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Category: Economic Analysis of Law

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Talent Wants to be Appreciated

Orly’s book is terrific–a model for pulling together theory, stories, and data to argue for a dynamic system of free-flowing employees, resources, and ideas. I am persuaded that non-competes and other human capital controls often cause more harm than good.

But amidst the many stories and studies, I would have welcomed more theory. Okay, employee mobility is good. But how good? How far should we push this idea?

Consider a society where every worker is an at-will contractor, working singly on a single project or task. Such a purely contractual world would be dynamic, as workers jump from project to project like insects chasing nectar. But would it maximize the value of production?

To have a theory of employee mobility, one must have a theory of the firm. Why do we have firms and employees in the first place, instead of a web of independent contractor relationships?  The idea of team production (Alchian & Demsetz) may be useful here: production may be maximized by working in teams. This seems to be as likely to be true for innovative production as any other form of production.

Through this team production lens, the critical information cost is the difficult and costly monitoring and metering of individual performance within a group activity. While Orly notes that “[t]oo much supervision can smother creative sparks” (p. 133), too little supervision means that high performers are not appreciated and rewarded. Organizing team production within a firm gives entrepreneurs and managers an incentive to monitor effectively. It is impossible to get performance incentives precisely right at the individual level, and unhappy employees have a tendency to jump ship. But human capital controls–hard or soft–may induce employees to stay put and allow managers to evaluate employees over a longer period of time.

(Soft controls–under the umbrella of what Orly calls “stickiness”–include health insurance, deferred comp, workplace perks (e.g. free food, working on a beautiful campus), and the transaction costs of moving.)

Firms are themselves a soft form of human capital control. When we agree to work for someone else, we give up some freedom. But the existence of firms is, perhaps, a better way to maximize team production and, at least under some conditions, to promote innovation.

My point is that talent doesn’t want to be free, it wants to be appreciated. Firms that find the most efficient way to appreciate and reward talent (financially and otherwise) without devolving into an eat-what-you-kill culture have a competitive advantage.

 

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CELS VII: Data is Revealing Part 2

 

Shouldn't it be "data are revealing?"

Shouldn’t it be “data are revealing?”

[This is part 2 of my recap of the Penn edition of CELS, promised here. For Part 1, click here.  For previous installments in the CELS recap series, see CELS IIIIVV, and VIVII.]

Where were we?  I know: throwing stink-bombs at a civil procedure panel!

At the crack of dawn saturday I stumbled into the Contracts II panel. Up first was Ian Ayres, presenting Remedies for the No Read Problem in Consumer Contracting, co-authored with Alan Schwartz.  Florencia Marotta-Wurgler provided comments.  The gist of Ayres’ paper is that consumers are optimistic about only a few hidden terms in standard-form contracts. For most terms, they guess the content right. Ayres argued that should be concerned only when consumers believe that terms are better than they actually are.  The paper  proposes that firms make such terms more salient with a disclosure box, after requiring firms to learn about consumer’s knowledge on a regular basis. Basically: Schumer’s box, psychologically-calibrated, for everyone.  Florencia M-W commented that since standard-form contracts evolve rapidly, such a calibrated disclosure duty might be much more administratively complex than Ayres/Schwartz would’ve thought.  A commentator in the crowd pointed out that since the proposal relies on individuals’ perceptions of what terms are standard, in effect it creates a one-way ratchet. The more people learn about terms through the Ayres/Schwartz box, the weaker the need for disclosure. I liked this point, though it appears to assume that contract terms react fairly predictably to market forces. Is that true?  Here are some reasons to doubt it.

Zev Eigen then presented An Experimental Test of the Effectiveness of Terms & Conditions.  Ridiculously fun experiment — the subjects were recruited to do a presidential poll. The setup technically permitted them to take the poll multiple times, getting paid each time.  Some subjects were exhorted not to cheat in this way; others told that the experimenters trusted them not to cheat; others were given terms and conditions forbidding cheating. Subjects exhorted not to cheat and trusted not to cheat both took the opportunity to game the system significantly less often than those presented with terms and conditions. Assuming external validity, this raises a bit of a puzzle: why do firms attempt to control user behavior through T&Cs? Maybe T&Cs aren’t actually intended to control behavior at all! I wondered, but didn’t ask, if T&Cs that wrapped up with different formalities (a scan of your fingerprint; a blank box requiring you to actually try to sign with your mouse) would get to a different result.  Maybe T&Cs now signal “bad terms that I don’t care to read” instead of “contract-promise.”  That is, is it possible to turn online T&Cs back into real contracts?

Next, I went to Law and Psych to see “It All Happened So Slow!”: The Impact of Action Speed on Assessments of Intentionality by Zachary C. Burns and Eugene M. Caruso. Bottom line: prosecutors should use slow motion if they want to prove intent. Second bottom line: I need to find a way to do cultural cognition experiments that involving filming friends jousting on a bike. I then hopped on over to International Law, where Adam Chilton presented an experimental paper on the effect of international law rules on public opinion. He used a mTurk sample.  I was a concern troll, and said something like “Dan Kahan would be very sad were he here.” Adam had a good set of responses, which boiled down to “mTurk is a good value proposition!”  Which it is.

After lunch it was off to a blockbuster session on Legal Education. There was a small little paper on the value of law degrees. And then,  Ghazala Azmat and Rosa Ferrer presented  Gender Gaps in Performance: Evidence from Young Lawyers. They found that holding all else equal, young women lawyers tend to bill somewhat fewer hours than men, a difference attributable to being less likely to report being highly interested in becoming partners while spending more time on child care.  What was noteworthy was the way they were able to mine the After the JD dataset. What seemed somewhat more troubling was the use of hours billed as a measure of performance, since completely controlling for selection in assignments appeared to me to be impossible given the IVs available.  Next, Dan Ho and Mark Kelman presented Does Class Size Reduce the Gender Gap? A Natural Experiment in Law. Ho and Kelman found that switching to small classes significantly increases the GPA of female law students (eliminating the gap between men and women). This is a powerful finding – obviously,it would be worth it to see if it is replicable at other schools.

The papers I regret having missed include How to Lie with Rape Statistics by Corey Yung (cities are lying with rape statistics); Employment Conditions and Judge Performance: Evidence from State Supreme Courts by Elliott Ash and W. Bentley MacLeod (judges respond to job incentives);  and Judging the Goring Ox: Retribution Directed Towards Animals by Geoffrey Goodwin and Adam Benforado.  I also feel terrible having missed Bill James, who I hear was inspirational, in his own way.

Overall, it was a tightly organized conference – kudos to Dave Abrams, Ted Ruger, and Tess Wilkinson-Ryan.  There could’ve been more law & psych, but that seems to be an evergreen complaint. Basically, it was a great two days.  I just wish there were more Twiqbal papers.

 

 

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CELS VIII: Data is Revealing, Part 1.

 

"If you are going to mine my data, at least have the courtesy of displaying predictive probabilities!"

“If you are going to mine my data, at least have the courtesy of displaying predictive probabilities!”

[This is part 1 of my recap of the Penn edition of CELS, promised here.  For previous installments in the CELS recap series, see CELS III, IV, V, and VI, VII.]

Barry Schwartz might’ve designed the choice set facing me at the opening of CELS. Should I go to Civil Procedure I (highlighted by a Dan Klerman paper discussing the limits of Priest-Klein selection), Contracts I (where Yuval Feldman et al. would present on the relationship between contract clause specificity and compliance), on Judicial Decisionmaking and Settlement (another amazing Kuo-Chang Huang paper). [I am aware, incidentally, that for some people this choice would be Morton's. But those people probably weren't the audience for this post, were they.] I bit the bullet and went to Civ Pro, on the theory that it’d be a highly contentious slugfest between heavyweights in the field, throwing around words like “naive” and “embarrassing.”  Or, actually, I went hoping to learn something from Klerman, which I did. The slugfest happened after he finished.

In response to a new FJC paper on pleading practices, a discussant and a subsequent presenter criticized the FJC’s work on Twiqbal. The discussant argued that the FJC’s focus on the realities of lawyers’ practice was irrelevant to the Court’s power-grab in Twombly, and that pleading standards mattered infinitely more than pleading practice.  The presenter argued that the FJC committed methodological error in their important 2011 survey, and that their result (little effect) was misleading. The ensuing commentary was not restrained. Indeed, it felt a great deal like the infamous CELS death penalty debate from 2008. One constructive thing did come out of the fire-fight: the FJC’s estimable Joe Cecil announced that he would be making the FJC’s Twombly dataset available to all researchers through Vandy’s Branstetter program. We’ll all then be able to replicate the work done, and compare it to competing coding enterprises. Way to go, Joe!

But still, it was a tense session.  As it was wrapping up, an economically-trained empiricist in the room commented how fun he had found it & how he hoped to see more papers on the topic of Twombly in the future. I’d been silent to that point, but it was time to say something.  Last year in this space I tried being nice: “My own view would go further: is Twiqbal’s effect as important a problem as the distribution of CELS papers would imply?” This year I was, perhaps impolitically, more direct.

I conceded that analyzing the effect of Twombly/Iqbal wasn’t a trivial problem. But if you had to make a list of the top five most important issues in civil procedure that data can shed light on, it wouldn’t rank.* I’m not sure it would crack the top ten.  Why then have Twiqbal papers eaten market share at CELS and elsewhere since 2011? Some hypotheses (testable!) include: (1) civil procedure’s federal court bias; (2) giant-killing causes publication, and the colossi generally write normative articles praising transsubstantive procedure and consequently hate Twombly; (3) network effects; and (4) it’s where the data are. But these are bad reasons. Everyone knows that there is too much work on Twombly. We should stop spending so much energy on this question. It is quickly becoming a dead end.

So I said much of that and got several responses. One person seemed to suggest that a good defense of Twiqbal fixation was that it provided a focal point to organize our research and thus build an empirical community. Another suggested that even if law professors were Twiqbal focused, the larger empirical community was not (yet) aware of the importance of pleadings, so more attention was beneficent. And the rest of folks seemed to give me the kind of dirty look you give the person who blocks your view at a concert. Sit down! Don’t you see the show is just getting started?

Anyway, after that bit of theatre, I was off to a panel on Disclosure. I commented (PPT deck) on Sah/Lowenstein, Nothing to Declare: Mandatory and Voluntary Disclosure leads advisors to avoid conflicts of interestThis was a very, very good paper, in the line of disclosure papers I’ve previously blogged here. The innovation was that advisors were permitted to walk away from conflicts instead of being assigned to them immutably. This one small change cured disclosure’s perverse effect. Rather than being morally licensed by disclosure to lie, cheat and steal, advisors free to avoid conflicts were chastened by disclosure just as plain-vanilla Brandeisian theory would’ve predicted.   In my comments, I encouraged Prof. Sah to think about what happened if advisors’ rewards in the COI were returned to a third party instead of to them personally, since I think that’s the more legally-relevant policy problem. Anyway, definitely worth your time to read the paper.

Then it was off to the reception. Now, as our regular readers know, the cocktail party/poster session is a source of no small amount of stress. On the one hand, it’s a concern for the organizers. Will the food be as good as the legendary CELS@Yale? The answer, surprisingly, was “close to it”, headlined by some grapes at a cheese board which were the size of small apples and tasted great.  Also, very little messy finger food, which is good because the room is full of the maladroit.  But generally, poster sessions are terribly scary for those socially awkward introverts in the crowd. Which is to say, the crowd. In any event, I couldn’t socialize because I had to circle the crowd for you. Thanks for the excuse!

How about those posters?  I’ll highlight two. The first was a product of Ryan Copus and Cait Unkovic of Bolt’s JSP program. They automated text processing of appellate opinions and find significant judge-level effects on whether the panel reverses the district court’s opinion, as well as strong effects for the decision to designate an opinion for publication in the first instance. That was neat. But what was neater was the set of judicial base cards, complete with bubble-gum and a judge-specific stat pack, that they handed out.  My pack included Andrew Kleinfeld, a 9th circuit judge who inspired me to go to law school.  The second was a poster on the state appellate courts by Thomas Cohen of the AO. The noteworthy findings were: (1) a very low appeal-to-merits rate; and (2) a higher reversal rates for plaintiff than defendant wins at trial. Overall, the only complaint I’d make about the posters was that they weren’t clearly organized in the room by topic area, which would have made it easier to know where to spend time.  Also, the average age of poster presenters was younger than the average age of presenters of papers, while the average quality appeared as high or higher. What hypotheses might we formulate to explain that distribution?

That was all for Day 1. I’ll write about Day 2, which included a contracts, international law, and legal education sessions,  in a second post.

 

*At some point, I’ll provide a top ten list.  I’m taking nominations.  If it has federal court in the title, you are going to have to convince me.

Rethinking Airline Deregulation

The challenge to the US Airways/American merger led Justin Fox to reconsider the much-vaunted “success” of passenger airline deregulation:

Before deregulation, airlines in the U.S. were pretty reliable moneymakers. [After deregulation they] lost $41.6 billion (in 2011 dollars). And it’s not just shareholders who have come off terribly. The past few decades have been, if anything, an even bigger disaster for airline employees, many of whom have seen their pensions mostly evaporate and their pay and status diminish. Taxpayers haven’t come off untouched, either — getting stuck with partial pension bailouts and big loan guarantees to aid the ailing industry in recent years along with ongoing subsidies for airport construction and improvement.

But at least things are good for CEOs, right? Doug Henwood adds more critical perspective:

Between 1963 (when the figures begin) and 1979, the airfare subindex of the CPI grew 25% more slowly than the overall CPI. Since 1979, it’s growth 2.4 times as fast as overall inflation. A major reason for this is that there are many fewer nonstop flights than in the regulated days, and far tighter advance purchase restrictions. To the Bureau of Labor Statistics, which computes the CPI, such quality decreases are the same as price increases. (This is the opposite of the logic prevailing in computers, where rapidly increasing power is the same as a price decline.) And then ridership. Between 1948 and 1978, annual passenger miles flown grew 12% a year; since then, they’ve grown less than 4%.

Perhaps we can thank the deregulators for one thing: cutting the climate impact of a carbon-intensive industry.

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UCLA Law Review Vol. 61, Discourse

Volume 61, Discourse Discourse

Fighting Unfair Credit Reports: A Proposal to Give Consumers More Power to Enforce the Fair Credit Reporting Act Jeffrey Bils 226
A Legal “Red Line”? Syria and the Use of Chemical Weapons in Civil Conflict Jillian Blake & Aqsa Mahmud 244
Alleyne v. United States, Age as an Element, and the Retroactivity of Miller v. Alabama Beth Colgan TBD

A Nobel for Shiller

When I read Robert Shiller’s Finance and the Good Society last year, I had a sense the author treated the work as the penultimate step in a scholarly cursus honorum, to culminate in the Nobel. Thus my cautionary note in this review:

[Shiller] has eloquently analyzed the role of human psychology in markets, and he predicted both the tech and housing bubbles. He has been a methodological trailblazer, introducing behavioral science to the ossified academic discipline of finance. Time’s Michael Grunwald has called him a “must-read” among wonks in the Obama Administration. Shiller’s past books command respect and repay close reading. Given his sterling career, it is deeply disappointing to see Shiller divert the “behavioral turn” in economics into the apologetics of Finance and the Good Society.

As I explain in the review, in Finance and the Good Society Shiller engages in the cardinal sin of celebrity economists: he presumes to comment authoritatively on legal, poltical, and moral matters far from his real domain of expertise. As for co-winner Eugene Fama’s contributions, Justin Fox’s work is useful (as summarized in this 2009 review):

Eugene Fama . . . promulgated the efficient markets hypothesis in its most widely recognised form by combining it with the capital asset pricing model that portrays investing as a trade-off between risk and return. . . . [I]n the early 1990s, Fama and Kenneth French published a large empirical survey of stock market returns since 1940 and found several ways in which returns were not random and which could not be explained by [Fama's theory]. In aggregate, smaller companies did better than larger ones, while “value” stocks, which are cheap compared with the book value on their balance sheet, also outperformed. There was even a “momentum” effect – stocks that had been doing well for a while tended to continue to do so. . . . . Fox makes clear that this was tantamount to the founder of efficient markets admitting his theory was wrong and quotes the judgment of one critic: “The Pope said God was dead.” He is also scathing about Fama’s attempt to rescue the theory by categorising all these effects as “risk factors”. . . . All of this came more than a decade before last year’s implosion. So why did regulators continue to enshrine assumptions of efficiency in the rules they set?

The person who can answer that last question truly deserves a Nobel.

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The Credit Card Merchant Fee Litigation Settlement

I’d like to thank Concurring Opinions for inviting me to blog about In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.  This eight-year-old multi-district litigation has produced the largest proposed cash settlement in litigation history  ($7.25 billion) along with what is perhaps the most extraordinary release from liability ever concocted.  It may also be the most contentious.  Over half the name plaintiffs and over 25% of the class, including most large merchants (think Walmart, Target) and most merchant organizations, have objected.  On September 12, Eastern District of New York Judge John Gleesaon held a fairness hearing to consider the settlement, and the parties are awaiting his decision.  An appeal is a virtual certainty.

This post will provide background on the credit card industry pricing mechanisms that led to this litigation, the legal issues in the case, and the structure of the settlement.  (You can read more about the history of the credit card industry’s relationship to the antitrust laws here.)  In subsequent posts, I’ll separately analyze the damages and relief provisions in the settlement.  (If you can’t wait 8-) my working paper analyzing the settlement is here.)  If there are particular issues that you’d like to read more about, let me know in the comments and I will respond in subsequent posts.

The credit card industry is atypical, but not unique, in that it competes in a two-sided market, i.e., one that serves two distinct customer bases.  A card system like Visa provides both a purchasing device (credit cards) to consumers and a payment acceptance service to merchants.  (By way of comparison, the legal blogging market is also two-sided.  Concurring Opinions provides both an information forum to its readers and a platform to its advertisers.)

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The Economics of the Baby Shortage: A Horrifying Counter-example

In Landes and Posner’s famous, The Economics of the Baby Shortage, the authors consider the possibility that baby buyers are likely to self-selecting monsters.  Not so, they argue, as

“Moreover, concern for child abuse should not be allowed to obscure the fact that abuse is not the normal motive for adopting a child.  And once we put abuse aside, willingness to pay money for a baby would seem on the whole a reassuring factor from the standpoint of child welfare. Few people buy a car or television set to smash it.  In general, the more costly a purchase, the more care the purchaser will lavish on it.”

I’ve always found these lines to be particularly bizarre  (even in the context of an otherwise famously provocative, probably misleading, essay). In any event, they came to mind when a student in my L&E class forwarded on this chilling story.

“KIEL, Wisconsin, Sept 9 (Reuters) – Todd and Melissa Puchalla struggled more than two years to raise Quita, the troubled teenager they’d adopted from Liberia. When they decided to give up the 16-year-old, they found new parents to take her in less than two days – by posting an ad on the Internet…”

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No Margin for Error

FastSmileSuzanne Kim’s post below on the economic and social pressures for “smile surgery” reminds me of Jonathan Crary’s excellent book, 24/7: Late Capitalism and the Ends of Sleep. Reviewing developments ranging from military use of modafinil to the rise of energy drinks, Crary concludes that “Time for human rest and regeneration is now simply too expensive to be structurally possible within contemporary capitalism.” Might the same be said for unsmiling faces in hypercompetitive service industries?

The key questions here are: who’s in charge, and what are their values? A recent story on gender dynamics at Harvard Business School offers some clues:

The men at the top of the heap worked in finance, drove luxury cars and advertised lavish weekend getaways on Instagram, many students observed in interviews. Some belonged to the so-called Section X, an on-again-off-again secret society of ultrawealthy, mostly male, mostly international students known for decadent parties and travel. Women were more likely to be sized up on how they looked. . . .

As a a recent discussion on the problem of “Second Generation” gender bias showed, emphasis on appearance may be a key “unseen barrier” to equity.

Image Credit: book by Robin Leidner on the commodification of affect.

What Drives Innovation? The State

Magazines like The Economist mock industrial policy while piling praise on the private sector. But the more one knows about the intertwining of state and market in health care, defense, telecommunications, energy, and banking, the less realistic any strict divide between “public” and “private” appears. Moreover, even the internet sector, that last bastion of venture capital and risk-taking, is more a creature of state intervention than market forces. As Mariana Mazzucato argues:

Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground.

Apple is a perfect example. In its early stages, the company received government cash support via a $500,000 small-business investment company grant. And every technology that makes the iPhone a smartphone owes its vision and funding to the state: the Internet, GPS, touch-screen displays, and even the voice-activated smartphone assistant Siri all received state cash. The U.S. Defense Advanced Research Projects Agency bankrolled the Internet, and the CIA and the military funded GPS. So, although the United States is sold to us as the model example of progress through private enterprise, innovation there has benefited from a very interventionist state.

VC’s and other financiers exaggerated their role in promoting innovation in order to get capital gains tax breaks. And while they retreat ever further from taking risks on game-changing advances in productivity, the tax breaks endure, starving the state of the revenues it needs to continue subsidizing innovation. The California Ideology gradually undoes its own material foundations, but its adherents are unfazed. They are content to reap the benefits of past decades of government investment. From Silicon Valley to Wall Street, seed corn is the tax-cutters’ favorite meal.

X-Posted: Madisonian.