The Spring term workshops will meet on each of the following Mondays in Room 101 of Jerome Greene Hall between 4:00 p.m. and 6 p.m. Speaker presentations will vary in subject matter. The workshops continue to be open to all who are interested.

Topic: "Designing Statutory Default Rules to Maximize Political Satisfaction"

Abstract - My workshop will present excerpts from a trilogy I am working on regarding statutory interpretation. The excerpts basically focus on the portions from these pieces that are more economic or mathematically-oriented, and cuts out the legal discussions and illustrations. I present them together because they are all interconnected, though they each focus on a separate thesis.

The first piece argues that statutory default rules should maximize political satisfaction, and analyzes how to do so to maximize the political preferences of the enacting legislature. The second piece argues that when political preferences have shifted, an enacting legislature itself would want the court to resolve statutory ambiguities by tracking reliable official indications of current legislative preferences. The third piece argues that, under certain conditions, it would maximize political satisfaction for courts to use statutory default rules that deviate from the best guess about legislative preferences in order to try to elicit an enactment that more precisely reflects current legislative preferences. The portions cut out of all three articles also make the descriptive claim that courts actually track my analysis, but since you do not have that before you, I will just focus on the normative claim.

Topic: "Incomplete Law - A Conceptual and Analytical Framework," co-authored with Chenggang Xu

Abstract - This paper develops a theory of the incompleteness of law. It argues that law is inherently incomplete and that the incompleteness of law has important implications for the design of lawmaking and law enforcement institutions. When law is incomplete, residual lawmaking rights must be allocated. In addition, agencies have to be vested with law enforcement rights. We analyze the optimal allocation of lawmaking and law enforcement rights under incomplete law, focusing on the legislature, regulators and courts as possible holders of residual lawmaking rights, and courts as well as regulators as possible law enforcers. Each of these three agents has different properties. Legislatures and regulators are ex ante lawmakers, courts are ex post lawmakers. Courts are reactive law enforcers, regulators are proactive law enforcers. We show that the optimal allocation of residual lawmaking and law enforcement rights to these agents is determined by the degree and nature of incompleteness of law and the magnitude of expected externalities of harmful actions. In the second part of the paper we apply this analytical framework to the development of financial market regulation in England, with some comparative references to developments in the United States and Germany. The empirical evidence demonstrates that financial market regulators with both residual lawmaking and proactive law enforcement rights emerged in response to underenforcement problems, which resulted from the incompleteness of law.

Topic: "Taking Care: Joint Action, Newness and Error Control"

Abstract - This article analyzes "error control" mechanisms used to mitigate concerns about the judgement of decision-makers. Such mechanisms help organizations pool the resources of many providers, but they also create a bias against "new" options where the lack of information about similar previous occurrences makes it difficult to estimate future outcomes. Organizations that pool the funds of many investors therefore undertake projects with larger capital requirements and less newness than self-financed entrepreneurs. Variations in error control mechanisms also help explain the tendency of organizations to specialize in different kinds of projects. Relatively rigid error controls give large public companies an advantage in undertaking complex projects over venture capital firms but they also lead to a lower tolerance for newness.

Topic: "Asset Securitization and Asymmetric Information," Co-authored with Ralph A. Winter

Abstract - We analyze the incentives for asset securitization that flow from informational asymmetries about the value of corporate assets. Within the framework of "hidden action" asymmetries, asset securitization can strengthen each of the five principal means by which managerial agency problems are controlled: incentive compensation schemes; monitoring; the market for corporate control; reputation in the market for managerial human capital; and limitations on the free cash flow over which managers have discretion. Securitization of cash flows that are relatively insensitive to managerial effort can leave each of these incentive devices more focused on cash flows that matter and more high-powered. In addition, asset securitization exchanges a stream of future cash inflows for a lump sum cash inflow, enhancing monitoring and control of management expenditures. Within the "hidden information" framework, asset securitization can be explained by asymmetric information: (1) between insiders and outside investors as to the value of non-securitized assets; (2) between classes of outside investors as to the value of securitized assets; or (3) between insiders and outsiders as to the value of securitized assets. In all three hidden-information theories, asset securitization is driven by the tendency of the market to match claims with investors who are best informed about asset values. Where an informational asymmetry is different between two classes of assets owned by a corporation, as in the three theories, the market can achieve this efficient matching only by splitting the ownership of the two classes. Asset securitization is thus a response to the asymmetry across assets in the informational asymmetry across investors as to the asset returns.

Topic: "Contracting in the Absence of Specific Investments and Moral Hazard: Understanding Carrier-Driver Relations in U.S. Trucking"

Abstract - This paper considers functions of contracting other than the protection of relationship-specific investments and the provision of marginal incentives, and applies the theory to explain variation in the form of compensation of over-the-road truck drivers in the U.S. Specifically, we argue that contracts in this industry serve to economize on the costs of price determination for heterogeneous transactions. We show that the actual terms of those contracts vary systematically with the nature of hauls in a way that is consistent with the theory. By contrast, we find that vehicle ownership, which defines a driver's status as an owner operator or company driver, depends on driver, but not haul and trailer, characteristics.

Topic: "A Dual-Efficiency Solution to the Lost-Volume Problem," co-authored with Alan Schwartz

Abstract - The Uniform Commercial Code permits a seller to recover lost profits after a buyer's breach of a contract to purchase a specific good even if the seller subsequently sells the good on the market at the contract price. The seller need show only that, but for the breach, it would have made both sales and has thus lost volume as a result of the breach. The contract literature to date calls this result into question, noting that the seller can anticipate such breaches and could thus invest efficiently ex ante even if the seller could not collect lost profits as a damages award. This literature is deficient, however, because it does not take into account the buyer's ex post incentives, which under plausible market assumptions justify full lost-profit damages. In essence, a failure to award lost-profit damages amounts to a buyer's option for which the seller is not compensated and in anticipation of which the seller will inefficiently curtail investment. In this light, the "lost-volume" problem can be seen also as a problem of industrial organization.

Topic: "Courts: The Lex Mundi Project," authored with Simeon Djankov, Rafael La Porta and Florencio Lopez-de-Silanes

Abstract - In cooperation with Lex Mundi member law firms in 109 countries, we measure and describe the exact procedures used by litigants and courts to evict a tenant for non-payment of rent and to collect a bounced check. We use these data to construct an index of formalism of dispute resolution for each country. We find that formalism is systematically greater in civil than in common law countries. Moreover, formalism is associated with higher expected duration of judicial proceedings, more corruption, less consistency, less honesty, and inferior access to justice. These results suggest that an inefficiently high level of judicial formalism has been transplanted to developing countries.

Please direct your questions to
Thelma Twyman 
e. ttwyman@columbia.edu
t. 212.854.3739