Law and Economics Commons^™

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Stephen J. Choi, Robert E. Scott, G. Mitu Gulati

Faculty Scholarship

The textbook model of commercial contracts between sophisticated parties holds that terms are proposed, negotiated and ultimately priced by the parties. Parties reach agreement on contract provisions that best suit their transaction with the goal of maximizing the joint surplus from the contract. The reality, of course, is that the majority of the provisions in contemporary commercial contracts are boilerplate terms derived from prior transactions and even the most sophisticated contracting parties pay little attention to these standard terms, focusing instead on the price of the transaction. With standard-form or boilerplate contracts, this dynamic of replicating by rote the terms …

Some Issues On The Law Of Direct Damages (Us And Uk), Victor P. Goldberg

Faculty Scholarship

When a contract is breached, both U.S. and U.K. law provide that the non-breaching party should be made whole. The Uniform Commercial Code (“UCC”) provides that “[t]he remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.” The English version, going back to Robinson v. Harman, is “that where a party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the same situation, with …

Why Financial Regulation Keeps Falling Short, Dan Awrey, Kathryn Judge

Faculty Scholarship

This article argues that there is a fundamental mismatch between the nature of finance and current approaches to financial regulation. Today’s financial system is a dynamic and complex ecosystem. For these and other reasons, policy makers and market actors regularly have only a fraction of the information that may be pertinent to decisions they are making. The processes governing financial regulation, however, implicitly assume a high degree of knowability, stability, and predictability. Through two case studies and other examples, this article examines how this mismatch undermines financial stability and other policy aims. This examination further reveals that the procedural rules …

How To Help Small Businesses Survive Covid-19, Todd Baker, Kathryn Judge

Faculty Scholarship

Small businesses are among the hardest hit by the COVID-19 crisis. Many are shuttered, and far more face cash flow constraints, raising questions about just how many will survive this recession. The government has responded with a critical forgivable loan program, but for many of these businesses, this program alone will not provide the cash they need to retain workers, pay rent, and help their business come back to life when Americans are no longer sheltering in place. This essay calls on regulators to find new and creative ways to work with existing intermediaries, including banks and online lenders, who …

The Essential Roles Of Agency Law, Gabriel Rauterberg

Faculty Scholarship

This Article suggests a fundamental shift in how we think about agency The essential function of agency law lies not only in enabling the delegation of authority, as is widely suggested, but as significantly in its effect on creditors’ rights through asset partitioning There is an increasing temptation in legal scholarship to treat agency law as a sideshow confined to the first day of corporations class This is because much of what agency law does in commerce could simply be accomplished through standard-form contracts that provide default terms for the relationships among firms, their managers, and third parties Even agency’s …

Building A Law-And-Political-Economy Framework: Beyond The Twentieth-Century Synthesis, Jedediah S. Purdy, David Singh Grewal, Amy Kapczynski, K. Sabeel Rahman

Faculty Scholarship

We live in a time of interrelated crises. Economic inequality and precarity, and crises of democracy, climate change, and more raise significant challenges for legal scholarship and thought. “Neoliberal” premises undergird many fields of law and have helped authorize policies and practices that reaffirm the inequities of the current era. In particular, market efficiency, neutrality, and formal equality have rendered key kinds of power invisible, and generated a skepticism of democratic politics. The result of these presumptions is what we call the “Twentieth-Century Synthesis”: a pervasive view of law that encases “the market” from claims of justice and conceals it …

Picking The Low-Hanging Fruit: A Short Essay For Michael Klausner, Ronald J. Gilson

Faculty Scholarship

The articles that comprise this issue of the Journal of Corporation Law were first presented at a conference held at the Wharton School and co-sponsored by Wharton together with Columbia and Stanford Law Schools. The event was organized by my friend Peter Conti-Brown, to whom I am grateful for both the thought and the effort. Standing alone, the thought that the conference was warranted would have been extremely generous. However, anyone who has organized a conference knows that the idea for such events can be exciting, but what follows is an amount of work that had it been anticipated would …

Innovation Versus Encrustation: Agency Costs In Contract Reproduction, Stephen J. Choi, Mitu Gulati, Robert E. Scott

Faculty Scholarship

This article studies the impact of exogenous legal change on whether and how lawyers across four different deal types revise their contracts’ governing law clauses in order to solve the problem that the legal change created. The governing law clause is present in practically every contract across a wide range of industries and, in particular, it appears in deals as disparate as private equity M&A transactions and sovereign bond issuances. Properly drafted, the clause increases the ex ante economic value of the contract to both parties by reducing uncertainty and litigation risk. We posit that different levels of agency costs …

Enhancing Efficiency At Nonprofits With Analysis And Disclosure, David M. Schizer

Faculty Scholarship

The U.S. nonprofit sector spends $2.54 trillion each year. If the sector were a country, it would have the eighth largest economy in the world, ahead of Brazil, Italy, Canada, and Russia. The government provides nonprofits with billions in tax subsidies, but instead of evaluating the quality of their work, it leaves this responsibility to nonprofit managers, boards, and donors. The best nonprofits are laboratories of innovation, but unfortunately some are stagnant backwaters, which waste money on out-of-date missions and inefficient programs. To promote more innovation and less stagnation, this Article makes two contributions to the literature.

First, this Article …

Why The Fed Should Issue A Policy Framework For Credit Policy, Kathryn Judge

Faculty Scholarship

The Federal Reserve has long used policy frameworks to both explain and inform its policymaking. These policy frameworks typically explain what the Fed is seeking to achieve in a given domain and how it plans to achieve its desired aims. Two prominent examples are the Fed’s use of Bagehot’s dictum when acting as a lender of last resort and its monetary policy framework issued in 2012 and revised in 2020. In both instances, the framework provides a foundation for informed debate among Fed policymakers, Congress, and the public, enhancing both efficacy and accountability. Since the onset of the Covid crisis, …

Executive Underreach, In Pandemics And Otherwise, David E. Pozen, Kim Lane Scheppele

Faculty Scholarship

Legal scholars are familiar with the problem of executive overreach, especially in emergencies. But sometimes, instead of being too audacious or extreme, a national executive's attempts to address a true threat prove far too limited and insubstantial. In this Essay, we seek to define and clarify the phenomenon of executive underreach, with special reference to the COVID-19 crisis; to outline ways in which such underreach may compromise constitutional governance and the international legal order; and to suggest a partial remedy.

The Problems With Decision-Making, Joanna K. Sax

Faculty Scholarship

Our society faces major challenges in numerous areas, including climate change and healthcare. Addressing these problems with technological advances are of great importance. Increasingly, however, consumers are resisting or rejecting such technological interventions based on inappropriate assignment of risk. In other words, the consumer assessment of risk is not in line with evidence-based assessment of risk. This article focuses on two controversial areas, vaccines and genetically engineered food, as examples in which consumers assign a high risk despite an evidence-based assessment of low risk. This article describes how empirically tested decision-making theories explain why consumers inappropriately assign risk. While these …

Race And Bankruptcy: Explaining Racial Disparities In Consumer Bankruptcy, Edward R. Morrison, Belisa Pang, Antoine Uettwiller

Faculty Scholarship

African American bankruptcy filers select Chapter 13 far more often than other debtors, who opt instead for Chapter 7, which has higher success rates and lower attorneys’ fees. Prior scholarship blames racial discrimination by attorneys. We propose an alternative explanation: Chapter 13 offers benefits, including retention of cars and driver’s licenses, that are more valuable to African American debtors because of relatively long commutes. We study a 2011 policy change in Chicago, which seized cars and suspended licenses of consumers with large traffic-related debts. The policy produced a large increase in Chapter 13 filings, especially by African Americans. Two mechanisms …

The Paradox Of Contracting In Markets, Robert E. Scott

Faculty Scholarship

Traditional economic analysis distinguishes economic organization along three dimensions: firm, contract, and market. This categorization is misleading in any number of respects, but none more so than the assumption that contract and market are separate modes of exchange. In fact, other than barter, which is almost unknown in contemporary commercial transactions, every market transaction is implemented by contract. Thus, in markets the two modes of exchange are inextricably combined. Moreover, the vast majority of contract activity occurs in some form of market, so it does not require much loss of generalization to say that not only are contracts in all …

Anticipating Venezuela's Debt Crisis: Hidden Holdouts And The Problem Of Pricing Collective Action Clauses, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

A creditor who asks for stronger enforcement rights upon its debtor’s default will rationally accept a lower interest rate reflecting the greater expected recovery the exercise of those rights provides. Over a dozen studies, however, have failed to document this basic relationship in the context of the collective action clause, a key provision in sovereign bonds. We conjecture that this failure is because enforcing the rights in question requires collective decision-making among anonymous creditors with different interests, impeding market predictions regarding future price effects. The pricing of rights that require collective enforcement thus turns on whether the market observes an …

What Do Lawyers Contribute To Law & Economics?, Robert E. Scott, George G. Triantis

Faculty Scholarship

The law-and-economics movement has transformed the analysis of private law in the United States and, increasingly, around the world. As the field developed from 1970 to the early 2000s, scholars have developed countless insights about the operation and effects of law and legal institutions. Throughout this period, the discipline of law-and-economics has benefited from a partnership among trained economists and academic lawyers. Yet the tools that are used derive primarily from economics and not law. A logical question thus demands attention: what role do academic lawyers play in law-and-economics scholarship? In this Essay, we offer an interpretive theory of the …

For Coöperation And The Abolition Of Capital, Or, How To Get Beyond Our Extractive Punitive Society And Achieve A Just Society, Bernard E. Harcourt

Faculty Scholarship

In hindsight, the term "capitalism" was always a misnomer, coined paradoxically by its critics in the nineteenth century. The term misleadingly suggests that the existence of capital produces a unique economic system or that capital itself is governed by economic laws. But that's an illusion. In truth, we do not live today in a system in which capital dictates our economic circumstances. Instead, we live under the tyranny of what I would call "tournament dirigisme": a type of state-directed gladiator sport where our political leaders bestow spoils on the wealthy, privileged elite.

We need to displace this tournament dirigisme with …

Rule By Data: The End Of Markets?, Katharina Pistor

Faculty Scholarship

This Article explores data as a source and, in their processed variant, as a means of governance that will likely replace both markets and the law. Discussing data not as an object of transactions or an object of governance, but as a tool for governing others on a scale that rivals that of nation states with their law, seems a fitting topic for a special issue that is devoted to the legal construction of markets. Here, I argue that while it may well be the case that law constitutes markets, markets are not the only way in which economic relations …

In Defense Of Empiricism In Family Law, Elizabeth S. Scott

Faculty Scholarship

It is fitting to include an essay defending the application of empirical research to family law and policy in a symposium honoring the scholarly career of Peg Brinig, who is probably the leading empiricist working in family law. While such a defense might seem unnecessary, given the expanding role of behavioral, social, and biological research in shaping the regulation of children and families, prominent scholars recently have raised concerns about the trend toward reliance on empirical science in this field. A part of the criticism is directed at the quality of the science itself and at the lack of sophistication …

The Race To The Middle, William Magnuson

Faculty Scholarship

How does federalism affect the quality of law? It is one of the fundamental questions of our constitutional system. Scholars of federalism generally fall into one of two camps on the question. One camp argues that regulatory competition between states leads to a “race to the bottom,” in which states adopt progressively worse laws in order to pander to powerful constituencies. The other camp, conversely, argues that regulatory competition leads to a “race to the top,” incentivizing states to adopt progressively better laws in the search for more desirable outcomes for their constituencies. Despite their apparent differences, however, both the …

The Supreme Court Bar At The Bar Of Patents, Paul Gugliuzza

Faculty Scholarship

Over the past two decades, a few dozen lawyers have come to dominate practice before the U.S. Supreme Court. By many accounts, these elite lawyers—whose clients are often among the largest corporations in the world—have spurred the Court to hear more cases that businesses care about and to decide those cases in favor of their clients. The Supreme Court’s recent case law on antitrust, arbitration, punitive damages, class actions, and more provides copious examples.
/="/">
/="/">Though it is often overlooked in discussions of the emergent Supreme Court bar, patent law is another area in which the Court’s agenda has …

Error Costs, Ratio Tests, And Patent Antitrust Law, Keith N. Hylton, Wendy Xu

Faculty Scholarship

This paper examines the welfare tradeoff between patent and antitrust law. Since patent and antitrust law have contradictory goals, the question that naturally arises is how one should choose between the two in instances where there is a conflict. One sensible approach to choosing between two legal standards, or between proof standards with respect to evidence, is to consider the relative costs of errors. The approach in this paper is to consider the ratio of false positives to false negatives in patent antitrust. We find that the relevant error cost ratio for patent antitrust is the proportion of the sum …

Automation: A Guide For Policymakers, James Bessen, Maarten Goos, Anna Salomons, Wiljan Van Den Berge

Faculty Scholarship

Advancing technologies are increasingly able to fully or partially automate job tasks. These technologies range from robotics to machine learning and other forms of artificial intelligence, and are being adopted across many sectors of the economy. Applications range from selecting job applicants for interviewing, picking orders in a warehouse, interpreting X-rays to diagnose disease, and automated customer service. These developments have raised concern that workers are being displaced by advancing automation technology. Indeed, over 18 recent studies predict job losses from new automation technologies, including some predictions of massive job losses (Winick 2018). A large literature on worker displacement [1] …

Ranking For Good?: A Comparative Assessment Of The Performance Of French Corporations In Human Rights Rankings, Erika George, David Restrepo Amariles

Faculty Scholarship

This article proceeds as follows. First, it will define well-being and discuss the ways in which a range of human rights must be protected to promote well-being. Next, it will explain the ways businesses can impact well-being, for good or for ill. This will be followed by a discussion on the relevant legal and policy frameworks in France that regulate information relevant to the social and environmental impacts of business, including the Duty of Vigilance Law and the National Action Plan of France for Implementing the U.N. Guiding Principles on Business and Human Rights. Using examples of leading French multinational …

Response To Oliar And Stern: On Duration, The Idea/Expression Dichotomy, And Time, Wendy J. Gordon

Faculty Scholarship

Courts often use possession to determine who should own unclaimed resources. Yet, as Oliar and Stern demonstrate, the concept of possession is little more than a metaphor, capable of being applied to a broad range of phenomena. The authors helpfully deploy “time” as a metric to sort through the rules determining what should count as possession, and they survey the likely costs and benefits attached to choosing earlier versus later events as triggers for acquiring title.

With those tools in hand, Oliar and Stern employ “time” and the analogy of physical possession to address problems in copyright, patent, and trademark …

Revising Boilerplate: A Comparison Of Private And Public Company Transactions, Robert E. Scott, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

The phenomenon of “sticky boilerplate” causing inefficient contract terms to persist exists across a variety of commercial contract types. One explanation for this failure to revise suboptimal terms is that the key agents on these transactions, including attorneys and investment bankers, are short sighted; their incentives are to get the deal done rather than ensure that they are using the best terms possible for their clients. Moreover, these agents face a first mover disadvantage that deters unilateral revisions to inefficient terms. If agency costs are indeed driving the stickiness phenomenon, we expect that the pace of revision will vary across …

The Myth Of Optimal Expectation Damages, Theresa Arnold, Amanda Dixon, Madison Sherrill, Mitu Gulati

Faculty Scholarship

A much-debated question in contract law scholarship is what the optimal measure of damages for breach should be. The casebook answer-drawing from the theory of efficient breach-is expectation damages. This standard answer, which was a major contribution of the law and economics field, has come under attack by theoreticians within that field itself. To shed an empirical perspective on the question, we look at data on the types of damages provisions parties contract/or themselves in international debt contracts. Specifically, we examine issuer call provisions, which are economically equivalent to damages for prepayment, yet not viewed as legally problematic in the …

Bringing Relevance Back To Consumer Bankruptcy, Nathalie Martin

Faculty Scholarship

The Seventeenth Annual Emory Bankruptcy Developments Journal Symposium

This Paper presumes that readers want to make bankruptcy more useful for consumers and for society as a whole. If this is true, we need to ask two questions: first, what do individual consumers hope to get out of the system, and second, what does society hope to get out of the system?

Part I of this Paper discusses the increase in debt over the last two decades, the growing wage and income gap, growing debt inequality and race, and the fall of the CFPB, all justifications for using the bankruptcy system …

Index Funds And The Future Of Corporate Governance: Theory, Evidence, And Policy, Lucian Bebchuk, Scott Hirst

Faculty Scholarship

Index funds own an increasingly large proportion of American public companies. The stewardship decisions of index fund managers—how they monitor, vote, and engage with their portfolio companies—can be expected to have a profound impact on the governance and performance of public companies and the economy. Understanding index fund stewardship, and how policymaking can improve it, is thus critical for corporate law scholarship. In this Article we contribute to such understanding by providing a comprehensive theoretical, empirical, and policy analysis of index fund stewardship.
/="/">
/="/">We begin by putting forward an agency-costs theory of index fund incentives. Stewardship decisions by …

Common Ownership And Executive Incentives: The Implausibility Of Compensation As An Anticompetitive Mechanism, David I. Walker

Faculty Scholarship

Mutual funds, pension funds and other institutional investors are a growing presence in U.S. equity markets, and these investors frequently hold large stakes in shares of competing companies. Because these common owners might prefer to maximize the values of their portfolios of companies, rather than the value of individual companies in isolation, this new reality has lead to a concern that companies in concentrated industries with high degrees of common ownership might compete less vigorously with each other than they otherwise would. But what mechanism would link common ownership with reduced competition? Some commentators argue that one of the most …