Alan Schwartz, Yale Law School, Visiting New York University Law School.

Topic -   "The Law and Economics of Preliminary Agreements," Co-author Robert E. Scott

Abstract -  This article analyzes the emerging law of preliminary agreements. We first show that courts will not award damages for reliance unless the parties have reached agreement on sufficient material terms to support an inference that they wanted legal weight to attach to their understanding and the party wishing to exit the transaction has failed to negotiate further in good faith. Very substantial confusion remains, however, regarding how complete a preliminary agreement must be to justify enforcement, and what good faith requires. The initial task is to understand why parties sometimes write only preliminary agreements, make sunk cost investments under conditions of uncertainty, and sue each other over failed deals. We create a model that shows that commercial parties sometimes maximize profits by beginning projects that are too inchoate to describe in formal contracts. The parties nevertheless understand the nature of the project, the areas in which each has primary responsibility and the rough order in which their contributions are best made. Investment itself makes the ex ante efficient project sufficiently tangible to support a formal contract that will divide expected gains and describe the parties= future actions. There are, however, incentives for parties to engage in strategic behavior: A party who agrees to invest when her partner invests is motivated to delay investment to see how things turn out. If the deal would be unprofitable, the party who delays will not have sunk costs. If the project turns out to be profitable, the faithful party=s sunk costs will be ignored in the bargain while the unfaithful party will be compensated for costs incurred to make the project successful. Our analysis thus shows that breach is a deviation from the agreed investment sequence: in particular, breach is delay. Awarding the faithful party its verifiable reliance costs if the other has wrongfully delayed investment deters strategic behavior and encourages investment. We test our analysis against a large sample of appellate cases. The sample offers some evidence that parties are motivated in the ways we identify and breach for the reason we have uncovered. The cases also show that some courts respond as if they were attempting to implement our policy proposals, but others make mistakes. Thus our primary contribution is normative: we offer a framework for treating early reliance cases that would, we argue, improve efficiency if followed by courts.

Topic -  Moduarity in Contracts:  Boilerplate and Information Flow

Abstract - Like property, contractual boilerplate is less tailored to its contractual and business environment than one might expect considering only the costs of producing it.  Boilerplate, like all legal communication, requires actors to trade off the benefits of information-rich communication with the need for adaptability to a wide variety of contexts.  One device for managing the complexity of contexts is modularity, under which a system is divided into information-hiding components which allow internal interaction but only limited interaction across component boundaries.  Modularity helps boundedly rational agent to understand systems and to specialize in working on a subset of modules.  Modularity also facilitates adaptability of systems in response to changes in the environment.  Boilerplate utilizes modularity to allow for its addition, subtraction, and porting from one contract to another, without the need to worry about unforeseen interactions with other parts of the contract and the business context.  Governing law and severability provisions provide particularly dramatic examples.  Boilerplate is also intermediate between contract and property in terms of contexts not taken into account by the creators of boilerplate, and thus boilerplate requires less judicial intervention to maintain standardization than does property, but more so than in the case of contracts.  The need for modularity also helps explain the role of "reading costs" in parties' choice of simpler contractual provisions than other more complex provisions that are not necessarily more costly to write.  Modularity and formalism more generally are matters of degree, and underappreciated benefits of modularity help explain the incompleteness of the realist revolution in contracts and the relationship of contracts to off-the-rack doctrines in civil and common law.

Topic - "Did Unilateral Divorce Laws Raise Divorce Rates?  A Reconciliation and New Results"

Abstract -  Application of the Coase Theorem to marital bargaining suggests that shifting from a consent divorce regime to no-fault unilateral divorce laws should not affect divorce rates. Each iteration of the empirical literature examining the evolution of divorce rates across US states has yielded different conclusions about the effects of divorce law liberalization. I show that these results reflect a failure to explicitly model the dynamic response of divorce rates to a shock to the policy regime. Taking explicit account of the dynamic response of divorce rates to the policy shock, I find that liberalized divorce laws caused a discernible rise in divorce rates for about a decade, with much of this effect concentrated in the first few years, and much smaller effects in following years. Estimates of longer-term effects are more fragile, and cannot reject either moderately positive or moderately negative changes. None of my estimates suggest that unilateral divorce laws can explain much of the rise in the divorce rate over the past half century. These results are suggestive of spouses bargaining within marriage, with an eye to their partner's divorce threat.

Title - "An Empirical Reassessment of MBO Bids:  Techniques, Outcomes and Corporate Law"

Abstract - Analysis of data on all public company management buyout (MBO) bids during 1988-2003 finds (1) contestable public company MBO bids face significantly more competition, and are much less likely to be completed, than any other negotiated type of public company axquisition, and the prices offered in MBO bids that face actual competition are increased significantly more than MBO bids that do not face actual competition; (2) public company MBOs have over time been more aggressively protected by more and larger termination fees, resulting in less competition and higher completion rates; and (3) procedural techniques for improving fairness to target shareholders (special committees, shopping, and shareholder votes) have no observable impact on MBO bids. Based on these findings, I argue (1) contestable public company MBOs exposed to robust bid competition should face less judicial scrutiny than other conflict transactions, but (2) Courts should be willing to scrutinize deal protections more closely I the context of MBOs than in arm's-length transactions, in order to protect and facilitate that competition.

Title - "Taxation of Families"

Abstract - Tax schedules and transfer programs can and often do depend on family structure, notably, on whether there are one or two adults and on the number of children. How taxes and transfers should depend on family characteristics has proved controversial, and treatment of different family types exhibits substantial variation among programs, across countries, and over time. This chapter (from a book manuscript, ATaxation and Redistribution@) analyzes taxation of families as an extension of the optimal income taxation framework. This chapter begins by considering a simplified setting in which only distribution across families is at issue. The latter portion of this chapter takes up incentive concerns, first, involving labor effort, the focus of most optimal income tax analysis, and, second, involving family structure

Title -  Mandatory vs. Contractual Disclosure in Securities Markets:  Evidence from the 1930's," Co-author Jianping Mei

Abstract - This paper studies mandatory disclosure documents filed during the period 1933-35 in response to the Securities Act of 1933 and the Securities Exchange Act of 1934.  Our sample companies are all listed on the New York Stock Exchange (NYSE) and therefore subject to the NYSE's disclosure requirements at the time of the regulatory filings.  We ask whether the additional disclosures contained in the filed documents constitute information.  Using newly-available daily price, volume, and bid and ask quotation data, we test whether the filings are associated with changes in bid-ask spreads, return autocovariance, turnover, volatility, or no-trade days.  We find almost no evidence that the new disclosures required by the securities laws—principally having to do with management compensation and large shareholdings—reduced informational asymmetry.  We also find no evidence that earnings reports were more informative after enactment of the securities laws.