance equilibria. This lack of …

Auctioning Class Action And Derivative Lawsuits: A Critical Analysis, Randall Thomas, Robert G. Hansen

Vanderbilt Law School Faculty Publications

Numerous legal academics and practitioners have criticized the handling by plaintiffs' attorneys of large-scale class action and derivative lawsuits. These critiques point out attorneys' abuse of the legal system, ranging from purported collusion among plaintiffs and defendants.