Spring 2008 Workshops
January 14, 2008
Barak Richman (Duke)
The Antitrust of Reputation Mechanisms: Institutional Efficiencies and Concerted Refusals to Deal
An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior, that state-sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic welfare, then per se treatment--or any heightened presumption of illegality--of reputation mechanisms with coordinated punishments is misplaced.
February 4, 2008
Omri Ben-Shahar (Chicago)
How to Repair Unconscionable Contracts
Several doctrines of contract law allow courts to strike down excessively one-sided terms. A large literature explored which terms should be viewed as excessive, but a related question is often ignored--what provision should replace the vacated excessive term? This paper begins by suggesting that there are three competing criteria for a replacement provision: (1) the most reasonable term; (2) a punitive term, strongly unfavorable to the overreaching party; and (3) the maximally tolerable term. The paper explores in depth the third criterion--the maximally tolerable term--under which the excessive term is reduced merely to the highest level that the law considers tolerable. This solution preserves the original bargain to maximal permissible extent, and yet brings it within the tolerable range. The paper demonstrates that this criterion, which received no prior scholarly notice, is quite prevalent in legal doctrine, and that its adoption is based on powerful conceptual and normative underpinnings.
February 18, 2008
Paul Mahoney (Virginia)
The Public Utility Pyramids
In the 1920s and 1930s, many public utilities in the United States were controlled by holding companies organized in pyramid form. The holding companies' critics claimed that they extracted wealth from their subsidiaries' other shareholders. Other commentators argued that holding companies increased the value of subsidiaries by reducing their financing costs. I examine the effects of the Public Utility Holding Company Act of 1935 (HCA), which outlawed pyramid structures. The value of both top holding companies and their subsidiaries fall (rise) around the time of key legislative events suggesting a higher (lower) likelihood that the HCA would be enacted, supporting the hypothesis that holding companies added value. I also find that the valuation effects are most pronounced for financially distressed companies, suggesting that investors expected the HCA to force liquidations that would destroy option value.
March 3, 2008
Vikrant Vig (London Business School)
Did Securitization Lead to Lax Screening? Evidence From Subprime Loans 2001-2006
(with Benjamin J. Keys, Tanmoy Mukherjee, and Amit Seru)
Theories of financial intermediation suggest that securitization, the act of converting illiquid loans into liquid securities, could reduce the incentives of financial intermediaries to screen borrowers. We empirically examine this question using a unique dataset on securitized subprime mortgage loan contracts in the United States. We exploit a specific rule of thumb in the lending market to generate an instrument for ease of securitization and compare the composition and performance of lenders' portfolios around the ad-hoc threshold. Conditional on being securitized, the portfolio that is more likely to be securitized defaults by around 20% more than a similar risk profile group with a lower probability of securitization. Crucially, these two portfolios have similar observable risk characteristics and loan terms. We use variation across lenders (banks vs. independents), state foreclosure laws, and the timing of passage of anti-predatory laws to rule out alternative explanations. Our results suggest that securitization does adversely affect the screening incentives of lenders.
March 24, 2008
Marco Ottaviani (Kellogg School of Management, Northwestern University)
(Mis)selling Through Agents
(with Roman Inderst)
This paper studies the implications of the inherent conflict between two tasks performed by sales agents: prospecting for customers and advising on the suitability of the product sold. When structuring their salesforce compensation, firms trade off the expected losses resulting from "misselling" with the agency costs of providing marketing incentives. We characterize how the equilibrium amount of misselling and the scope for policy intervention depend on a number of features of the identified agency problem, such as a firm's internal organization of the sales process, the transparency of its commission structure, and the steepness of its agents' sales incentives.
April 7, 2008
Efraim Benmelech (Harvard)
Vintage Capital and Creditor Protection
(with Nittai Bergman)
We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraftlevel data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology as well as firms with larger aircraft fleets. Moreover, we find that more profitable airlines, airlines with lower leverage ratios, and airlines with less debt overhang are less sensitive to prevailing creditor rights in their country. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies and foster productivity.
April 28, 2008
Bill Wilhelm (Virginia)
Information Production in Financial Markets
(with Zhaohui Chen)
Information-producing agents can opt to produce from the sell-side or the buy-side of a financial market. In the former case, they act as intermediaries who can only sell their information to other market participants. In the latter capacity they can trade on their own private information or that acquired from an intermediary. Intermediaries generate a positive externality because they cannot enforce strong property rights over the information they produce for sale. As a consequence, financial market prices are more informative in the presence of sell-side information production. We examine conditions under which the sell-side externality is sustainable without an external subsidy.