Law and Economics Commons^™

The Economics Of Litigation And Arbitration: An Application To Franchise Contracts, Keith N. Hylton, Christopher R. Drahozal

Faculty Scholarship

If we define the deterrence benefits from contract enforcement as avoided harms net of avoidance costs, we should expect contracting parties to choose the dispute resolution forum that provides the greatest difference between deterrence benefits and dispute resolution costs for every type of dispute. We apply this general framework to franchise contracts and conduct an empirical analysis of the determinants of arbitration agreements among franchising parties. Although it is obvious that contracting parties have an incentive to choose arbitration in order to reduce dispute-resolution costs, there have been no studies of the importance of deterrence concerns. We examine the deterrence …

Technology And Learning By Factory Workers: The Stretch-Out At Lowell, 1842, James Bessen

Faculty Scholarship

In 1842 Lowell textile firms increased weaving productivity by assigning three looms per worker instead of two. This marked a turning point. Before, weavers at Lowell were temporary and mostly literate Yankee farm girls; afterwards, firms increasingly hired local residents, including illiterate and Irish workers. An important factor was on-the-job learning. Literate workers learned new technology faster, but local workers stayed longer. These changes were unprofitable before 1842, and the advantages of literacy declined over time. Firm policy and social institutions slowly changed to permit deeper human-capital investment and more productive implementation of technology

The Law And Economics Of Critical Race Theory, Mitu Gulati, Devon W. Carbado

Faculty Scholarship

Legal academics often perceive law and economics (L&E) and critical race theory (CRT) as oppositional discourses. Using a recently published collection of essays on CRT as a starting point, we argue that the understanding of workplace discrimination can be furthered through a collaboration between L&E and CRT. L&E's strength is in its attention to incentives and norms, specifically its concern with explicating how norms incentivize behavior. Its limitation is that it treats race as exogenous and static. Thus, the literature fails to consider how institutional norms affect, and are affected by, race. To put the point another way, L&E does …

Making Markets: Network Effects And The Role Of Law In The Creation Of Strong Securities Markets, Robert B. Ahdieh

Faculty Scholarship

As Russia and other formerly socialist states construct market economies, the appearance of strong securities markets remains an unfulfilled expectation. Notwithstanding broad privatization of state-owned enterprises and the elimination of industrial subsidies - essential precursors to demand for capital-raising securities markets - stock markets in Central and Eastern Europe remain illiquid, inefficient, and unreliable.

Strong securities markets do not, it seems, neatly follow from the welfare-maximizing behavior of individuals and institutions. Nor can the appearance of securities markets be effectively dictated by government decree. Post-communist securities market transition therefore presents a puzzle: Do markets emerge, or must they be created? …

Local Institutions, Foreign Investment And Alternative Strategies Of Development: Some Views From Practice, Tamara Lothian, Katharina Pistor

Faculty Scholarship

This Essay summarizes the major insights gained from a panel discussion with legal practitioners about the relevance of local institutions to foreign direct investors. The Essay offers a critique of policy conclusions drawn from empirical studies that suggest a positive correlation between legal institutions and foreign investment flows. It points out that the data used in these studies are far too general to allow policy conclusions and that neither the data nor the policy conclusions are sufficiently attuned to the challenges or opportunities that foreign direct investment projects face on the ground. According to the results of the panel discussion, …

Taxing International Portfolio Income, Michael J. Graetz, Itai Grinberg

Faculty Scholarship

Most analyses of the taxation of international income earned by U.S. corporations or individuals have addressed income from direct investments abroad. With the exception of routine bows to the "international tax compromise" and sporadic discussions of the practical difficulties residence countries face in collecting taxes on international portfolio income, the taxation of international portfolio income generally has been ignored in the tax literature.

Analysis and reassessment of U.S. tax policy regarding international portfolio income is long overdue. The amount of international portfolio investment and its role in the world economy has grown exponentially in recent years. In most years since …

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

Faculty Scholarship

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

The Mechanisms Of Market Efficiency Twenty Years Later: The Hindsight Bias, Ronald J. Gilson, Reinier Kraakman

Faculty Scholarship

Twenty years ago we published a paper, "The Mechanisms of Market Efficiency," that sought to describe the institutional underpinnings of price formation in the securities market. Since that time, financial economics has moved forward on many fronts. The sub-discipline of behavioral finance has struggled to bring yet more descriptive realism to the study of financial markets. Two important questions are (1) how much has this new discipline changed our understanding of the efficiency and nature of the institutional mechanisms that set price in financial markets; and (2) how far does this discipline carry novel implications for the regulation of financial …

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

Faculty Scholarship

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

The Attorney As Gatekeeper: An Agenda For The Sec, John C. Coffee Jr.

Faculty Scholarship

Section 307 of the Sarbanes-Oxley Act authorizes the SEC to prescribe "minimum standards of professional conduct" for attorneys "appearing or practicing" before it. Although the initial debate has focused on issues of confidentiality, this terse statutory provision frames and seemingly federalizes a much larger question: What is the role of the corporate attorney in public securities transactions? Is the attorney's role that of (a) an advocate, (b) a transaction cost engineer, or, more broadly, (c) a gatekeeper – that is, a reputational intermediary with some responsibility to monitor the accuracy of corporate disclosures? Skeptics of any gatekeeper role for attorneys …

Foreword: Nafta As A Lesson For Globalization, Elizabeth Trujillo

Faculty Scholarship

Since its enactment, NAFTA has impacted international business among its members and it has awakened concerns of the environmental and labor challenges that the participating countries face as they move toward economic integration. Among the many challenges, coping with the economic, legal, and cultural differences that exist among the partners has been difficult. The nations must continue to work together to harmonize their laws in such a way that allows for easier integration without impeding their sovereign power to enact laws that address local needs. At the conference entitled “NAFTA at Ten: Harmonization and Legal Transformation,” held on June 14-15, …

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

Faculty Scholarship

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 …

The Byrd Amendment Is Wto-Illegal: But We Must Kill The Byrd With The Right Stone, Jagdish N. Bhagwati, Petros C. Mavroidis

Faculty Scholarship

On 16 January 2003, the WTO Appellate Body issued its report on United States – Continued Dumping And Subsidy Offset Act Of 2000 (WTO Doc. WT/DS217 and 234/AB/R). In this report, the Appellate Body condemned the so-called US Byrd Amendment by finding that it was inconsistent with the US obligations under the WTO Agreements on Antidumping (AD) and Subsidies and Countervailing Measures (SCM).

Of Legal Transplants, Legal Irritants, And Economic Development, Katharina Pistor, Daniel Berkowitz

Faculty Scholarship

The collapse of the socialist system has given way to unprecedented economic and legal reforms in the former socialist countries. Over the past decade they have enacted new legislation in all areas of the law, drawing heavily on legal models from developed market economies, including common law and civil law countries. While the transplanted laws now on the books is largely consistent with Western practice, the enforcement of these new laws is often ineffective (Berkowitz, Pistor, and Richard, 2003).

Innovation In Corporate Law, Katharina Pistor, Yoram Keinan, Jan Kleinheisterkamp, Mark D. West

Faculty Scholarship

In most countries large business enterprises today are organized as corporations. The corporation with its key attributes of independent personality, limited liability and free tradeability of shares has played a key role in most developed market economies since the 19th century and has made major inroads in emerging markets. We suggest that the resilience of the corporate form is a function of the adaptability of the legal framework to a changing environment. We analyze a country's capacity to innovate using the rate of statutory legal change, the flexibility of corporate law, and institutional change as indicators. Our findings suggest that …