December 4, 2006

Abstract - We analyze a model in which firms are able to acquire information about product risks and may or may not be required to disclose this information. We initially study the effect of disclosure rules assuming that firms are not liable for the harm caused by their products. Although mandatory disclosure obviously is superior to voluntary disclosure given the information about product risks that firms possess - since such information has value to consumers - voluntary disclosure induces firms to acquire more information about product risks because they can keep silent if the information is unfavorable. The latter effect could lead to higher social welfare under voluntary disclosure.l The same results hold if firms are liable for harm under the negligence standard of liability. Under strict liability, however, firms are indifferent about revealing information concerning product risk, and mandatory and voluntary disclosure rules are equivalent.

Gillian K. Hadfield
USC Gould School of Law
Center for the Advanced Studies in the Behavioral Sciences

"The Quality of Law in Civil Code and Common Law Regimes:  Legal Human Capital and the Evolution of Law"

Abstract- As developing countries and countries transitioning from planned economies struggle to develop the institutions that support market democracy, there has been increased attention from economists and legal scholars directed to the question of what legal environments best promote economic growth and stability.  Some have suggested that common law regimes outperform civil code regimes throughout the world (La Porta et al 1997, 1998, 1999, 2004, Mahoney 2001, Djankov et al 2002, 2003, Botero et al 2004 ).  While others have questioned the empirical work on which these claims are based, few have looked at the theoretical basis for predicting any difference in the quality of law generated by particular legal regimes.  In this paper I first set out informally a model I have developed formally elsewhere that defines the quality of a legal regime in terms of its capacity to generate costly investments in the information necessary to adequately adapt law to local and changing circumstances (a key requirement for the quality of transplanted law, for example, or legal adaptation to changing technology or social conditions) and for these investments to subsequently be incorporated into what I call shared legal human capital—expertise about the relationship between law and its environment that is available systemically to judges as they decide cases.  The paper's main focus is then on analyzing what we currently know about the attributes of legal institutions in common law and civil code regimes in light of the parameters the model suggests will be important for the rate at which a legal regime will accumulate legal human capital, reduce legal error and adapt rules to a local and changing environment.  Although one of my principal conclusions is that there is a need for much more refined institutional knowledge to ground our comparative empirical analysis, this initial analysis suggests some basis for thinking that common law regimes generate substantially more shared legal human capital and rule adaptation than traditional civil code regimes, not as a consequence of differential ideology, but as a consequence of the institutional features that traditionally characterize a common law regime.  Whether this is optimal is another question.

"Economic and Legal Boundaries of Firms," Co-author, George G. Triantis

Abstract - Two types of theories of the firm have emerged in scholarship. Economic theories concern the allocation of control rights and residual claims: A firm is a group of assets under common ownership. Legal theories focus on the legal significance of firm boundaries: Each firm is a legal person. Thus, assets may be economically integrated under common control and yet be partitioned between distinct legal entities. This paper presents a theory of legal boundaries that focuses on the choice of capital structure, and traces the interplay between economic integration and legal partitioning. Many capital structure decisions, including both financial and governance features, are personal in the eyes of the law and they must be made firm-wide: for example, the issuance of debt or of equity, the adoption of takeover defenses and the composition of the board of directors. Yet, the determinants of optimal capital structure are often asset-contingent: for example, the amount of leverage, the desirability of takeover defenses and the number of independent directors may vary with the industry. The resulting tension is significant in the choice of firm boundaries. If two groups of assets have divergent capital structure demands - in that the optimal design of financial and governance rights related to each group is different - then either the assets are put in separate firms that tailor capital structure to their respective asset groups or they are combined in a single firm with a blended capital structure. We suggest that "legal" integration in a single firm sacrifices efficiency in some cases, but not in others. Where the efficiency losses are large enough to offset countervailing advantages from legal integration, we expect legal partitioning to occur. We demonstrate that legal partitioning may undermine the benefits from economic integration, even if the discrete firms are kept under common control (as that concept is defined in law). Our theory offers new explanations of the structure of combinations (e.g. mergers or acquisitions) and divestitures (e.g., spin-offs, carve-outs or securitizations).

Professor Claire Priest
Northwestern University, School of Law

"Creating an American Property Law:  Alienabilityand Its Limits in American History"

Ronen Avraham
Northwestern UniversitySchool of Law

"An Empirical Study of the Impact of Tort Reforms on Medical Malpractice Settlement Payments"

Abstract. This study evaluates the impact of six different types of tort reforms on the frequency, size and number of total annual settlements in medical malpractice cases between 1991 and 1998. Previous studies have failed to correctly identify the effective dates of reforms, to account for the retroactive applicability of striking down reforms, or used highly selected samples of jury verdicts or litigated cases. I employ a new legal data set of tort reforms, which carefully evaluates effective dates as well as when certain laws were overturned. Medical malpractice data comes from the National Practitioner Data Bank, which contains more than 100,000 malpractice settlement payments in the study time frame. The data represent the universe of cases in which doctors paid a positive settlement. Thus, the present study has significant advantages over previous work for being the first study to systematically and adequately explore the impact of tort reform on settlements (in contrast to judgments). Of the six tort reforms examined, only one reform (caps on pain-and suffering damages) reduced the number of annual payments, and two reforms (caps on pain-and-suffering damages and limitation on the collateral source rule) reduced average awards. Caps on non-economic damages and limitation on the collateral source rule also had an effect on total annual payments, although the statistical significance of that effect was weak. The joint effect of enacting all six reforms was statistically significant for reducing the number of cases but not the average award or total payments.

Professor Mark J. Ramseyer
Harvard Law School 

"Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records," by Minoru Nakazato, J. Mark Ramseyer & Eric B. Rasmusen

Abstract:  Most studies of executive compensation have data on pay, but not on total income. Studies of executives in Japan do not even have good data on pay. Although we too lack direct data on Japanese salaries, from income tax filings we compile data on total executive incomes, and from financial records obtain some indication of which executives have substantial investment income. We find that Japanese executives earn far less than U.S. executives -- holding firm size constant, about one-third the pay of their U.S. peers. Using tobit regression analysis, we further confirm that executive pay in Japan depends on firm size and accounting performance, but seems not to depend on stock price. Most corporate governance variables such as board composition have little or no effect on executive compensation, though firms with a large lead shareholder do appear to pay lower salaries.