Archive for the ‘Economic Analysis of Law’ Category

Exciting Addition for Public Choice Profs

posted by Danielle Citron

My colleague, Max Stearns, and Todd Zywicki of the George Mason University School of Law have just published their new course book, Public Choice Concepts and Applications in Law (West Publishing Company).  This course book, the only one of its type, introduces law students to the concepts of public choice and the implications of those concepts for a host of substantive legal doctrines and for features of institutional design of various lawmaking bodies.  Covered concepts include an general economic reasoning (including an overview of price theory), interest group theory, social choice theory, and elementary game theory. The institutional applications unit includes chapters that consider the implications of covered concepts for legislatures, the judiciary, the executive branch (and bureaucracies), and constitutions as governing documents.  The book is designed for courses or seminars in public choice or for use as a supplement courses as legislation, administrative law, or jurisprudence.  Students will love this: the book is in paperback.  Max tells me that he and Todd will be submitting the Teachers’ Manual to West this week and that West will quickly make that available to potential adopters.  In addition, they are working toward posting supporting materials for part III on line.  That part which will include various chapters on discrete topics of law to be used in connection with the bound volume and that will be updated over time.  Max tells me that he is happy to respond to any questions or comments that you have by email.   Having sat in on Max’s public choice seminar and enjoyed, and learned from, his vast body of work in the area, I have no doubt that Public Choice Concepts and Applications in Law is a great contribution to the classroom and beyond.

  October 12, 2009 at 12:39 pm   Posted in: Administrative Law, Economic Analysis of Law, Jurisprudence   Print This Post   No Comments

What Factors Correlate With Veil Piercing Success?

posted by Dave Hoffman

If you’ve made it through the content of complaints, some data about who gets sued, and descriptive statistics about wins and losses, you basically are pot committed to this veil piercing project. In this post, I’m going to exploit that commitment by describing the results of our statistical analysis of two different kinds of success that plaintiffs may achieve in veil piercing cases: (1) on motions; and (2) at the case level. If you don’t care to follow me beyond the jump, here’s the bottom line (from our abstract):

“Voluntary creditor causes of action promote veil piercing; LLCs are in very limited circumstances better insulated from veil piercing claims than corporations; undercapitalization is strongly associated with success while conclusory grounds like “façade” and “sham” are not; and defendants’ legal sophistication is predictive of plaintiff failure. Extra-legal factors play a more striking and counterintuitive role. Plaintiffs suing companies with few employees are much more likely to win veil piercing motions, and obtain relief in cases, than plaintiffs suing companies employing many workers. This results holds even when controlling for legally-relevant variables. Contrary to both theory and previous empirical work, we also find that judicial liberalism is inversely related to the likelihood of plaintiff success.”

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  October 9, 2009 at 6:51 am   Posted in: Contract Law & Beyond, Corporate Law, Economic Analysis of Law, Empirical Analysis of Law, Law School (Scholarship)   Print This Post   One Comment

What Does Veil Piercing Success Mean Anyway?

posted by Dave Hoffman

If you look at opinions, winning in a veil piercing case is pretty easy to define: did the court agree to pierce the veil, reaching through an entity to its shareholders. If you were inclined, you could model success at those terminal moments in cases, asking which factors (described in the opinions) correlated with courts agreeing to pierce.

There’s value in this approach, not least because opinions shape reality. But there’s a problem too.  Not only are opinions unrepresentative, but they come late in cases.  The result is an extreme form of selection.  It’s not clear (to me, anyway) what the null hypothesis regarding the effect of independent variables  ought to be for late-stage dispositions.

Dockets offer the promise of a different approach: asking which factors correlate with success or failure early in cases.  Further, assuming that adjudicated motions teach the parties about the strength of their cases, and that they settle strategically, we can even start to learn from the timing and incidence of settlement.

In this post, I’m going to relay some descriptive statistics about the veil piercing successes that plaintiffs achieved in our data. (I’m continuing to pull the data and some text from our paper.)  To those who are getting annoyed by all of these posts, I’m sorry!  I’ve been living with this project for a long time — I’m excited to finally share it publicly.

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  October 8, 2009 at 7:24 am   Posted in: Contract Law & Beyond, Corporate Law, Economic Analysis of Law, Empirical Analysis of Law, Law Practice, Law School (Scholarship)   Print This Post   2 Comments

A Proposed Study To Measure Law Clerk Influence

posted by Dave Hoffman

Citation studies as a proxy for judicial quality are all the rage.  I concur with Larry that the effort spent often seems disproportionate to the result.  Selection is the culprit here, not just academic modesty: it’s hard to imagine that any truly dramatic effects of judicial character, or legal rule, would not be washed away by parties’ ability to settle strategically.

Exogenous shocks open windows – of limited scope – which may help us penetrate this fog.  There’s one ongoing today that I think could in several years allow us to test one of the most important, but obscure, questions about judicial performance.  Although there have been a few studies about the usage, hiring, and quality of law clerks, I haven’t seen work that really convinces me that clerks change judicial performance (rather than match it).  That question of influence is pretty important for all kinds of reasons — not least because if law clerks were really influencing their judges, we might want to spend a little bit more time thinking about their roles, ethics, hiring, etc.

So what’s the shock?  I think that the period of 2008-2011 will prove, in retrospect, to be bumper years for clerk quality.  Anecdotally, I’ve heard that the clerkship market has never been more competitive: Yale grads have been encouraged to take state court clerkships (the horror); judges in popular jurisdictions are receiving literally four to five thousand applications per clerk year; individuals who before might have taken firm jobs are instead throwing their hats in the ring; magistrate judges are taking clerks previously destined for district judges; alumni in practice for five years are going back into the clerk market and competing with fresh-faced 3Ls.  As an organ of the government, the judiciary simply eats better brains when the economy stinks.

Assuming the effect is real (which we could test by looking at placement statistics), I’d propose that eight to ten years from now – in 2018 or thereabouts – we test whether opinions arising from this bumper-clerk period are cited at a higher rate than opinions from the ordinary market periods immediately preceding and following.  The hypothesis would be that if clerks influence judges to write better opinions, better clerks will produce to more citable opinions.  Notably, we can’t perform this same analysis on the effect of past recessions, as (1) they reportedly didn’t have the same effects on the clerkship market; and (2) opinion collection practices were really sporadic before 1995.  It’s 2018 or bust.  Mitu et al., I call dibs!

  October 7, 2009 at 8:34 am   Posted in: Behavioral Law and Economics, Economic Analysis of Law, Empirical Analysis of Law, Sociology of Law   Print This Post   12 Comments

Growth and Entrepenuership

posted by Dave Hoffman

Quick: what percent of the U.S. manufacturing workforce labors in workplaces of twenty employees or less. What percent of all workers are self-employed?

No idea? Here’s some help.

• 18 percent of the British manufacturing workforce labors in small firms, and 15 percent of all workers are self-employed.
• 13  percent of the German manufacturing workforce labors in small firms, and 12  percent of all workers are self-employed.
• 31 percent of the Italian manufacturing workforce labors in small firms, and 26 percent of all workers  are self-employed.
• 18  percent of the French manufacturing workforce labors in small firms, and 9  percent of all workers are self-employed.

Answers follow the jump.

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  September 23, 2009 at 10:50 am   Posted in: Economic Analysis of Law, Social Network Websites   Print This Post   2 Comments

Google Books and the Limits of Courts

posted by Frank Pasquale

The Google Books litigation has inspired a lot of commentary on the web. As an early October fairness hearing approaches, a consensus appears to be building: the proposed settlement is too important and complex for a court to approve in its current form. Agent Lynn Chu has complained that “No one elected the[] ‘class representatives’ to represent America’s tens of thousands of authors and publishers to convey their digital rights to Google.” Pamela Samuelson, by all accounts one of the leading academics in American intellectual property law, has this to say:

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. OCLC has estimated that there are 22 million authors of books published in the U.S. since 1923 (the year before which books can be presumed to be in the public domain). Jan Constantine, a lawyer for the Authors Guild, is optimistic that authors and publishers of out-of-print books will sign up with the Registry, but there are many reasons to question this.

For one thing, the proposed settlement agreement implicitly estimates that only about 750,000 copyright owners will sign up with the Registry, at least in the near term. Second, many books are “orphans,” that is, books whose rights holders cannot be located by a reasonably diligent search. Third, many easily findable rights holders, particularly academic authors, would much rather make their works available on an open access basis than to sign up with the Registry. Fourth, signing up with the Registry will not be a simple matter, since the Registry won’t just take your word for it that you are the rights holder. You are going to have to prove your ownership claim.

The non-representativeness of the class is one ground on which it is possible to object to the proposed Book Search settlement. Other reasons to object or express concerns will be explored in subsequent articles. Objections must be filed with the court by September 4, 2009.

A suitable platform for hosting public discussions of the deal only launched a few weeks ago, thanks to the diligent efforts of James Grimmelmann (who is also organizing an academic conference on the issue in October). The proposed settlement raises a number of issues, which may only be addressed by extensive regulation of the project — or a public alternative dedicated to serving those marginalized by the current proposal.
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  August 11, 2009 at 9:39 am   Posted in: Antitrust, Economic Analysis of Law, Google & Search Engines, Intellectual Property, Law and Inequality, Privacy, Uncategorized   Print This Post   One Comment

From Antitrust to Anti-Systemic Risk

posted by Frank Pasquale

The “optimal size and complexity of developing countries’ financial systems” has been hotly debated in the economics community. Writing for the Harvard Business Review & Boston Globe, Duncan Watts focuses on our own dilemmas in a provocative account of complex systems:

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity of the system.

So if the complexity of our financial systems exceeds that of even the most sophisticated risk models, how can government regulators hope to manage the problem? There is no simple solution, but one approach is close to what the government already does when it decides that some institutions are “too big to fail,” and therefore must be saved – a strategy that, as we have seen recently, can cost hundreds of billions of taxpayer dollars. . . .

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail.

Of course, our system has been headed in precisely the opposite direction, largely thanks to the “best and brightest” now at Treasury and the Fed. As Simon Johnson puts it, we “pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.”

  July 20, 2009 at 8:57 am   Posted in: Antitrust, Corporate Finance, Economic Analysis of Law   Print This Post   2 Comments

Google Book Search Scrutiny

posted by Frank Pasquale

Writing in Slate, Mark Gimein knocks down a number of straw man arguments against the Google Book search deal. I look forward to seeing how he grapples with more serious concerns, like those raised by James Grimmelmann. I’ve also been impressed by Christopher Suarez’s working paper on the need for antitrust scrutiny of the proposed deal . Suarez proposes a number of sensible settlement modifications that I hope the court will take seriously. It doesn’t have much time to get this right, as the following conference announcement shows:
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  July 1, 2009 at 4:29 pm   Posted in: Antitrust, Economic Analysis of Law, Google & Search Engines, Intellectual Property   Print This Post   No Comments

Modern Day McCarthyism

posted by Frank Pasquale

I was recently listening to a program on the rise of “red-baiting” in some Vietnamese-American communities. It’s apparently becoming a common rhetorical strategy:

On April 16, 2009, the Thurston County Court ruled in favor of a Vietnamese man who sued for defamation. This case was the first of its kind in the state of Washington. . . . The court found the five defendants . . . guilty for wrongly accusing the plaintiff . . . of having communist sympathies.

[I]n this case, both the defendants and plaintiffs fought against communism during the Second Indochina War. All those interviewed invoked a word commonly used within the Vietnamese émigré community to describe the act of wrongly accusing someone of communist sympathies: chụp mũ. As this trial brought to light, chụp mũ is a widespread practice among Vietnamese community leaders. However, it is very rare for a person who has been chụp mũ to sue his/her accusers.

This might be an interesting precedent for those accused by shock jocks of being socialist, Marxist, Bolshevik, or in favor of concentration camps.
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  June 25, 2009 at 5:41 pm   Posted in: Current Events, Economic Analysis of Law, First Amendment, Law and Inequality   Print This Post   No Comments

Paging Dr. Gawande: Health Reform Matters.

posted by Frank Pasquale

Atul Gawande’s article “The Cost Conundrum” has become a cause celebre in policy circles. The Obama White House is reading it, leading journal Health Affairs has sponsored a roundtable on it, and pundits across the political spectrum are invoking it.

There are good reasons for all the attention in health reform circles. But there’s a paradox here, too, because Gawande doesn’t believe that changes to health care finance and regulation can deter the wasteful and uncoordinated provider behavior which he sees at the root of the present crisis. I respectfully disagree. Law may not be doing a good job at this now—largely because health care regulators over the past 20 years vastly overestimated the degree to which the market would improve quality and access. But we have a rare window of opportunity to correct for those assumptions. Moreover, without real reform, the profit-obsessed providers who are the villains of Gawande’s piece will systematically outcompete the integrated delivery systems he champions. Gresham’s Law applies in health care, too.

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  June 24, 2009 at 6:51 am   Posted in: Economic Analysis of Law, Health Law   Print This Post   One Comment

Where are the Rating Agencies in the Financial Regulatory Overhaul?

posted by Frank Pasquale

Jonathan Stempel of Reuters notes that “rating agencies [were] largely spared” in the financial industry regulatory overhaul proposed by the Obama administration. Jonathan Macey of Yale critiques the oversight:

“The overall impact of existing and proposed regulatory changes on rating agencies is extraordinarily easy to summarize: They reward abject failure,” said Jonathan Macey, deputy dean of Yale Law School.

“Any credit rating agency that relies on an NRSRO rating [nationally recognized statistical rating organization pursuant to the Securities and Exchange Act of 1934], which is effectively a government subsidy, should be subject to lawsuits by investors,” he went on. “It should also be made clear to professional investors that it is not a defense or a sufficient discharge of their fiduciary duties to rely on credit ratings when assembling portfolios.”

Given my recent series of posts on the “public/private” divide, I was heartened to see Macey characterize the government licensure of rating agencies as a “subsidy.” As I noted in my 2007 post “From First Amendment Absolutism to Financial Meltdown?,” the agencies have used a “free expression” shield to protect against legal consequences for their incompetence, malfeasance, and conflicts of interests. Following the reasoning of FAIR v. Rumsfeld, Congress may be able to condition the “subsidy” of requiring investor reliance on ratings agencies’ work on ratings agencies’ willingness to give up First Amendment immunity from lawsuits.

Admittedly, Congress has gone in precisely the opposite direction in the recent past. In 2006, the Rating Agency Reform Act specifically prohibited the SEC from regulating the “substance of the credit rating or the procedures and methodologies.” We can only hope that current Congress is more serious about either really regulating this field, or getting out of the “implicit subsidy” business altogether.

  June 19, 2009 at 8:27 am   Posted in: Corporate Finance, Economic Analysis of Law   Print This Post   No Comments

Routing Around Government Pay Scales

posted by Frank Pasquale

I know, you’re expecting a post on the new compensation czar. But before commenting on that, I want to think a bit about the way in which Sallie Mae–once a GSE, now “fully privatized”–may amount to a de facto end-run around the usual pay scales for government work.

Back in May, Gail Collins editorialized on “the epicenter of the college loan strangeness,” guaranteed student loans. For such loans, she says, the following holds:

We the taxpayers pay the banks to make loans to students.

We the taxpayers then guarantee the loans so the banks won’t lose money if the students don’t pay.

We the taxpayers then buy back the loans from the banks so they can make more loans to students, for which we will then pay them more rewards.

As she noted in another column, “The White House believes that if it cuts out the middlemen, and just gives the loans to the students directly, it can save $94 billion over 10 years.”

Predictably, the middlemen have furiously lobbied to preserve their prerogatives. Sallie Mae has “hired two prominent lobbyists, Tony Podesta, whose brother, John, led the Obama transition, and Jamie S. Gorelick, a former deputy attorney general in the Clinton administration.” The lobbyists are to press the case that private lenders create value via “marketing, customer relations, billing, default prevention and collection of delinquent loans.” Collins counters that “The real competition among the lenders is not to win over students so much as the school financial aid officers . . . [leading to] thinly disguised bribes and kickbacks.” The Wall Streeting of higher education encourages such shenanigans.

I only have a couple of comments on the situation.
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  June 10, 2009 at 6:41 pm   Posted in: Administrative Law, Economic Analysis of Law, Law School   Print This Post   One Comment

Public Option as Private Benchmark

posted by Frank Pasquale

Ezra Klein has given a nice explanation of the advantages of public options in our health insurance ecosystem. He summarizes three different types of options that could develop, including a “trigger plan” (which be “triggered into existence [where] the private insurance market” failed), a “weak public plan” (which “couldn’t use the low rates that Medicare sets” and would just act as another insurer) and a “strong public plan” (which would basically be modeled on Medicare). Klein argues that, whatever public plan were adopted, “The existence of another option changes the market. Individuals will have access to private insurers, but they’ll no longer be stuck with them.”

I agree with Klein that a public option can help us achieve the trifecta of health reform–increasing access, reducing costs, and improving quality. Tyler Cowen challenged Klein today, and I’ll try to answer Cowen.

First, Cowen argues that the public plan will be very expensive, for if “public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.” Even if that’s the case, other industrialized nations have used prospective and retrospective risk adjustment to level the playing field between plans. As I noted yesterday, even private health insurance lobbies have conceded that “spread[ing] costs for the highest-risk individuals” is necessary to guarantee coverage for all. Risk-adjustment should not be seen as a subsidy—rather, it’s a way to keep a level playing field between the public and private plans.

Private insurers’ apparent acceptance of risk-adjustment may seem irrational if you think that they are only in the business of trying to gain the healthiest customers and shed the sickest. Tempting as it is, that cream-skimming is only one part of the broad range of things that insurers do. Many large insurers make substantial “administrative services only” revenue–for example, by administering self-insured employers’ plans. (In that way they avoid financial risk from sick insures–that risk is assumed by the employer funding the plan). Risk adjustment would further reduce their incentives to avoid people with pre-existing conditions. In terms of quality, private insurers can compete with the public plan on several dimensions, including identifying good providers, incentivizing best practices, and fairly determining access to treatment and payments for providers.

It’s that last function—coverage and payment determinations—where the public plan really has a chance at improving insurance for everyone. Today’s default for private insurers is secrecy in pricing, and opaque “gotchas” buried in thick plan documents. As Uwe Reinhardt has noted,
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  June 9, 2009 at 5:50 pm   Posted in: Economic Analysis of Law, Health Law   Print This Post   10 Comments

Immutable Terms?

posted by Dave Hoffman

Bob’s opening post about the ALI Principles of Software Contracts project alludes to commentators who criticized Section 3.05(b)’s purported immutability.   As a commentator to Bob’s post noted, a joint letter between rivals Linux and Microsoft is the most prominent example of this critique.  According to lawyers representing the software concerns, a “far better way” of addressing the implied warranty of no material hidden defects would be to make it disclaimable, since implied warranties are ordinarily disclaimable under the UCC.

As Bob’s post points out,  3.05 isn’t strictly speaking immutable at all: the vendor can “contract out” by simply disclosing the defect!  And even were that not true, contracts transferring goods with defects that are (i) material; (ii) known to the seller at the time of sale; and (iii) hidden would create a serious problem of good faith, which is not generally disclaimable under the common law or under the UCC.   Providing a good that the seller knows is materially defective — when the buyer can not learn that fact before the purchase is completed – would very likely be bad faith.  But why not permit such bad faith conduct to be disclaimed?  Can’t Microsoft simply come out and say

“There is an implied warrant out there that promises you that the copy of Windows you are about to buy isn’t materially defective.  Without admitting, or denying, that this particular copy of windows contains a material, hidden, defect, we hereby disclaim that warranty.  Go pound sand.”

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  June 2, 2009 at 9:20 pm   Posted in: Contract Law & Beyond, Cyberlaw, Economic Analysis of Law   Print This Post   2 Comments

Compensation Caps and Relative Deprivation

posted by Frank Pasquale

Former Fed Vice Chair Alan S. Blinder’s column “Crazy Compensation and the Crisis” offers a sensible perspective on some origins of the current economic crisis:

Take a typical trader at a bank, investment bank, hedge fund or whatever. . . .[W]hen they place financial bets [they face the following odds]: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM [other people's money] will absorb almost all of the losses anyway.

[Now] let’s consider the incentives facing the CEO and other top executives of a large bank or investment bank (but, as I’ll explain, not a hedge fund). For them, it’s often: Heads, you become richer than Croesus ever imagined; tails, you receive a golden parachute that still leaves you richer than Croesus. So they want to flip those big coins, too.

After this flash of insight, Blinder retreats into quietism, counseling that “fixing compensation should be the responsibility of corporate boards of directors and, in particular, of their compensation committees.” I don’t know why he doesn’t consider the power of an income tax system that’s much more progressive at the very top income levels. As David Leonhardt observes,

Today . . . the very well off and the superwealthy are lumped together. The top bracket last year started at $357,700. Any income above that — whether it was the 400,000th dollar earned by a surgeon or the 40 millionth earned by a Wall Street titan — was taxed the same, at 35 percent. This change [from the past] is especially striking, because there is so much more income at the top of the distribution now than there was in the past.

Of course, we may need to be sensitive to the rising costs of living for the wealthy.
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  May 29, 2009 at 7:33 am   Posted in: Economic Analysis of Law, Law and Inequality, Tax   Print This Post   2 Comments

Inequality and the Global Economic Crisis

posted by Frank Pasquale

Yale Global Online Magazine has been publishing some interesting articles on the global economic crisis. I found Branko Milanovic’s observations on the origins of the crisis a refreshing new take on the matter:

In the United States, the top 1 percent of the population doubled its share in national income from around 8 percent in the mid-1970s to almost 16 percent in the early 2000s.* That eerily replicated the situation that existed just prior to the crash of 1929, when the top 1 percent share reached its previous high watermark. . . . . . But the richest people and the hundreds of thousands somewhat less rich, could not invest the money themselves. They needed intermediaries, the financial sector. Overwhelmed with such an amount of funds, and short of good opportunities to invest the capital (as well as enticed by large fees attending each transaction), the financial sector became more and more reckless, basically throwing money at anyone who would take it. . . . The increased wealth at the top was combined with an absence of real economic growth in the middle. . . . [as] household debt increase[d] from 48 percent of GDP in the early 1980s to 100 percent of GDP before the crisis.

The root cause of the crisis is not to be found in hedge funds and bankers who simply behaved with the greed to which they are accustomed (and for which economists used to praise them). The real cause of the crisis lies in huge inequalities in income distribution which generated much larger investable funds than could be profitably employed. The political problem of insufficient economic growth of the middle class was then “solved” by opening the floodgates of the cheap credit.

In other words, rather than being directed toward concrete projects that would satisfy real human needs, the money went round and round in speculative games, as the notional value of global OTC derivatives doubled three times between 2000 and 2008. As Martin Wolf observes, those able to skim compensation from those games “now sit on fortunes earned in activities that have led to unprecedented rescues and the worst recession since the 1930s.” Why would they invest in, say, renewable energy here, or infrastructure in Africa, or heating equipment for China when they could make a quick buck on the US housing bubble?
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  May 27, 2009 at 7:47 pm   Posted in: Economic Analysis of Law, Uncategorized   Print This Post   3 Comments

Froomkin on Foreclosure Prevention

posted by Frank Pasquale

I wanted to highlight an effort by University of Miami Professor Michael Froomkin to create public interest positions designed to help those in South Florida facing foreclosure:

[I am] trying to get one problem (the lousy market for law graduates) to help solve another (South Florida’s foreclosure crisis). . . . South Florida is ground zero for the national foreclosure crisis. The courts and the legal system are overwhelmed by this legal tsunami. In all of 2006, fewer than 10,000 foreclosures were filed in the Miami-Dade courts. In the first month of 2009, more than 6,000 foreclosures were filed in those same courts . . . and the rate of foreclosure filings has increased since then. . . . This is an unprecedented legal crisis for our community. As the Daily Business Review recently put it, “thousands of families are being displaced. Some end up on the streets or in shelters.”

As George Packer’s article The Ponzi State noted, “government oversight of the real-estate market was so negligent that more than ten thousand convicted criminals got jobs in the mortgage industry.” Riddled with fraud, the housing market in Florida recapitulated the 1920’s boom and bust that John Kenneth Galbraith described. Now a welter of interests on Capitol Hill are likely to make an already formidable legal landscape ever more complex.

Given Katherine Porter’s work on the dubious fees that are a staple of the foreclosure landscape, I applaud Froomkin’s effort to improve the legal prospects of homeowners in distress. As Dean Baker has testified, even the sea of money now unleashed by the Fed probably won’t be enough to prop up housing markets there:

In some of the most bubble-infected markets, like Phoenix, San Diego, Los Angeles, and Miami, the rate of price decline is closer to 30 percent. By every measure, inventories of new homes, inventories of existing homes, and vacant ownership and rental units, there is an unprecedented excess supply of housing. As a result, it is almost inconceivable that house prices will stop deflating in these markets any time soon.

I think Baker’s “right to rent” proposal is a sensible one. (As Stephanie Stern has shown, the “benefits of ownership” have been greatly exaggerated by housing policy makers.) But given the unlikelihood of its adoption, proposals like Froomkin’s are probably the best way to level the playing field between homeowners and the powerful banking lobbies now influencing policy on Capitol Hill. He’s accepting donations for the program at Discourse.net.

Via: Brian Leiter.

  May 23, 2009 at 7:55 pm   Posted in: Current Events, Economic Analysis of Law, Uncategorized   Print This Post   One Comment

Does Law and Economics Destroy Law Students’ Sense of Justice?

posted by Dave Hoffman

A draft paper by Raymond Fisman (Columbia Business),  Shachar Kariv (Berkeley Economics) and Daniel Markovits (Yale Law) has gotten surprisingly little attention given its potentially radical implications.  Maybe it’s the title: Exposure to Ideology and Distributional Preferences. I would have gone with something different.  Perhaps “Law and Economics Eats Law Students’ Hearts.”

The authors looked at first-year students at Yale Law School taking contracts and torts.  They labeled the students’ professors by their purported tendency to emphasize economic and “humanist” rhetoric in class.*  They then used the natural experiment of law school sorting to determine the effect that exposure to economic ideology had on law students’ distributional preferences in the dictator game. That is, did students taught by economically-minded professors behave differently than those taught by professors disposed toward humanism or critical-legal studies?

The bottom line: students taught by economically-minded professors were both more selfish and more likely to see fairness as a form of kaldor-hicks efficiency.  By contrast, students taught by humanists were more generous and also  likely to see fairness as a matter of equity.

These are important results for those interested in legal education.

• First, and most obviously, it suggests that our preferences for altruism and the content of fairness are highly manipulable — one semester of teaching by a professor – at Yale, no less – can affect them.  I admit to being a bit surprised by the size of the effect, given the mixed results from earlier work on the relationship between economics and altruism.  It’s also surprising that Yalies are so impressionable!  I wonder whether the effect persists past a semester, and whether better coding of actual classroom discussion would have changed the results.
• Second, it suggests yet more reasons for researchers to think hard about the effect that law school teaching has on the content of legal doctrine.  As I’ve argued, it’s quite likely that some law school professors who never published a lick have had more effect on substantive legal doctrine than those who’ve written reams, simply by influencing how their students (who went on to be lawyers and judges) thought about the content of rules and the byways of arguments.  We should do more work like this!
• Third, and most personally, this makes me nervous.  I’m a highly socratic teacher who places lots (and lots) of emphasis in the first-year on efficiency-arguments and on the need to look beyond questions about distributional equality in the present case.  I thought that by doing so I was helping students to think critically about the dynamic nature of contract law – the relationship between contract rules and market price; the usefulness of an intelligent system of defaults; the importance of getting beyond gut intuitions.  But maybe I’m also indoctrinating the students to grab more of the pie for themselves.  Nuts.

*The method they used to code economic preferences was, to be frank, a little mystifying.  They gave points for PhD’s in economics, but had to make exceptions for Alan Schwartz, PhDless but L&E to the bone, Guido, for obvious reasons, and both Robert Gordon and Carol Rose, who are similarly off-set.  Why not simply ask the professors themselves how much they emphasized economic rhetoric in class?  Or the students?

  May 18, 2009 at 6:17 pm   Posted in: Behavioral Law and Economics, Contract Law & Beyond, Economic Analysis of Law, Empirical Analysis of Law, Law School, Law School (Scholarship), Law School (Teaching), Law Student Discussions   Print This Post   4 Comments

Brooksley Born: Profile in Financial Courage

posted by Frank Pasquale

While public intellectuals like Richard Posner assure us that “no one could have foreseen” today’s financial crisis, many voices called for the types of sensible regulation that may well have prevented it. Today one of them, Brooksley Born, is being honored at the John F. Kennedy Presidential Library with a Profile in Courage Award. It is given to “to one or more public officials who took a stand that took a lot of integrity and nerve.” Here is Born’s citation:

In 1998, as chair of the Commodity Futures Trading Commission (CFTC), Brooksley Born unsuccessfully tried to bring over-the-counter financial derivatives under the regulatory control of the CFTC. The government’s failure to regulate such financial deals has been widely criticized as one of the causes of the current financial crisis. In the booming economic climate of the 1990’s, Born battled other regulators in the Clinton Administration, skeptical members of Congress and lobbyists over the regulation of derivatives, warning that unregulated financial contracts such as credit default swaps could pose grave dangers to the economy.

Her efforts brought fierce opposition from Wall Street and from Administration officials who believed deregulation was essential to the extraordinary economic growth that was then in full bloom. Her adversaries eventually passed legislation prohibiting the CFTC from any oversight of financial derivatives during her term. She stepped down from the CFTC in 1999 and returned to a distinguished career in public interest law.

The silencing of Born was just one more sad consequence of the Clinton administration–whose tilt to Wall Street lobbies was almost indistinguishable from that of Reagan and the Bushes. As Frank Partnoy has said,

History already has shown that [Alan] Greenspan was wrong about virtually everything, and Brooksley was right . . . I think she has been entirely vindicated. . . . If there is one person we should have listened to, it was Brooksley.

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  May 18, 2009 at 12:23 am   Posted in: Corporate Finance, Economic Analysis of Law, Uncategorized   Print This Post   One Comment

Toward Transparent Derivatives Trading

posted by Frank Pasquale

Could you describe the financial crisis in a sentence? Margaret Atwood’s description (in Payback: Debt and the Shadow Side of Wealth) appears to me as good as any:

[This] scheme. . . boils down to the fact that some large financial institutions peddled mortgages to people who could not possibly pay the monthly rates and then put this snake-oil debt into cardboard boxes with impressive labels on them and sold them to institutions and hedge funds that thought they were worth something.

I’d only add one amendment, to recognize the last step in the agency problem: the products were sold by and to institutions whose managers believed that they could still pocket fees and bonuses without being liable to principals for gross malfeasance. As the former head of AIGFP enjoys his fortune, the joy in passing on the proverbial hot potato must daily bring a smile to his face.

As these black boxes continue to blow up, the WSJ Opinion page recently featured a proposal to open up some of them. Professors Viral Acharya and Robert Engle argue that “derivative trades should all be transparent,” in refreshingly plain English:

Most financial contracts are arrangements between two parties to deliver goods or cash in amounts and at times that depend upon uncertain future events. By their nature, they entail risk, but one kind of risk — “counterparty risk” — can be difficult to evaluate, because the information needed to evaluate it is generally not public. Put simply, a party to a financial contract might sign a second, similar financial contract with someone else — increasing the risk that it may be unable to meet its obligations on the first contract. So the actual risk on one deal depends on what other deals are being done. But in over-the-counter (OTC) markets — in which parties trade privately with each other rather than through a centralized exchange — it is not at all transparent what other deals are being done.

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  May 17, 2009 at 6:21 pm   Posted in: Corporate Finance, Economic Analysis of Law, Uncategorized   Print This Post   4 Comments

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