Fall 2004 Workshops
Law and Economic Studies
September 13, 2004
Guhan Subramanian, Harvard University Law School
Abstract - Freeze-out transactions, in which a controlling shareholder buys out the minority shareholders, have occurred more frequently since the stock market downturn of 2000 and the Sarbanes-Oxley Act of 2002. While freeze-outs were historically executed as statutory mergers, recent Delaware case law facilitates a new mechanism - freeze-out via tender offer - by eliminating entire fairness review for these transactions. This Article identifies an efficiency lass that arises from this new regime because the tender offer mechanism will facilitate some inefficient (value-destroying) freeze-outs. This efficiency loss will become more pronounced as the incidence of tender offer freeze-outs increases, merger freeze-outs are increasingly negotiated in the shadow of a tender offer, or both. Rather that advocating patchwork reforms to correct this problem, this Article proposes a return to first principles of Delaware corporate law in the freeze-out context. The result of this re-grounding would be convergence in judicial standards of review for freeze-outs, and elimination of the efficiency loss that is inherent in existing doctrine
Subramanian - Fall 04 WS.pdf
September 27, 2004
Max Schanzenbach, Northwestern University School of Law
Instrument Choice Theory and Criminal Sentencing:
Strategic Judging Under the United States Sentencing Guidelines
Authored with Emerson H. Tiller
Abstract - We present an instrument choice theory of criminal sentencing and test it empirically with data from the United States Sentencing Commission. The theory posits that, faced with appellate review, federal district court judges applying the United States Sentencing Guidelines strategically use "sentencing instruments" -- fact-based and law-based determinations made by a district court judge in the sentencing phase of criminal proceedings -- to maximize the judges' sentencing preferences. Specifically, district court judges are more likely to use law-based departures when they share the same party ideology with the overseeing circuit court than when there is no party align the two courts. Fact-based adjustments, on the other hand, are routinely used to maximize sentencing preferences regardless of party alignment between the two courts. Our regression analyses suggest that the theory is largely supported. We find that: (1) democrat appointees generally gave lower prison sentences relative to republican appointees for crimes of violence, theft and drug-trafficking and (2) sentencing instruments were selectively used to raise or lower the prison sentence based on the political ideology of the judge, the type of crime, and whether there was political alignment between the district and circuit court.
Instrument Choice Theory and Criminal Sentencing
October 11, 2004
Christine Jolls, Harvard University Law School,
Debiasing Through Law
Authored with Cass R. Sunstein
Abstract - Human beings are often boundedly rational. In the face of bounded rationality, the legal system might attempt either to "debias law," by insulating legal outcomes from the effects of boundedly rational behavior, or instead to "debias through law," by steering legal actors in more rational directions. Legal analysts have focused most heavily on insulating outcomes from the effects of bounded rationality. In fact, however, a large number of actual and imaginable legal strategies are efforts to engage in debiasing through law to help people reduce or even eliminate boundedly rational behavior. In important contexts, these efforts promise to avoid the costs and inefficiencies associated with regulatory approaches that take bounded rationality as a given and respond by attempting to insulate outcomes from its effects. This Article offers both a general theory of debiasing through law and a description of how such debiasing does or could work to address central legal questions in a large number of domains, from employment law to consumer safety law to corporate law to property law. Discussion is devoted to the risks of overshooting and manipulation that are sometimes raised when government engages in debiasing through law.
Jollls - Fall 04 WS.pdf
October 25, 2004
Professor Jennifer Arlen, New York University, School of Law
Contracting Over Malpractice Liability
Abstract - This chapter examines the proposals to permit patients to contract over liability, focusing on the justifications for such proposals made by leading law and economics scholars. These scholars assert that patients necessarily will be better off if permitted to contract over malpractice liability because patients will only alter tort liability - or opt out of it altogether - when doing so makers them better off than they would be under mandatory tort liability. Using economic theory, this chapter examines this claim and shows that it is not true. Patients may be made worse off if they are allowed to contract over liability because patients may waive liability even when their welfare would be maximized were liability imposed. This chapter focuses on two problems: one well known, the other not. Most obviously, patients may be less well off if permitted to contract if they are unable to contract in their own best interests as a result of information problems. Beyond this, however, permitting patient contract may reduce patients' welfare even if patients are well informed. Patients may waive contractual liability even when they would have benefitted from tort liability because liability imposed by contract provides fewer benefits to patients than liability provided by tort because many of the benefits of tort liability arise from its commitment to bind all patients to act collectively to impose liability o all providers for all time. Accordingly, even when tort liability would be optimal patients may waive liability imposed by contract because, under plausible circumstances, they benefit less from such liability than from tort. Thus this chapter refutes the existing law and economics argument for the superiority of contractual liability over tort. The ultimate test of contractual liability awaits future research into the relative merits of the two regimes, taking full account of their costs and benefits.
Arlen - Fall 04 WS.pdf
November 8, 2004
Professor David A. Weisbach, The University of Chicago, The Law School
The (Non) Taxation of Risk
Abstract - A long line of literature argues that income taxes do not tax the return to risk bearing. The conclusion, if correct, has important implications for the choice between an income tax and a consumption tax and for the design of income taxes. The literature, however, on its face seems unrealistic because it models only very simplified tax systems, assumes perfect rationality by individuals, and requires the government to take complex positions in securities markets to hold in equilibrium. This paper examines the extent to which these problems affect the conclusions we draw from the literature. It argues that the criticisms are overstated. Moreover, the criticisms do not detract from the central value of the models, which is to understand ideal income taxes, which are the purported goal of most who support an income tax.
Weisbach - Fall 04 WS.pdf
November 22, 2004
Honorable Richard A. Posner, U.S. Court of Appeals, 7th Circuit
The Law and Economics of Contract Interpretation
Abstract - Contract interpretation is an understudied topic in the economic analysis of contract law. This paper combines simple formal analysis of the tradeoffs involved in interpretation with applications to the principal doctrines of contract interpretation, including the "four corners" rule, mutual mistake, contra proferentum, and what I call the (informal but very important) rule of "extrinsic nonevidence." Gap filling is distinguished, and the relativity of interpretive doctrines to the interpretive medium-jurors, arbitrators, and judges in different kinds of judicial system-is emphasized.
Posner, Richard A. - Fall 04 WS.pdf
December 6, 2004
Mark J. Roe, Harvard University Law School
Abstract - Delaware makes the corporate law governing most large American corporations. Since Washington can take any, or all, of that lawmaking away from Delaware, a deep conception of American corporate law should show how, when, and where Washington leaves lawmaking authority in state hands, and how Washington systematically affects what the states do.
The interest groups and ideas in play in Delaware are narrow; those in Congress are wide. Here I analyze three key public choice issues in making corporate law, each emanating from that one initial core public choice observation, that the interest groups in play in Delaware are narrower than those in play in Congress. First, interest groups powerful enough to dominate lawmaking on the state level forgo a winner-take-all strategy because losers in state lawmaking can appeal to the federal authorities and either ally with new interest groups or appeal to ideas not in play in Delaware. Second, the major state-level players usually want to confine federal authority in making corporate law, because a local deal cuts in fewer players; a federal deal splits the pie with others. Third, we can delineate the space in which the states have room to maneuver and where they risk federal action.
To delineate that space, I show that it's when Delaware acts first—as it often can because the federal agenda is large and the Delaware agenda is small—that it gains most of its discretion vis-à-vis the federal authorities. When it moves first, especially when its two main players-managers and investors agree on what to do, then those two players largely determine American corporate law's initial content. Federal authorities might then change the state-made result, and players and ideologies absent in Delaware but big in Washington influence the federal result. But by then, the original Delaware players have acquiesced in their compromise and resist federal action. Doctrines that limit the federal effort—corporate law's principle that states should govern corporate internal affairs, for example—are public-regarding justifications for deferring to interests that prevail on the state level. But when Delaware cannot act first—either because media saliency puts the matter on the federal agenda or because its primary players cannot agree—then Delaware loses its dominance.
I then link this public choice analysis to major currents in the political science literature. The relationship between Delaware and Congress can be analogized to that between federal agencies and Congress. Federal agencies have discretion and first-mover advantages, but their independence even when wide is confined: their discretion ends when they provoke Congress. So it is with Delaware.
The interstate race has been overrated as the primary structural determinant of American corporate law. Without understanding the federal-state relationship in making corporate law—and above all the public choice content of that relationship—one cannot understand core characteristics of American corporate law. And to begin to understand that federal-state relationship, we must grapple with the public choice issues of the differing interest groups and ideas in play in Delaware and in Congress.
Roe, Mark J. - Fall 04 WS.pdf