David A. Weisbach The University of Chicago, The School of Law
Topic - "Climate Change and Discounting the Future: A Guide for the Perplexed"
Abstract - Some of the most important disagreements about how aggressively to respond to the threat of climate change turn on the choice of the discount rate. A high discount rate implies relatively modest and slow reductions; A low discount rate implies immediate and dramatic action. The debate between the two sides reflects a disagreement between the positivists, who argue for a market rate, and the ethicists, who urge that the positivist approach violates the duty of the present to the future. We argue that the positivists are largely right, and that the question of discounting should be separated from the question of the ethical duties of the present. Discounting is a means of taking account of opportunity costs, and a refusal to discount may well hurt, rather than help, future generations. Nonetheless, it is also possible that cost-benefit analysis with discounting will impose excessive harms on future generations. If so, the proper response is to make investments that will help those generations, not to refuse to discount. We also explore several questions on which the ethicists’ legitimate objections require qualification of the positivists’ arguments, justifying a low discount rate for climate change policy.
Topic - "Rating the Ratings: How Good Are Commercial Governance Ratings?,"Co-authors, Ian Gow and Dave Larcker
Abstract - Proxy advisory and corporate governance rating firms play an increasingly important role in U.S. public markets. Proxy advisory firms provide voting recommendations to shareholders on proxy proposals and sometimes take an active role persuading management to change governance arrangements. Corporate governance rating firms provide indices to evaluate the effectiveness of a firm's governance and claim to be able to predict future performance, risk, and undesirable outcomes such as accounting restatements and shareholder litigation. We examine these claims for the commercial corporate governance ratings produced for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms. Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.
Topic - "Naked Exclusion: An Experimental Study of Contracts with Externalities," Co-author, Claudia Landeo (University of Alberta)
Abstract - This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.
Topic - The Pivotal Mechanism and Organizational Control
Abstract - Organizations with multiple individuals typically make decisions by following the will of the majority of some subset of stakeholders that are entitled to vote. This paper examines an alternative decision-making mechanism—the "pivotal" mechanism developed by Groves and Clarke. Unlike voting, the pivotal mechanism produces efficient outcomes in the presence of heterogeneous voter preferences. Moreover, the mechanism allows control rights to be allocated more widely, reducing the costs of opportunism when a controlling class of stakeholders has interests adverse to another class. These benefits come with costs. The pivotal mechanism’s efficiency diminishes in the presence of collusion between voters and requires the creation of "pools" that disperse revenues created by the mechanism. The mechanism is therefore most attractive when the costs of heterogeneity are large and the risks of collusion are small. As a result, I propose the development of a legal basis for the pivotal mechanism as a menu option for organizational decision making.
Topic - Rethinking the Great Compromise: What Happens When Large Companies Opt Out of Workers’ Compensation?"
Abstract - The "great compromise" of workers’ compensation, whereby workers relinquished the right to sue their employers in exchange for no-fault recovery for occupational injuries, was one of the major tort reforms of the Twentieth Century. Because participation in the workers’ compensation system is usually compulsory, it is difficult to forecast what the real-world effects might be of making participation voluntary. However, there is one U.S. state that permits employers to decline workers’ compensation coverage, and in which a significant number of firms (called "nonsubscribers") have chosen to opt out: Texas. This study is the first to examine comprehensively the impact of Texas nonsubscription on the frequency, cost, and duration of occupational injury claims. To minimize the potentially confounding effects of selection bias, I analyze confidential, highly granular data obtained from more than a dozen large companies that operate homogenous facilities across a large number of U.S. states. Using facilities and claims as the units of analysis, this paper analyzes data from the first five study participants and contains several preliminary findings. First, nonsubscription depresses the frequency of "indemnity" claims, i.e., those involving reimbursement for loss of work. Second, nonsubscription reduces the frequency of claims associated with hard-to-diagnose injuries. Third, nonsubscription is associated with lower total programmatic costs, as well as lower per-claim costs for medical care and wage replacement. The latter trend is especially pronounced among female employees. Legal costs per claim, however, reveal no consistent trends across companies. Finally, nonsubscription tends to expedite the speed of injured employees’ return to work. Taken as a whole, these preliminary findings suggest that for many large firms, the high cost of workers’ compensation insurance may outweigh the benefits of tort immunity.
This paper is not being openly circulated at this time.
Topic - “Life-Cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk”Co-author, Barry Nalebuff
Abstract - By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies-both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 year.
