Fall 2014 Workshops
September 8, 2014
Einer Elhauge, Petrie Professor of Law, Harvard Law School and Founding Director, Petrie-Flom Center for Health Law Policy, Biotechnology and Bioethics, Harvard Law School
"Rehabilitating Jefferson Parish: Why Ties Without A Substantial Foreclosure Share Should Not Be Per Se Legal"
Abstract: Current tying law uses a bifurcated rule of reason, condemning ties that have either tying market power or a substantial tied foreclosure share, absent an offsetting procompetitive justification. Many critics of tying law advocate overruling the first branch, commonly called the quasi per se rule, thus making all ties without a substantial foreclosure share per se legal. This article shows they are mistaken. Even without a substantial foreclosure share, ties with market power restrain competition in ways that are likely to harm both consumer welfare and total welfare as long as they foreclose a substantial dollar amount of sales. Critics claim that these effects do not legally count as anticompetitive because they do not impair rivals, but their claim conflicts with precedents that rule otherwise and with the principle that antitrust protects competition, not competitors. Both precedents and economics also show that critics are wrong in claiming that there is no valid distinction between setting a profit-maximizing price and extracting the remaining consumer surplus through tying agreements. Because even the critics admit that consumer welfare and total welfare are harmed by some ties with market power that lack a substantial foreclosure share, even their own analysis fails to support their position of per se legality for such ties. It would instead support the current doctrine that sorts out the ties with market power that harm consumer welfare from those that do not.
September 22, 2014
Ulrike Malmendier, Professor of Economics, University of California, Berkeley
"M&A Negotiations and Lawyer Expertise"
Abstract: We use proprietary data to look into the “black box” of M&A negotiations and to shed light on the effects of lawyer expertise on M&A contract design, the bargaining process, and acquisition pricing. Measuring the effects of buyer relative to seller lawyer expertise, we document that more expertise is associated with more beneficial negotiation outcomes across several dimensions. Lawyer fixed effects and geographic-proximity instruments allow us to address concerns about the endogenous allocation of lawyers to deals or clients. Our results help explain the importance of league table rankings and the variation in legal fees within the legal M&A services industry.
October 6, 2014
Eric Posner, Kirkland & Ellis Distinguished Service Professor of Law, University of Chicago Law School
"How Do Bank Regulators Determine Capital Adequacy Requirements?"
Abstract: Minimum capital regulations play a central role in banking regulation. Regulators require banks to maintain capital above a certain level in order to correct incentives to make excessively risky loans and investments. However, it has never been clear how regulators determine how high or low the minimum capital-asset ratio should be. An examination of U.S. regulators’ justifications for five regulations issued over more than 30 years reveals that regulators have never performed (or at least disclosed) a serious economic analysis that would justify the levels that they chose. Instead, regulators appear to have followed a practice of what I call “norming”—incremental change designed to weed out a handful of outlier banks. This approach resulted in a significant regulatory failure because it could not have given, and did not give, banks an adequate incentive to increase capital. The failure of banking regulators to use cost-benefit analysis in order to determine capital requirements may therefore have contributed to the financial crisis of 2007-2008.
October 20, 2014
Paige Skiba, Professor of Law, Vanderbilt Law School
"Payday Loan Choices and Consequences”
Abstract: High-cost consumer credit has proliferated in the past two decades, raising regulatory scrutiny. We match administrative data from a payday lender with nationally representative credit bureau files to examine the choices of payday loan applicants and assess whether payday loans help or harm borrowers. We find consumers apply for payday loans when they have limited access to mainstream credit. In addition, the weakness of payday applicants’ credit histories is severe and longstanding. Based on regression discontinuity estimates, we show that the effects of payday borrowing on credit scores and other measures of financial well-being are close to zero. We test the robustness of these null effects to many factors, including features of the local market structure.
November 3, 2014
Geoffrey A. Manne, Executive Director, International Center for Law and Economics
Todd Zywicki, Foundation Professor of Law, George Mason University School of Law
"Uncertainty, Evolution, and Behavioral Economic Theory"
Abstract: Armen Alchian was one of the great economists of the twentieth century, and his 1950 paper, Uncertainty, Evolution, and Economic Theory, one of the most important contributions to the economic literature. Anticipating modern behavioral economics, Alchian explains that firms most decidedly do not – cannot – actually operate as rational profit maximizers. Nevertheless, economists can make useful predictions even in a world of uncertainty and incomplete information because market environments “adopt” those firms that best fit their environments, permitting them to be modeled as if they behave rationally. This insight has important and under-appreciated implications for the debate today over the usefulness of behavioral economics.
Alchian’s explanation of the role of market forces in shaping outcomes poses a serious challenge to behavioralists’ claims. While Alchian’s (and our) conclusions are born out of the same realization that uncertainty pervades economic decision making that preoccupies the behavioralists, his work suggests a very different conclusion: The evolutionary pressures identified by Alchian may have led to seemingly inefficient firms and other institutions that, in actuality, constrain the effects of bias by market participants. In other words, the very “defects” of profitable firms – from conservatism to excessive bureaucracy to agency costs – may actually support their relative efficiency and effectiveness, even if they appear problematic, costly or inefficient. In fact, their very persistence argues strongly for that conclusion.
In Part I, we offer a short summary of Uncertainty, Evolution, and Economic Theory. In Part II, we explain the implications of Alchian’s paper for behavioral economics. Part III looks at some findings from experimental economics, and the banking industry in particular, to demonstrate how biases are constrained by firms and other institutions – in ways often misunderstood by behavioral economists. In Part IV, we consider what Alchian’s model means for government regulation (with special emphasis on antitrust and consumer protection regulation).
November 17, 2014
Anthony Casey, Assistant Professor of Law, University of Chicago Law School
"The New Corporate Web: Tailored Entity Paritions and Creditors' Selective Enforcement"
Abstract: Firms have developed sophisticated legal mechanisms that partition assets across some dimensions and not others. The result is a complex web of interconnected affiliates. For example, an asset placed in one legal entity may serve as collateral guaranteeing the debts of another legal entity within the larger corporate group. Conventional accounts of corporate groups cannot explain these tailored partitions. Nor can they explain the increasingly common scenario where one creditor is the primary lender to all or most of the legal entities in the group.
This article develops a new theory of selective enforcement to fill these gaps. When a debtor defaults on a loan, the default may signal a failure across the entire firm or it may signal an asset- or project-specific failure. Tailored partitions give a primary monitoring creditor the option to select between project-specific and firm-wide enforcement depending on the signal it receives. In this way, firm-wide risks and failures can be addressed globally while the costly effects of project-specific risks and failures can be locally contained. This option for precision makes monitoring and enforcing loan agreements less costly and, in turn, reduces the debtor’s overall cost of capital.
These concepts of selective enforcement and tailored partitions have important implications for legal theory and practice. In addition to providing a cohesive justification for the web of entity partitions and cross liabilities that characterize much of corporate structure today, they also inform how bankruptcy courts should approach a wide range of legal and policy issues from holding-company equity guarantees and good-faith-filing rules, to fraudulent transfers and ipso facto clauses.
December 1, 2014
Louis Kaplow, Finn M.W. Caspersen & Household International Professor of Law and Economics, Harvard Law School
"Information and the Aim of Adjudication: Truth or Consquences?"
Abstract: Adjudication is fundamentally about information, usually concerning individuals’ prior or proposed behavior. Legal system design is challenging because information is ordinarily costly and imperfect. This Article analyzes a broad array of features, asking throughout whether design should aim at the truth or at consequences, how these approaches may differ, and what general lessons may be drawn from the comparison. It will emerge that the differences in approach are often large and their character is sometimes counterintuitive. Accordingly, system engineers concerned for social welfare need to aim explicitly at consequences. This message is not one that is opposed to truth per se but rather a strong admonition: it is dangerous to be attached to the alluring view that adjudication is primarily about generating results most in accord with the truth of the matter at hand.