Spring 2005 Workshops
Law and Economic Studies
January 24, 2005
Eric A. Posner, The University of Chicago, The Law School
Is the International Court of Justice Biased?
Authored with Miguel de Figueiredo
Abstract - The International Court of Justice has jurisdiction over disputes between nations, and has decided dozens of cases since it began operations in 1946. Its defenders argue that the ICJ decides cases impartially and confers legitimacy on the international legal system. Its critics argue that the members of the ICJ vote the interests of the states that appoint them. Prior empirical scholarship is ambiguous. We test the charge of bias using statistical methods. We find strong evidence that (1) judges favor the states that appoint them, and (2) judges favor states whose wealth level is close to that of the judges' own state; and weaker evidence that (3) judges favor states whose political system is similar to that of the judges' own state, and (4) (more weakly) judges favor states whose culture (language and religion) is similar to that of the judges' own state. We find weak or no evidence that judges are influenced by regional and military alignments.
Posner, Eric - Spring 2005 WS.pdf
February 7, 2005
Kathryn M. Zeiler, Georgetown University Law Center
Asymmetries in Exchange Behavior Incorrectly Interpreted
as Evidence of Prospect Theory
Authored with Charles R. Plott
Abstract - The results of exchange experiments have been widely reported in the experimental economics literature. In these experiments ,subjects are endowed with coffee mugs and then provided with an opportunity to exchange their mugs for pens. Very few decide to exchange. What makes this result so dramatic is that when a different group is endowed with pens and given an opportunity to exchange their pens for coffee mugs, again very few wish to exchange. This result has been interpreted as an endowment effect, the observed reluctance to part with endowed goods. Others have used results of this kind as evidence supporting loss aversion, the observation that losses generally loom larger than gains, arguing that individuals perceive getting something as a "gain" and giving up an endowment as a "loss." In turn, this generates support for a popular alternative to expected utility theory called prospect theory, of which loss aversion is a major component.
The results seem robust; they have been replicated many times. Furthermore, the experiment's simple design creates an illusion that few controls are needed to accurately measure preferences. Indeed, the design's simplicity leads some to question the results of more sophisticated and carefully constructed experiments that do not support prospect theory. The experiments reported here use variations of the experimental design to demonstrate the opposite-that the results include measurements of phenomena unrelated to ownership or endowment effects and thus do not support loss aversion or prospect theory.
The paper is organized as follows. Section 2 provides a recap of the design of and results from exchange experiments. Section 3 discusses design features that might affect the results even when ownership is held constant across treatments. Section 4 reports the results from four versions of the experiment that incorporate various combinations of design features. The main take-away point is that the results are not robust to changes in the set of design features used to elicit preferences. Our experimental results suggest that the earlier results cannot be attributed to an endowment effect. Section 5 concludes by arguing that our results, in combination with results from other studies, strongly suggest that the endowment effect is merely an artifact of the experimental designs. This paper, thus, calls into question legal rules and policy choices grounded in the assumptions that individual preferences are influenced by endowments and that behavior can be explained by prospect theory.
Note: An abstract of a related paper is also attached.
Zeiler, K. - Spring 05 WS.pdf
Zeiler, K. - Spring 05 WS - Related Abstrac.pdft.pdf
February 21, 2005
Anup Malani, University of Virginia, School of Law
and Albert Choi, University of Virginia
Are Non-Profit Firms Simply For-Profits in Disguise?
Evidence from Executive Compensation in the Nursing Home Industry
Abstract - It is well-established that non-profit hospitals employperformance bonuses with much lower frequency than for-profit hospitals. Weisbrod (1999, 2003a, 2003b) suggest that this implies that principals of non-profit and for-profit firms have different objectives or purposes. Brickley and Van Horn (2002) dispute the different-objectives hypothesis. They present evidence that the salaries and turnover of executives at non-profit hospitals reward financial performance but not altruistic tivities. Employing a unique data set of executive compensation at 2,700 nursing homes in 2001 and 2002, this paper improves on Brickley and Van Horn's analysis in three important ways. First, we provide an explanation for how non-profit firms and for-profit firms may both seek to reward financial performance but write different executive compensation contracts. This explanation relies upon tax penalties on the use of financial rewards for executives by non-profit firms. Second, we introduce direct comparisons of wages at non-profit and for-profit facilities as well as superior controls for quality of patient care and the risk profile of patients. Third, we consider the implications of observed patterns in executive compensation for alternative theories of non-profit behavior, such as quality/quantity maximization. We conclude that executive compensation at non-profit firms supports that the hypothesis that principals at non-profit firms either care about profits just like principals at for-profit firms (the strong version of the for-profit-in-disguise model) or behave as if they do (the weak version).
Malani & Choi - Spring 05 WS.pdf
March 7, 2005
Douglas G. Baird, The University of Chicago, The Law School
and Robert K. Rasmussen, Vanderbilt University Law School
When Good Managers Go Bad: Controlling the Agents of Enterprise
Abstract - Traditional approaches to corporate governance focus on shareholders. These approaches, however, are necessarily incomplete. Creditors play a large and growing role in corporate governance. Investors as a group rely upon creditors to craft loan covenants that ensure the business remains on track, especially when it encounters rough times. Among other things, these covenants now give creditors the power to replace under-performing managers with new ones of their own choosing. A new type of manager, the chief restructuring officer, has come into being. Picked by creditors, paid by the hour, and reporting directly to the board, the CRO occupies center stage of financially distressed businesses. Loan covenants are now the mechanism of choice to ensure that managers who lose their touch are replaced.
Baird & Rasmussen - Spring 05.pdf
March 28, 2005
Gideon Parchomovsky, University of Pennsylvania Law School
Authored with Polk Wagner
Abstract - This article presents a new theory of patent value, responding to growing empirical evidence that the traditional appropriability premise of patents is fundamentally incomplete in the modern innovation environment. We find that for patents, the whole is greater than the sum of its parts: the true value of patents lies not in their individual worth, but in their aggregation into a collection of related patents, a patent portfolio.
The patent portfolio theory thus explains what is known as "the patent paradox": in recent years patent intensity—patents obtained per research and development dollar—has risen dramatically even as the expected value of individual patents has diminished. We find the benefits of patent portfolios to be so significant as to suggest that firms' patenting decisions are essentially unrelated to the expected value of individual patents; because patent portfolios simultaneously increase both the scale and the diversity of available marketplace protections for innovations, firms will typically seek to obtain a large quantity of related patents, rather than evaluating their actual worth. The result—which we find widely recognized in commercial circles—is that the modern patenting environment exhibits (and requires) a high-volume, portfolio-based approach that is at odds with scholars' traditional assumptions.
The implications of the patent portfolio theory are important and widespread. First, the explanatory power of the theory allows resolution of not only the patent paradox, but many of the otherwise-puzzling observable patterns in the modern patenting environment—such as firm-size differences in patent intensity and litigation rates. Second, the patent portfolio theory neatly complements the prior theories that have sought to explain modern patent value, strengthening their relationship with the reality of patenting behavior—and confirming that the value of patents has expanded beyond traditionalist notions. Third, the patent portfolio theory allows a number of important predictive insights into future trends in the patent system, allowing policymakers and scholars to frame their inquiry within a range of likely outcomes. In our analysis, the patent portfolio theory does not suggest a better, brighter future for the patent system, but does build a foundation for the important academic and policy-related work that springs from this initial treatment.
Parchomovsky, Gideon - Spring 05 WS.pdf
April 11, 2005
Jeffrey J. Rachlinski, Cornell Law School
Can Judges Ignore Inadmissible Information?
The Difficulty of Deliberately Disregarding
Authored with Andrew J. Wistrich and Chris Guthrie
Abstract - Procedural fairness and due process requires that courts assess evidence before them without regard to information outside of the record. Skepticism about the ability of jurors to ignore inadmissible information is widespread. Empirical research confirms that this skepticism is well-founded. Many courts and commentators, however, assume that judges can accomplish what jurors cannot. This article reports the results of studies we have conducted to determine whether judges can disregard inadmissible evidence. We found that the judges who participated in our studies struggled to perform this challenging mental task. The judges had difficulty disregarding demands disclosed during settlement talks, conversations protected by attorney-client privilege, the prior sexual history of an alleged rape victim, prior criminal convictions of a party in a civil case, and extrinsic evidence in a criminal sentencing decision . This information influenced judges' decisions even when they had ruled the evidence inadmissible. In contrast, judges were able to ignore inadmissible, constitutionally infirm evidence in two criminal cases. We conclude that like jurors, judges are not reliably able to avoid being influenced by relevant but inadmissible information of which they are aware. Nevertheless, judges displayed a surprising ability to do so in some situations.
Rachlinski, Jeffrey J. - Spring 05 WS.pdf
April 25, 2005
John J. Donohue, Yale Law School
The Costs of Wrongful-Discharge Laws
Authored with David H. Autor and Stewart J. Schwab
Abstract - This paper provides empirical estimates of the effects on employment and wages of wrongful-discharge protections adopted by state courts across the United States during the last three decades. We find robust evidence that one wrongful-discharge doctrine, the implied-contract exception, reduced state employment rates by 0.8 to 1.6 percent. The initial impact is largest for female, younger, and less-educated workers - those who change jobs frequently - while the longer-term effect is greater for older and more-educated workers - those most likely to litigate. By contrast, we find no robust employment or wage effects of two other widely recognized wrongful-discharge laws: the public-policy and good-faith exceptions.
Donohue, John J. - Spring 05 WS.pdf