Law and Economics Commons^™

Operationalizing Deterrence Claims Management (In Hopsitals, A Large Retailer, And Jails And Prisons), Margo Schlanger

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The theory that the prospect of liability for damages deters risky behavior has been developed in countless articles and books. The literature is far sparser, however, on how deterrence is operationalized. And prior work slights an equally important effect of damage actions, to incentivize claims management in addition to harm-reduction responses that are cost- rather than liabilityminimizing. This article works in the intersection of these two understudied areas, focusing on claims management steps taken by frequently sued organizations, and opening a window into the black box of deterrence to see how those steps may end up serving harm-reduction purposes as …

Did Bankruptcy Reform Fail? An Empirical Study Of Consumer Debtors, Robert M. Lawless, Angela K. Littwin, Katherine M. Porter, John A. E. Pottow, Deborah K. Thorne, Elizabeth Warren

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Before 2005, many people went broke and many filed for bankruptcy. After 2005, many people still go broke, but not so many file for bankruptcy. Why has the number of bankruptcies declined? Surely it is not the economy. All throughout the 2000s, families have been under increasing economic pressure. Median family incomes have declined, basic expenses have risen, and families are shouldering unprecedented debt loads. Defaults remain high for credit cards and car loans, while mortgage foreclosures have soared. By 2008, over half of all Americans reported that their incomes were falling behind their cost of living. These data all …

Time Well Spent: An Economic Analysis Of Daylight Saving Time Legislation, Steve P. Calandrillo, Dustin E. Buehler

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Several nations implemented daylight saving time legislation in the last century, including the United States. The United States briefly experimented with year-round daylight saving time twice—during World War II and the energy crises in the 1970s. Agency studies and congressional hearings from the 1970s show several benefits of year-round daylight saving time, along with potential disadvantages. These studies are dated, and much has changed in the last thirty years. While congressional efforts to extend daylight saving time in 2007 have again focused on the energy savings this legislation would produce, far more meaningful benefits have been largely ignored.

This Article …

Optimal Tax Compliance And Penalties When The Law Is Uncertain, Kyle D. Logue

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This article examines the optimal level of tax compliance and the optimal penalty for noncompliance in circumstances in which the substance of the tax law is uncertain - that is, when the precise application of the Internal Revenue Code to a particular situation is not clear. In such situations, a number of interesting questions arise. This article will consider two of them. First, as a normative matter, how certain should taxpayers be before they rely on a particular interpretation of a substantively uncertain tax rule? If a particular position is not clearly prohibited but neither is it clearly allowed, what …

Does Nonprofit Ownership Matter?, Jill R. Horwitz

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In recent years, policymakers have increasingly questioned whether nonprofit institutions, particularly hospitals, merit tax exemption. They argue that nonprofit hospitals differ little from their for-profit counterparts in the provision of charity care and, therefore, should either lose their tax-exempt status or adhere to new, strict, and specific requirements to provide free services for the poor. In this Article, I present evidence that hospital ownership-whether it is for-profit, nonprofit, or government owned-has a significant effect on the mix of medical services it offers. Despite notoriously weak enforcement mechanisms, nonprofit hospitals act in the public interest by providing services that are unlikely …

Insider Trading Laws And Stock Markets Around The World: An Empirical Contribution To The Theoretical Law And Economics Debate, Laura Nyantung Beny

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The primary goal of this Article is to bring empirical evidence to bear on the heretofore largely theoretical law and economics debate about insider trading. The Article first summarizes various agency, market, and contractual (or "Coasian") theories of insider trading propounded over the course of this longstanding debate. The Article then proposes three testable hypotheses regarding the relationship between insider trading laws and several measures of stock market performance. Exploiting the natural variation of international data, the Article finds that more stringent insider trading laws are generally associated with more dispersed equity ownership, greater stock price accuracy and greater stock …

Insider Trading Rules Can Affect Attractiveness Of Country's Stock Markets, Laura Nyantung Beny

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The academic debate about the desirability of prohibiting insider trading is longstanding and as yet unresolved. Until Henry Manne’s 1966 book, Insider Trading and the Stock Market, the debate centered on whether insider trading is unfair to public investors who are not privy to private corporate information. However, the fairness approach is malleable and indeterminate and thus does not lend itself to clear-cut policy prescriptions. Since Manne’s book, the focus of the debate has been on the effect of insider trading on economic efficiency. Manne argued that, contrary to the prevailing legal and moral opinion of the time, insider trading …

Against Irreparable Benefits, Omri Ben-Shahar

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In a recent essay in The Yale Law Journal, Douglas Lichtman argues that courts considering preliminary injunctions should account for irreparable benefits in addition to irreparable harms. This is a provocative idea. If a preliminary injunction harms one party but benefits the other, and if both effects are equally difficult to subsequently undo, why focus on one effect (harm) and ignore the other (benefit)? There is a compelling geometric validity to this symmetry observation. But is this a valuable “flipping” exercise? Does it shed a new light and provide useful insight into the law of injunctions? In this Response I …

Exploding The Class Action Agency Costs Myth: The Social Utility Of Entrepreneurial Lawyers, Myriam E. Gilles, Gary B. Friedman

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In this article, we challenge the traditional view that entrepreneurial plaintiffs' class action lawyers operating entirely according to their own economic self-interest serve no social utility, or worse yet, tremendous disutility. In seeking to counter this notion, we try to show that the agency costs problem long derided in class action practice is overblown: in the majority of small-claims class actions, there is no legitimate reason to care whether class members are being undercompensated (or compensated at all), nor any reason to worry that entrepreneurial lawyers are being overcompensated. Rather, we assert that the driving force behind class action practice …

The (Legal) Pains Of Vioxx: Why Product Liability Can Make Products More Dangerous, Omri Ben-Shahar

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Comparing the experience of Vioxx and Celebrex leads Omri Ben-Shahar to think that stiff product liability has the perverse effect of inducing manufacturers of defective products to leave these products on the market, rather than withdraw them.

The Economics Of Open Access Law Publishing, Jessica D. Litman

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The conventional model of scholarly publishing uses the copyright system as a lever to induce commercial publishers and printers to disseminate the results of scholarly research. Recently, we have seen a number of high-profile experiments seeking to use one of a variety of forms of open access scholarly publishing to develop an alternative model. Critics have not quarreled with the goals of open access publishing; instead, they've attacked the viability of the open access business model. If we are examining the economics of open access publishing, we shouldn't limit ourselves to the question whether open access journals have fielded a …

Second Best Damage Action Deterrence, Margo Schlanger

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Potential defendants faced with the prospect of tort or tort-like damage actions can reduce their liability exposure in a number of ways. Prior scholarship has dwelled primarily on the possibility that they may respond to the threat of liability by augmenting the amount of care they take.1 Defendants (I limit myself to defendants for simplicity) will increase their expenditures on care, so the theory goes, when those expenditures yield sufficient liability-reducing dividends; more care decreases liability exposure by simultaneously making it less likely that the actors will be found to have behaved tortiously in the event of an accident and …

Boilerplate And Economic Power In Auto Manufacturing Contracts, Omri Ben-Shahar, James J. White

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This Article is structured as follows. Part I compares the terms and conditions in the purchase orders of the Original Equipment Manufacturers (OEMs) and highlights important differences in the substance of these boilerplate provisions. It argues that these differences cannot be easily reconciled with the prediction that sophisticated parties draft the most efficient boilerplate terms. Part II examines how these forms are drafted, how their terms are negotiated, and how the OEMs guard their terms from erosion. It provides some insight on how tailoring occurs and how the internal organization of a party to a deal affects the terms that …

Public Law Limitations On Privatization Of Government Functions, Paul R. Verkuil

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The privatization movement is on the verge of succeeding too well. The fact that some of what government does can be done better and cheaper by the private sector has gained such momentum that the public sector is sometimes seen as redundant or irrelevant. But the economist's make-or-buy choice simply fails to capture the full range of responsibilities that government faces in deciding whether to outsource a particular function to private contractors.

This Article illuminates the public dimension of government functions. By exploring the public-private distinction and relating it to constitutional, statutory, and administrative requirements, it structures an argument that …

Legal Durability, Omri Ben-Shahar

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This paper develops a framework to study the effects of the durability of legal allocation decisions, such as trial outcomes, regulatory enactments and property entitlements. For a party favored by the legal allocation, a more durable decision is also more costly to secure, ex-ante. Thus, it is not the greater durability of the allocation that determines whether the “winner” is better-off, but other factors that are affected by the durability attribute, such as the cost of securing a favorable outcome and the ability of contesting parties to affect this cost. The paper develops conditions under which greater durability is irrelevant, …

Spectres Of Law And Economics (Book Review), William H. Widen

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No abstract provided.

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

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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 …

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

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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, …

Reparations As Redistribution, Kyle D. Logue

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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 …

The Genie And The Bottle: Collateral Sources Under The September 11th Victim Compensation Fund, Kenneth S. Abraham, Kyle D. Logue

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The September 11th Victim Compensation Fund of 2001 (the Fund) was part of legislation enacted just eleven days after the terrorist attacks of September 11th in the wake of extraordinary national loss. It is possible, therefore, that the Fund will always be considered an urgent and unique response to the unprecedented events of September 11th. On that view, the character of the Fund will have little longterm policy significance. It is equally possible, however, that the enactment of the Fund will prove to be a seminal moment in the history of tort and compensation law. The Fund adopts a new …

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

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In the literature on legal transitions, the term "transition policy" is generally understood to mean a rule or norm that influences policymakers' decisions concerning the extent to which legal change should be accompanied by transition relief, whether in the form of grandfathering or phase-ins or direct compensation. Legal change within this literature is defined broadly, and somewhat counter-intuitively, to include any resolution of the uncertainty regarding what the law will be in the future or how the law will be applied to future circumstances. Thus, a legal change would obviously include an unexpected repeal of a tax provision, such as …

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

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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 …

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

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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 during 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, as well as the interaction between relief and the incentives for taking precautions against similar losses in the future. …

Redistributing Optimally: Of Tax Rules, Legal Rules, And Insurance, Kyle D. Logue, Ronen Avraham

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From the beginning of the law and economics movement, normative legal economists have focused almost exclusively on evaluating the efficiency of alternative legal rules. The distributional consequences of legal rules, therefore, have largely been ignored. It is tempting to conclude that legal economists are hostile or indifferent to concerns of distributional fairness. In fact, however, the discipline of economics has a great deal to say about distributional policy. The normative branch of economics, known as welfare economics, has always been deeply concerned with distributional issues. It is not that welfare economists purport to know a priori the "right" or "optimal" …

A Control-Based Approach To Shareholder Liability For Corporate Torts, Nina A. Mendelson

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Some commentators defend limited shareholder liability for torts and statutory violations as efficient, even though it encourages corporations to overinvest in and to externalize the costs of risky activity. Others propose pro rata unlimited shareholder liability for corporate torts. Both approaches, however, fail to account fully for qualitative differences among shareholders. Controlling shareholders, in particular, may have lower information costs, greater influence over managerial decisionmaking, and greater ability to benefit from corporate activity. This Article develops a control-based approach to shareholder liability. It first explores several differences among shareholders. For example, a controlling shareholder can more easily curb managerial risk …

The Economic Analysis Of Evidence Law: Common Sense On Stilts, Richard O. Lempert

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There was a time when the empire of Law was not overrun by economists. The economists had their own fiefdoms to be sure-there was the Duchy of Antitrust and the Kingdom of Regulatory Law-but the economists lived in peace within these borders, welcoming many unlike themselves into their midst, only gently proselytizing their students in the first few classes of a term, and swearing fealty to the law. It is true that a few marauders from beyond the borders saw the wealth of the empire and sought to colonize it, but even the most daring, Archbishop Coase and Duke Gary …

Chief Judge Edward R. Becker: A Truly Remarkable Judge, Marci A. Hamilton

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No abstract provided.

Law, Economics, And The Skeleton Of Value Fallacy, Kyron Huigens

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Experiments in the last decade or so have demonstrated persistent failures on the part of ordinary individuals rationally to pursue self-interest. The experiments pose serious challenges to economics, rational choice theory, and the law and economics school. Some experiments, for example, suggest an "endowment effect", that contradicts the Coase Theorem; the notion that, in the absence of transaction costs, goods will find their most efficient distribution regardless of their initial assignment. Cass Sunstein has collected a set of essays by economists and legal scholars exploring these challenges, in a volume entitled Behavioral Law and Economics.

The Current Life Insurance Crisis: How The Law Should Respond, Kyle D. Logue

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This article explores some of the issues raised by the new evidence of underinsurance. Part I explores the initial theoretical question: why do people buy life insurance? Put differently, what function does life insurance serve? Part II provides some background on the life insurance market as it currently exists. Thus, Part II summarizes the major types of life insurance that are currently offered and summarizes the main elements of the current regulatory regime for life insurance companies. Part III then provides support for the claim that households tend to drastically underconsume life insurance. Section A of that Part summarizes the …

The Liberal Commons, Hanoch Dagan, Michael A. Heller

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Following the Civil War, black Americans began acquiring land in earnest; by 1920 almost one million black families owned farms. Since then, black rural landownership has dropped by more than 98% and continues in rapid decline-there are now fewer than 19,000 black-operated farms left in America. By contrast, white-operated farms dropped only by half, from about 5.5 million to 2.4 million. Commentators have offered as partial explanations the consolidation of inefficient small farms and intense racial discrimination in farm lending. However, even absent these factors, the unintended effects of old-fashioned American property law might have led to the same outcome. …