Law and Economics Commons^™

Think Twice Before You Sign! An Experiment On A Cautionary Function Of Contractual Formalities, Monika Leszczynska

Faculty Scholarship

Contractual formalities, such as handwritten signatures, have long been viewed as serving a cautionary function that protects individuals from entering ill-considered agreements. With the rise of digital contracting, it is uncertain whether online forms of assent can play the same role. In an incentivized laboratory experiment, four modes of contract confirmation were compared: clicking “OK,” typing one’s name, entering a PIN code (analogous to a qualified e-signature), and handwritten signing. The study examined how these methods affect choices between smaller–sooner and larger–later rewards. Results show that participants were more impulsive when confirming by clicking “OK” or typing their name than …

Law Enforcement With Rent Dissipation, Murat C. Mungan, J. Shahar Dillbary

Faculty Scholarship

We consider a framework which brings together losses arising from rent-dissipation and the workhorse model of law enforcement. Governmental actors engage in a contest to share the proceeds from the enforcement of the law through monetary fines, which leads to rent-dissipation. This causes monetary sanctions to be costly, rendering the model used for studying nonmonetary sanctions a better fit for their analysis. The effect of rent-dissipation on optimal sanctions is directly related to the sanction elasticity of offenses measured at the classic optimum (i.e., where the expected sanction equals the direct harm from the offense). When offenses are inelastic, the …

Interior Optimal Imprisonment Under Diminishing Marginal Disutility, Tim Friehe, Murat C. Mungan

Faculty Scholarship

This note revisits the important question of how fines and imprisonment should be optimally employed. In D’Antoni et al. (2022), a monotone hazard rate condition implies a corner solution for imprisonment in the observable-wealth benchmark when imprisonment disutility is linear. We show that this result is not robust to offenders facing diminishing marginal disutility of imprisonment. The optimal prison term is interior as long as the marginal disutility associated with large imprisonment terms are low and the harms from the offense are large enough to warrant imprisonment. The sentence length thus becomes a genuine policy margin rather than a boundary …

The Business Of Ai-Producing Startups: Evidence From A Worldwide Survey, James Bessen, Stephen Michael Impink, Robert Seamans

Faculty Scholarship

We report results from a multi-year, worldwide survey of artificial intelligence (AI)-producing startups to describe the types of technologies, frameworks, data protection, and partnerships nascent firms use to develop their AI products. Analyses of our survey findings also inform how startups gather the resources to commercialize their AI applications in alignment with their entrepreneurial strategies, address competitive barriers, and respond to regulations. These data provide initial evidence of the perceived impact of these products on their customers’ tasks and industries, suggesting that these firms’ AI products not only reduce labor costs but augment human capabilities.

Does Law Constitute Society?, Jeremy K. Kessler

Faculty Scholarship

The resistance of capitalist inequality to legal reform has led a growing number of scholars to reconsider the explanatory virtues of Marxist legal thought. But what are those virtues? Some scholars hold that what makes Marxist legal thought special is its ability to explain the development of legal relationships in terms of the development of extra-legal relationships — specifically, the relations of production as they adapt to changes in the productive forces. Other scholars argue that this focus on the causal process by which extra-legal change (or stasis) drives legal change (or stasis) is too reductive. They contend that Marxist …

Originalism, Official History, And Perspectives Versus Methodologies, Keith N. Hylton

Faculty Scholarship

This paper addresses a well-worn topic: originalism, the theory that judges should interpret the U.S. Constitution in a manner consistent with the intent of its framers. I am interested in the real-world effects of originalism. The primary effect advanced by originalists is the tendency of the approach to constrain the discretion of judges. However, I identify another effect of originalism: the creation of official histories, a practice that imposes a hidden tax on society. Another question I consider is whether originalism should be considered a methodology of analyzing the law or a perspective on the law; I argue that originalism …

Purpose-Driven Compliance, Veronica Root Martinez

Faculty Scholarship

Whether it is a small brokerage firm in Ann Arbor, Michigan, a private university in Cambridge, Massachusetts, or a multinational conglomerate head-quartered in New York City, organizations understand that they are required to fulfill a range of compliance obligations. Compliance programs today tend to have two important characteristics in common. First, the notion that perfect compliance is an impossible goal is a key component of the understandings and expectations of many firms’ compliance programs. Second, organizations have almost uniformly adopted compliance programs in areas where enforcement activity has been significant—like in the areas of antibribery and anticorruption, anti-money laundering, antitrust, …

Nest Eggs And Lifelines: The Overlooked Strain Of Economic Volatility On 401(K) Participants, Samantha Prince

Faculty Scholarship

Many Americans rely on defined contribution plans like 401(k) plans for retirement savings. These plans do not guarantee a fixed retirement benefit; rather, the benefit is based on accumulated contributions and investment performance. When the stock market drops, so do retirement account balances. When inflation hikes living expenses, money does not go as far. President Donald Trump's policies, including those associated with tariffs, are causing economic and resource volatility leading to financial hardship. Americans worry as they watch living costs increase and their retirement savings diminish. It is well known that retirees rely on 401(k) plan balances to fund their …

Symmetry, Presumptions, And The Judges Design, Murat C. Mungan

Faculty Scholarship

An instrumental variables approach called ‘the judges design’ used frequently in social sciences relies on an assumption called ‘average monotonicity’. This assumption pertains to how different judges’ (or other classifiers’) decision making processes relate to each other. Violations of it are hard to detect, which raises the importance of it being supported by a plausible theory. Decisions of judges who solve Bayesian decision problems violate average monotonicity as long as the signals they process are symmetric and they do not possess strong presumptions. This result is extended to cases where judge presumptions are symmetrically distributed and may include strong presumptions. …

Romanist-Bourgeois Property And The Development Of The Modern Capitalist World System, Anna Di Robilant

Faculty Scholarship

This article examines the role of Romanist-bourgeois property law in the development of the modern capitalist world system, focusing on how nineteenth-century jurists deliberately crafted and adapted Roman law-based property doctrines to address the evolving social relations of production in both Europe and its peripheries. Rather than viewing legal concepts as merely reflective of broader economic transformations, the author highlights the active role played by a professional class of jurists in shaping property law to legitimize and structure emergent capitalist class dynamics. The article critically engages with competing scholarly perspectives that either privilege market expansion or downplay class relations, arguing …

Universities, Capital, And Democratic Vulnerability, Steven Dean, Dana Brakman Reiser

Faculty Scholarship

For many, the university serves as a crucial guardian of democracy. Still, the capitulation of leading American private universities to authoritarian pressure from the Trump Administration should not be terribly surprising. This Essay offers one reason why. It does so by focusing on the law governing private nonprofit universities. It examines both the origins and the impact of a fundamental tension between their charitable missions and their need for capital. It shows how the legal framework designed to protect these nonprofit universities from market pressures can actually intensify their vulnerability.

The so-called “nondistribution constraint” stands at the core of U.S. …

Emergency Lending By The Federal Reserve, Kathryn Judge, Richard Clarida

Faculty Scholarship

The Federal Reserve established an array of innovative emergency lending facilities during the Great Financial Crisis and expanded the scope of its emergency lending yet further in response to the Covid-19 pandemic. This Article provides a retrospective of how the Federal Reserve used its emergency lending authority across these two episodes, identifying patterns and revealing some differences. It sheds light on the conditions that enabled the Federal Reserve to establish the facilities that it did, including the roles played by Congress and Treasury in providing the equity funding that made certain facilities possible. It shows how in each episode, the …

The Blackstone Ratio, Modified, Murat C. Mungan

Faculty Scholarship

In his discussion of evidentiary policies, Blackstone famously noted that ‘it is better that ten guilty persons escape than that one innocent suffer’ (Blackstone 1769). The conventional wisdom among lawyers, judges as well as academics holds that accepting this statement as a maxim necessitates the adoption of pro-defendant evidentiary rules. It is also commonly believed that costs associated with false convictions being greater than those associated with failures to punish offenders due to the presence of punishment costs provides a utilitarian rationale for Blackstonian principles. After formalizing Blackstone ratios (either as marginal rates of substitution or, alternatively, as the ratio …

A New View Of Formal Equality And A Case For Predistribution, Alex Raskolnikov

Faculty Scholarship

A long-held egalitarian view is that formal equality — the absence of formal legal distinctions based on the material resources of individuals — is regressive. If legal rules are the same for the rich and the poor, the rich benefit and the poor suffer. This Essay argues that this view is mistaken. Far from being synonymous with laissez-faire, a commitment to formal equality provides a counterweight to the key neoliberal maxim that regulation of the market economy should focus on efficiency alone. Moreover, a new view of formal equality offered here reveals a key advantage of predistribution over redistribution: Explicit …

Trips And Its Futures, Peter K. Yu

Faculty Scholarship

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) was adopted on 15 April 1994, along with the estab-lishment of the World Trade Organization (WTO). With the WTO’s recent celebration of its thirtieth anniversary, it is high time we explore what the future will hold for this agreement. This chapter begins by revisiting the past to examine whether the TRIPS Agreement would be adopted if it were negotiated today. The chapter then discusses whether WTO members will undertake a major overhaul of this agreement in the future. Taking note of the fast-evolving international norm-setting environment and …

Assembly-Line Public Defense, David S. Abrams, Priyanka Goonetilleke

Faculty Scholarship

Each year, millions of Americans rely on public defenders to fulfill their Sixth Amendment right to counsel. Despite being the linchpin of the criminal justice system, public defense remains both underfunded and understudied. This Article provides empirical analysis to contribute to a critical question: How should public defender systems be structured?

Criminal justice advocates, scholars, and the American Bar Association strongly favor vertical representation in public defense. Under this model, a single public defender represents a defendant throughout their case, from their initial appearance through sentencing. The alternative approach—horizontal representation—operates like an assembly line: Different attorneys handle each stage of …

The Sec Proposed Cybersecurity Infrastructure Rules And New Disclosure Requirements, Neal F. Newman, Lawrence J. Trautman, Brian Elzweig

Faculty Scholarship

In addition to regulation of securities market issuers, the Securities & Exchange Commission (SEC) is also responsible for regulation of those entities that provide the networks, either electronic or physical, that enable the functioning of our securities markets. On February 9, 2022, the Commission published a Release for Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies containing proposals that, if adopted, would establish a new cybersecurity incident reporting and disclosure regime and require registered investment advisers (“advisers”) and investment companies (“funds”) to implement policies and procedures designed to address cyber risks. The comment period for …

Oriented Data-Generating Processes: A Categorization Of Roc Curves, Claude Fluet, Murat C. Mungan

Faculty Scholarship

Decision makers attempting to classify a binary state of the world may commit two types of errors. Even when the two alternative states have equal prior probabilities and when the two types of errors are equally costly, a classification criterion may be chosen which leads to one type of error being committed more frequently than the other, because of asymmetries in the data that informs their decisions. We formalize this possibility through a categorization of data-generating processes (DGPs), which may be ‘oriented’ towards evidence favoring one of the two alternatives, or which may be ‘unoriented’. We identify the shape properties …

Is R&D Rivalry Slowing The Growth Of Productive Firms?, Yoshiki Ando, James Bessen, Xiupeng Wang

Faculty Scholarship

The reallocation of jobs to more productive firms is a substantial component of aggregate productivity growth, yet job reallocation rates have declined substantially in the United States. This paper explores the hypothesis that greater technological rivalry has exacerbated adjustment costs, slowing reallocation. Using microdata at the US Census and estimates of technological rivalry in firm growth regressions, we find that technological rivalry slows firm responses to productivity shocks. Firms do not expand as rapidly in the face of higher obsolescence risk. Estimating counterfactual firm growth from 1997-2018, we find that growing technological rivalry accounts for most of the decline in …

The Potential And Perils Of Financializing Climate Risk Governance: Insights For Urban Policymakers, Emma Colven, Madison Condon, Kelly Hereid, Savannah Cox

Faculty Scholarship

In this roundtable discussion, Savannah Cox speaks with three experts about the financialization of climate risk governance: Kelly Hereid, a climate scientist at Liberty Mutual, Madison Condon, an associate professor at Boston University School of Law, and Emma Colven, a lecturer in risk, environment, and society at King’s College London. In this conversation that ranges from Miami to Jakarta, Savannah, Kelly, Madison, and Emma discuss the legal, political, and technical challenges relating to financialized climate risk governance: on one hand, the rise of insurance companies and rating agencies as de facto “risk assessors” and, on the other hand, the proliferation …

On Simple Competition Policy, Keith N. Hylton

Faculty Scholarship

These remarks address the topic of “simple competition policy for a complex world”.[1] There is much to be said in favor of simplicity in legal rules. Complex legal rules are often difficult for the individuals who must comply with the rules to understand what they mean. Complex rules are often confusing, and take a long time to understand, when in the real business world decisions must be made quickly – at the pace at which business occurs. Businessmen do not have the luxury that academics possess to read, discuss, and think about rules for long periods of time. Markets …

The Rising Returns To R&D: Ideas Are Not Getting Harder To Find, Yoshiki Ando, James Bessen, Xiupeng Wang

Faculty Scholarship

R&D investment has grown robustly, yet aggregate productivity growth has stagnated. Is this because “ideas are getting harder to find”? This paper uses micro-data from the US Census Bureau to explore the relationship between R&D and productivity in the manufacturing sector from 1976 to 2018. We find that both the elasticity of output (TFP) with respect to R&D and the marginal returns to R&D have risen sharply. Exploring factors affecting returns, we conclude that R&D obsolescence rates must have risen. Using a novel estimation approach, we find consistent evidence of sharply rising technological rivalry. These findings suggest that R&D has …

The "Not Seen" Effect Of International Financial Centers: Innovation In The Global Financial Ecosystem, Charlotte Ku, Andrew P. Morriss

Faculty Scholarship

International Financial Centers (IFCs) are hubs of legal and financial innovation, developing specialized frameworks that facilitate cross-border investment, enhance global capital mobility, and support economic growth. Through jurisdictional competition, professional clustering, and adaptive regulatory frameworks, IFCs have pioneered legal structures that enable enterprises of all sizes to participate in the global economy. Using case studies of the International Business Company, the Limited Liability Company, the Protected Cell Company, and advances in trust law and applying the theoretical frameworks of social scientist Richard Florida and psychologist Mihalyi Csikszentmihalyi, this Article illustrates how IFCs serve as laboratories for financial experimentation, generating widely …

The Sec, Fraud, And Cryptocurrencies, Lawrence J. Trautman, Brian Elzweig, Neal F. Newman

Faculty Scholarship

The SEC’s Strategic Plan for Fiscal Years 2022–2026 is focused on the impact of the rapidly developing rate of change in new technologies that provide for markets to be more interconnected and interdependent than ever. Because Congress has yet to give the SEC, or any other agency, express authority to regulate cryptocurrency, the SEC has taken a regulation-by-enforcement approach. The SEC’s recent enforcement efforts relating to crypto asset securities were substantial, with enforcement actions addressing a range of alleged misconduct in the crypto asset securities space, including billion- dollar crypto fraud schemes; unregistered crypto asset offerings, platforms, and intermediaries; and …

Law And Political Economy: Missing Markets, Missing Law, And Missing Political Economy, Andrew P. Morriss, Roger E. Meiners

Faculty Scholarship

This Article critiques the "Law and Political Economy" (LPE) framework. It aims to challenge the Law and Economics (L&E) approach. We argue that LPE lacks a coherent theoretical foundation and fails to engage with empirical evidence, rendering its critiques of markets, law, and political economy incomplete and unpersuasive. By contrast, L&E provides robust analytical tools and a well-developed understanding of legal and market dynamics, is grounded in empirical research, and has theoretical consistency. We illustrate these points through historical examples in the evolution of L&E and suggest ways LPE can evolve to offer a meaningful alternative. Rigorous intellectual competition will …

Against Monetary Primacy, Yair Listokin, Rory Van Loo

Faculty Scholarship

To reduce inflation, the Federal Reserve (Fed) raises interest rates. But every month with high interest rates increases the risk of a devastating recession. Recessions impose not only short-term pain in the form of widespread unemployment but also lifelong harm for many, as vulnerable workers and those who start their careers during a downturn never fully recover. Yet hiking interest rates is the centerpiece of U.S. inflation-fighting policy. When inflation is high, the Fed raises interest rates until inflation is tamed, regardless of the consequent sacrifices. We call this inflation-fighting paradigm “monetary primacy.” Despite its great risks, monetary primacy has …

Sex & Startups, Jens Frankenreiter, Talia B. Gillis, Eric L. Talley

Faculty Scholarship

Private law offers a unique solution to the problem of long-term fiscal commitment. When Congress enacts a spending program that will take many years to reach fruition, there is a risk of a subsequent Congress or President cutting off funding in the interim. There is no escape from the problem within appropriations law itself. One solution, however, is to entrust private sector allies as vessels of long-term commitment. As a matter of political economy, that solution draws on policy-feedback theory. As a matter of law, the solution rests on a mechanism that Congress already uses but has not recognized its …

Legal Market Decartelization, Milan Markovic, Nuno Garoupa

Faculty Scholarship

American lawyers’ grip on the legal market is receding. Scholars and policymakers increasingly agree that the public has little to lose and potentially much to gain from legal market decartelization - the weakening of the lawyers’ monopoly over the legal services market. Harkening to deregulatory initiatives abroad and in Arizona and Utah, reformers contend that removing restrictions on the corporate delivery of legal services and unauthorized practice of law will slash costs and expand access to justice.

Drawing on economic theory and recent market developments, this Article offers a cautionary rejoinder. Understandable concerns about cartelization and lawyer rent-seeking have led …

Micro-Costs, Kiel Brennan-Marquez, Brendan S. Maher

Faculty Scholarship

The modern world is filled with tiny attentional impositions (cognitiveasks) that inflict small mental burdens (micro-costs) on virtually everyone, everywhere, all the time. Micro-costs make life worse, and everybody knows it. They sap collective energy; they lead to worse decisions; they exacerbate inequality; and they contribute to an overall sense of "mismanagement" in the world, a sentiment that readily pairs with destructive political impulses.

Yet the law has essentially ignored micro-costs-until now. In what follows, we construct a theory of micro-costs that gives the phenomenon analytic shape and charts a path forward for reform. Drawing on the insights of philosophy, …

Debt Tokens, Andrea Tosato, Diane Lourdes Dick, Christopher K. Odinet

Faculty Scholarship

The worlds of crypto and bankruptcy have collided. Once-prominent, fast-growing, and even politically influential platforms for trading cryptocurrencies have imploded spectacularly. Gone are the glossy advertisements, celebrity endorsements, and proclamations that blockchain operates as a law unto itself. Instead, insolvent crypto businesses—including the crypto exchange giant FTX—find themselves in bankruptcy court, no different from any other failed enterprise. These bankruptcies reveal a startling reality: individual investors who placed their trust in these platforms have been stripped of their digital assets. In their stead, they hold hard-to-collect claims against these defunct platforms.

Amid the chill of the crypto winter, bankruptcy has …