Law and Economics Commons^™

The Ftc And State Action: Evolving Views On The Proper Role Of Government, John T. Delacourt, Todd Zywicki

George Mason University School of Law Working Papers Series

The state action doctrine was born in an era of exceptional confidence in government, with governmental entities widely regarded as unbiased and conscientious defenders of the public interest. Over time, however, more cautious and skeptical theories of government began to gain sway. In particular, the school of thought known as “public choice” – which holds that governmental entities, like private firms, will act in their economic self-interest – began to influence both legal theory and competition policy. Indeed, a close examination of recent state action case law suggests that public choice thinking has driven a slow, but consistent, evolution of …

Antitrust And Inefficient Joint Ventures: Why Sports Leagues Should Look More Like Mcdonald’S And Less Like The United Nations, Stephen F. Ross

ExpressO

Antitrust law generally favors joint ventures that allow separate firms to integrate economic functions while continuing to compete as independent entities. In evaluating the risks to competition that joint ventures could pose, insufficient attention has been paid to the risk that joint ventures with market power may be structured so that the parties, acting in their independent self-interest, will prevent the venture from providing innovative goods and services responsive to consumer demand. In these cases, it may be better if a single firm provided services rather than having them provided jointly.

We illustrate this problem by challenging the conventional wisdom …

Are Public Sector Assets By Nature Insuitable For Financing Transnational Investments? , Lucien A. Rapp

ExpressO

Does the legal regime applicable to publicly owned assets constitute a policy instrument to protect public investment? In what way can this benefit public sector property ? Are the structures of the regime sufficiently well established to provide investors with enough certainty?

This paper aims to answer these questions by taking a trans-national perspective. The main concern is to resolve the problems of ownership or non-ownership of public sector assets in the context of financing trans-national investments.

This paper responds to this issue by examining (in two stages) the various consequences for trans-national investment; the first regarding the acquisition of …

Insider Trading: Hayek, Virtual Markets And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

Insider Trading: Hayek, Virtual Markets, And The Dog That Did Not Bark, Henry G. Manne

ExpressO

This Essay briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the …

The North Korean Nuclear Crisis: Past Failures And Present Solutions, Morse Tan

ExpressO

North Korea has recently announced that it has developed nuclear weapons and has pulled out of the six-party talks. These events do not emerge out of a vacuum, and this article lends perspective based on an interdisciplinary lens that seeks to grapple with the complexities and provide constructive approaches based on this well-researched understanding. This article analyzes political, military, historical, legal and other angles of this international crisis.

Past dealings with North Korea have been unfruitful because other nations do not recognize the ties between North Korean acts and its ideology and objectives. For a satisfactory resolution to the current …

From St. Ives To Cyberspace: The Modern Distortion Of The Medieval 'Law Merchant', Stephen E. Sachs

ExpressO

Modern advocates of corporate self-regulation have drawn unlikely inspiration from the Middle Ages. On the traditional view of history, medieval merchants who wandered from fair to fair were not governed by domestic laws, but by their own lex mercatoria, or "law merchant." This law, which uniformly regulated commerce across Europe, was supposedly produced by an autonomous merchant class, interpreted in private courts, and enforced through private sanctions rather than state coercion. Contemporary writers have treated global corporations as descendants of these itinerant traders, urging them to replace conflicting national laws with a law of their own creation. The standard history …

Price, Path & Pride: Third-Party Closing Opinion Practice Among U.S. Lawyers (A Preliminary Investigation), Jonathan C. Lipson

ExpressO

This article presents the first in-depth exploration of third-party closing opinions, a common but curious – and potentially troubling -- feature of U.S. business law practice. Third-party closing opinions are letters delivered at the closing of most large transactions by the attorney for one party (e.g., the borrower) to the other party (e.g., the lender) offering limited assurance that the transaction will have legal force and effect.

Hundreds, if not thousands, of legal opinions are delivered every week. Yet, lawyers often complain that they create needless risk and cost, and produce little benefit. Closing opinions thus pose a basic question: …

Why "Bad" Patents Survive In The Market And How Should We Change?--The Private And Social Costs Of Patents, Jay P. Kesan

ExpressO

In this paper, we formally demonstrate that incorrectly issued patents can survive in the market without judicial review, even when the invention is neither novel nor non-obvious. We support this contention by presenting a game theoretic model that studies the interaction between the patentee and an alleged infringer/challenger. Using this model, we demonstrate the impact of the transaction costs in the patent system at the administrative stage in the Patent Office and at the enforcement stage in the courts, and highlight the inability in our current system to mount effective challenges to improperly granted patents in the current system. We …

Communication Breakdown?: The Future Of Global Connectivity After The Privatization Of Intelsat, Kenneth D. Katkin

ExpressO

In 1971, 85 nations (including the United States) formed the International Telecommunications Satellite Organization “INTELSAT,” a public intergovernmental treaty organization. INTELSAT was charged with operating the world’s first global telecommunications satellite system, in order to guarantee the interconnectedness of the world’s communications systems and the availability of international telecommunications service to every nation on earth. By the late 1980s, however, INTELSAT’s operations began to experience substantial competition from the private sector. In 2000, the proliferation of privately-owned telecommunications satellites and transoceanic fiber optic cables led the U.S. Congress to mandate the privatization of INTELSAT. That privatization process began in 2001, …

Patterns In A Complex System: An Empirical Study Of Valuation In Business Bankruptcy Cases, Bernard Trujillo

ExpressO

This Article applies complex systems research methods to explore the characteristics of the bankruptcy legal system, presenting the results of an empirical study of twenty years of bankruptcy court valuation doctrine in business cramdown cases. These data provide solid descriptions of how courts exercise their discretion in valuing firms and assets.

This Article accomplishes two objectives: First, using scientific methodology, this Article explains the content of bankruptcy valuation doctrine. Second, this Article uses doctrine as a variable to explore system dynamics that govern the processes of change over time.

Significant findings include (i) courts tend to “split the difference” in …

The Legal Status Of “Dump & Sue”: Should Plaintiffs And Their Attorneys Be Prohibited From Trading The Stock Of Companies They Sue? – A Law And Economics Approach, Moin A. Yahya

ExpressO

There is some evidence that plaintiffs and their attorneys are profitably short-selling the stock of the companies they intend to sue. The status of such short sales is undecided in the law. Lawsuits against companies can cause large drops in market value, and hence such an action by the plaintiff should cause concern. Plaintiffs, however, are not traditional insiders, and they do not owe the shareholders any fiduciary duties. They can therefore consent to their attorneys also short-selling the stock of the defendant corporation. The attorneys need to receive such permission to avoid misappropriating the information concerning their client’s decision …

The Supreme Court And The Trusts: Antitrust And The Foundations Of Modern American Business Regulation From Knight To Swift, Donald J. Smythe

ExpressO

The period from 1870-1920 was a turning point in modern history. It was during this time that the contours of the modern industrial state were formed. A “Great Merger Movement” occurred right in the middle of this period across most of the industrialized nations of the world. The trend toward industrial concentration, which was known at the time as the “trust problem,” generated considerable public alarm. Some have argued that it was caused by antitrust policy and the Supreme Court’s early antitrust decisions. Indeed, the idea has become the conventional wisdom among some antitrust scholars, especially those connected with the …

A Response To Professor Goldberg: An Anticompetitive Restraint By Any Other Name..., Timothy J. Muris

George Mason University School of Law Working Papers Series

In ignoring the facts of the Three Tenors case and the transactions costs of legal rulemaking, Professor Goldberg would unnecessarily complicate antitrust law to the detriment of consumers. Contrary to his assertions, the FTC’s opinion does not favor ownership over contract. The parties could have chosen to coordinate Three Tenors products and promote a “brand,” but their contract explicitly provided otherwise. For a small class of cases – in which the parties restrain basic forms of competition such as price or advertising without a claim of consumer benefit – antitrust law avoids the costs of finding market power. In any …

Institutions, Incentives, And Consumer Bankruptcy Reform, Todd Zywicki

George Mason University School of Law Working Papers Series

Consumer bankruptcy filing rates have soared during the past 25 years. From 225,000 filings in 1979, consumer bankruptcies topped 1.5 million during 2004. This relentless upward trend is striking in light of the generally high prosperity, low interest rates, and low unemployment during that period. This anomaly of ever-upward bankruptcy filing rates during a period of economic prosperity had spurred calls to reform the Bankruptcy Code to place new conditions on bankruptcy relief. Although bankruptcy reform has drawn broad bipartisan support on Capitol Hill, these proposals have proven controversial within the academy. Critics have argued that these reforms are unnecessary …

The False Promise Of De-Regulation In Banking, Jonathan R. Macey

ExpressO

Jonathan R. Macey

The False Promise of De-Regulation in Banking

Abstract

This Article presents new approach to the concept of "deregulation" in financial services and particularly banking. Generally regulatory policy is thought to involve more or less straightforward choices between regulation and deregulation. Those most concerned with market failure and equality of outcomes favoring regulation and those with faith in markets and concerns about efficient outcomes favoring deregulation.

This Article shows that government regulation, sometimes in heavy doses, is necessary in order for private markets to function effectively. Consequently, government has in important role to play in fostering markets. The …

The Deep Structure Of Law And Morality, Robin B. Kar

ExpressO

This Article argues that morality and law share a deep and pervasive structure, an analogue of what Noam Chomsky calls the “deep structure” of language. This structure arises not to resolve linguistic problems of generativity, but rather from the fact that morality and law engage psychological adaptations with the same natural function: to allow us to resolve social contract problems flexibly. Drawing on and extending a number of contemporary insights from evolutionary psychology and evolutionary game theory, this Article argues that we resolve these problems by employing a particular class of psychological attitudes, which are neither simply belief-like states nor …

Overcoming Poletown: County Of Wayne V. Hathcock, Economic Development Takings, And The Future Of Public Use, Ilya Somin

George Mason University School of Law Working Papers Series

County of Wayne v. Hathcock is an important step forward in public use takings law. The Michigan Supreme Court was right to overturn its notorious 1981 Poletown decision and forbid condemnations that transfer property to private parties solely on the grounds that the new owners will contribute to “economic development.” Poletown was the best known and most widely criticized decision justifying a nearly unlimited condemnation power.

As the Poletown case dramatically demonstrates, the economic development rationale is a virtual blank check for eminent domain abuse for the benefit of private parties. Poletown upheld a condemnation as a result of which …

Soft Regulators, Tough Judges, Gerrit De Geest, Giuseppe Dari-Mattiacci

George Mason University School of Law Working Papers Series

Judges have a tendency to be more demanding than regulators. In the United States, a majority of the courts has adopted the rule that the unexcused violation of a statutory standard is negligence per se. However, the converse does not hold: compliance with regulation does not relieve the injurer of tort liability. In most European legal systems, the outcome is similar. We use a framework in which, on the one hand, the effects of tort law are undermined by insolvency and evidence problems and, on the other hand, regulation is expensive in terms of monitoring and information gathering. We show …

The "Duty" To Be A Rational Shareholder, David A. Hoffman

ExpressO

How and when do courts determine that corporate disclosures are actionable under the federal securities laws? The applicable standard is materiality: would a (mythical) "reasonable investor" have considered the disclosures important. As I establish through empirical and statistical testing of 500 cases analyzing the materiality standard, judicial findings of immateriality are remarkably common, and have been stable over time. Materiality's scope results in the dismissal of a large number of claims, and creates a set of cases in which courts attempt to explain and defend their vision of who is, and is not, a "reasonable investor." Thus, materiality provides an …

The Missing Preferred Return, Victor Fleischer

ExpressO

Managers of buyout funds typically offer their investors an 8% preferred return on their investment before they take a share of any additional profits. Venture capitalists, on the other hand, rarely offer a preferred return. Instead, VCs take their cut from the first dollar of nominal profits. This disparity between venture funds and buyout funds is especially striking because the contracts that determine fund organization and compensation are otherwise very similar. The missing preferred return might suggest that agency costs pose a larger problem in venture capital than previously thought. Is the missing preferred return evidence, perhaps, that VCs are …

Taxing Utility, Terrence Chorvat

George Mason University School of Law Working Papers Series

In order to assess the efficiency of a tax, we should examine its effect on the behavior of individuals. In general, the less a tax affects behavior, the more efficient it is thought to be. The standard example of a non-distorting tax is a lump-sum tax, which does not change with the behavior of the taxpayer. However, this article demonstrates that behavioral distortions can and do arise from a change in even a lump-sum tax. The only truly non-distortionary tax would be one based on utility itself. Utility, which has been used as a norm for distributional analysis, is also …

What Is A Tragedy Of The Commons? Overfishing And The Campaign Spending Problem, Shi-Ling Hsu

ExpressO

Over the thirty-seven years since its publication, Garden Hardin's "Tragedy of the Commons" has clearly become one of the most influential writings of all time. The tragedy of the commons is one of those rare scholarly ideas that has had an enormous impact in academia and is also commonly used outside of academia. In legal scholarship, the tragedy of the commons has been used to characterize a wide variety of resource problems, including intellectual property rights, overcrowding of telecommunications spectra, air and water pollution, and of course, the classic environmental commons problem, overfishing. But I suggest this embarrassment of citation …

The Risks Of And Reactions To Underdeterrence In Torts, Thomas C. Galligan

ExpressO

The Risks of and Reactions to Underdeterrence in Torts posits that as our nation considers tort reform at both the state and federal levels, it should not be blinded to the fact that, while tort law may, in some cases, overdeter, it also may underdeter, especially in mass tort cases. The piece contends that the traditional (one-on-one) model of tort law may both cause and exacerbate the underdeterrence problems and, consequently, alternative models (class action, augmented awards, and public tort suits) must be considered and analyzed. The piece proceeds to compare and contrast the strengths and weaknesses of each of …

The Cyclical Transformations Of The Coporate Form: A Historical Pespective On Corporate Social Responsibility, Reuven S. Avi-Yonah

Law & Economics Working Papers Archive: 2003-2009

This Article describes the transformations underwent by the corporate form from its Roman origins to the present. It shows that every time there was a shift in the role of the corporation, three theories of the corporation (the aggregate, artificial, and real entity theories) were brought forward in cyclical fashion. However, every time the real entity theory prevailed, and it is the dominant theory during periods of stability in the relationship between the corporation, the shareholders, and the state. The article describes this evolution in detail, and then attempts to derive normative consequences for the legitimacy of corporate social responsibility …

Organizational Misconduct: Beyond The Principal-Agent Model, Kimberly D. Krawiec

ExpressO

This article demonstrates that, at least since the adoption of the Organizational Sentencing Guidelines in 1991, the United States legal regime has been moving away from a system of strict vicarious liability toward a system of duty-based organizational liability. Under this system, organizational liability for agent misconduct is dependant on whether or not the organization has exercised due care to avoid the harm in question, rather than under traditional agency principles of respondeat superior. Courts and agencies typically evaluate the level of care exercised by the organization by inquiring whether the organization had in place internal compliance structures ostensibly designed …

Western Institution Building: The War, Hayek’S Cosmos And The Wto, M. Ulric Killion

ExpressO

Despite the shortcomings of Hayek’s spontaneous order, there is a positive side, perhaps even a positive feedback. Hayek left us with a “what if” question and returns us to that initial opening of Pandora’s Box, or perhaps the initial onset of neo-realism, neo-liberalism, developmentalism, globalism, transnationalism and other concepts, precepts and adjectives justifying institution building by bargaining and military force. In terms of new world order, institution building by necessity requires fundamental changes in governmental structures in non-western cultures and nation-states such as China, Afghanistan and Iraq. Such changes are being prompted by means of political, economic and military powers …

World Trade Organization’S Identity Crisis: Institutional Legitimacy And Growth Potential In The Developing World, Jason Wiener

ExpressO

No abstract provided.

Disappearing Defendants V. Judgment Proof Injurers: Upgrading The Theory Of Tort Law Failures, Giuseppe Dari-Mattiacci, Barbara Mangan

George Mason University School of Law Working Papers Series

Do injurers’ insolvency and victims’ reluctance to sue affect accident prevention in the same way? Are these circumstances less of a problem under the negligence rule than under strict liability? We argue, contrary to the literature, that the answer is, in most cases, negative and make three main points. First, the judgment proof problem and the disappearing defendant problem are shown to have different effects on injurers’ behavior and hence yield dissimilar levels of social welfare. Second, when these two problems occur simultaneously they may have offsetting effects. Third, the negligence rule is superior to strict liability only under some …

How Liability Distorts Incentives Of Manufacturers To Recall Products, Omri Ben-Shahar

Law & Economics Working Papers Archive: 2003-2009

The nature and likelihood of harms associated with products may be revealed over time. As more information is gathered, a manufacturer must decide whether to continue selling the product as is, or to recall it. The paper shows that existing products liability law gives the manufacturers bad incentive to recall products. It shows, counter-intuitively, that as the post-recall liability becomes more severe, manufacturers would be more likely to leave products in the market longer and more often than is socially desirable. It also demonstrates that the law hurts the incentives of manufacturers to acquire better information about the riskiness of …