Category: Economic Analysis of Law

4

Economists Say the Funniest Things

firefighter.jpgThese scorching days inspire writing about firefighters. In Montana, Senator Burns is under fire for having attacked a local brigade. And in Dallas, W. Michael Cox, chief economist for the Federal Reserve Bank of Dallas, is in a bit of hot water for commenting on a study that found that the middle-class is being priced out of urban life. Cox said (to the NYT):

Of course, cities need police officers, firefighters, teachers. But as long as they can get the labor they need from somewhere nearby, some economists say, middle-class shrinkage may not hurt. In Southern California, developers import construction workers from Las Vegas and put them up in hotels; costs go up but rich clients can pay. Firefighters who want to live in high-priced cities can work two jobs, said [Cox.] “I think it’s great,” he said. “It gives you portfolio diversification in your income.” Pay for essential workers like plumbers and cabdrivers will tend to go up, he said.

Cox has an optics issue here, but he’s also missing the point. Economically diverse neighborhoods, the argument goes, are a type of a public good. Believing that individuals will “pay” for that good through double-employment is foolish.

13

Must District Judges Give Reasons?

gavel.jpgJonathan Adler highlights this astonishing Ninth Circuit opinion on the alleged misconduct of now-embattled District Judge Manuel Real. Some interesting facets of the case (previously blogged about here, here, and elsewhere). First, dissents matter. It is more than tempting to attribute the current push to impeach Judge Real to Judge Kozinski’s harsh dissent from the panel’s order exonerating him on the misconduct charge. Second, the case raises a neat issue which relates to what I’ve been writing this summer. While the overall facts of the case are well worth reading in the original, if you’ve ten or twenty minutes, I want to focus briefly on part of Judge Kozinski’s charge against Real: that he failed to explain the reasoning for a controversial order.

The basic story is that Judge Real withdrew the petition in a pending bankruptcy case and stayed a state-court judgement evicting a woman who was appearing before his court in a criminal matter. Both orders were entered apparently sua sponte, or at least without hearing the evicting party’s arguments. According to Kozinski, Judge Real “gave no reasons, cited no authority, made no reference to a motion or other petition, imposed no bond, balanced no equities. The two orders [the withdraw and stay] were a raw exercise of judicial power…” In a subsequent hearing, Kozinski continued, “we find the following unilluminating exchange”:

The Court: Defendants’ motion to dismiss is denied, and the motion for lifting of the stay is denied . . .”

Attorney for Evicting Party: May I ask the reasons, your Honor?

The Court: Just because I said it, Counsel.

Kozinski wrote:

I could stop right here and have no trouble concluding that the judge committed misconduct. [Not only was there a failure of the adversary process . . . but also] a statement of reasons for the decision, reliance on legal authority. These niceties of orderly procedure are not designed merely to ensure fairness to the litigants and a correct application of the law . . . they lend legitimacy to the judicial process by ensuring that judicial action is-and is seen to be-based on law, not the judge’s caprice . . . [And later, Kozinski exclaims] Throughout these lengthy proceedings, the judge has offered nothing at all to justify his actions-not a case, not a statute, not a bankruptcy treatise, not a law review article, not a student note, not even a blawg. [DH: Check out the order of authority!]

So here’s the issue: in the ordinary case, to what extent are judges required to explain themselves?

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2

The Judicial Salary Problem

Peter Lattman highlights some recent comments by Chief Justice Roberts. The Chief Justice talked, in part, about the campaign to raise the salary of federal judges:

At current salaries, “you no longer can draw the best trial lawyers, on a regular basis,” to the federal bench, Roberts said. While no one becomes a judge to get rich, he said, the government “ought to pay them enough so they can educate their children and have a reasonable lifestyle.””We don’t want to get to the point where we have the judiciary staffed solely by people of independent means, or by people for whom the judicial pay scale is a raise,” he said.

A few comments.

First, I wonder why the Chief Justice refers to “trial lawyers” as the appropriate pool. Even to the extent that he means “litigators” (because there are vanishingly few trials for judges to preside over), is there any reason, in theory, to think that litigation departments produce better jurists than corporate departments? I wonder. Considering that most of the job of the modern district judge is management of a process through to settlement, it would seem that corporate attorneys – at least ones who like to write – have a leg up.

Second, I (along with many others) question the claim’s empirics. The studies I have seen suggest that pay is not correlated with judicial decisions to retire (early). (The evidence is concededly mixed). It would be also quite surprising if it is correlated with agreeing to be nominated to the bench in all but the anecdotal case. The legal profession is acutely status conscious: lawyers who are in the position to be nominated have already demonstrated (through public service, or political connections, or effort) that they are particularly motivated by prestige as a substitute for cash. Moreover, it is a well-accepted fact that it is better to be a hammer than a nail. In our system, judges aren’t the nails. (Most of the time). In short, I think that even if you cut real federal judicial starting salaries (by keeping them constant despite inflation) the applicant pool would not significantly change.

But those are, essentially, market-clearing arguments, and don’t persuade me that the Chief Justice’s “real” point is wrong. Roberts has a better argument.

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8

Wild KPMG Fees Decision

Barely one day old, and Gonzalez-Lopez is already making waves in corporate law. To see the connection, however, you’ll have to bear with me for a bit of brush-clearing.

Judge Lewis A. Kaplan (S.D.N.Y.) today ruled on certain individual defendants’ motions to dismiss an indictment arising from the KPMG tax shelter investigation. (Large pdf here.) According to the defendants, their due process rights were violated when the U.S. Attorney pressured their former employer (KPMG) not to advance and reimburse legal fees incurred as individuals defendants. Judge Kaplan found a due process violation, scolded the government, and suggested a new lawsuit against KPMG to recover those legal fees, in which today’s decision would have collateral effect and make the proceedings summary. In short: the decision seems to constitutionalize the right to receive indemnification from your employer.

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7

Markets for Markets

Rob Rogers and I recently completed an article on the development of information markets. Our motivating question was to ask why information markets have covered certain subject areas, sometimes of minor importance (like the Michael Jackson trial), while neglecting other subject areas of greater social or monetary significance. We trace part of the answer to the choice of business model that information market entrepreneurs have chosen to employ, but part of it remains unexplained and is, we propose, a product of the random walk. The article is here.

3

Update on Plea Bargains and Prediction Markets

In Let Markets Help Criminal Defendants, I wrote that “If I were running a public defender service, I’d consider setting up an online prediction market for the conviction of my clients.” I still think this is a good idea, but someone suggested a serious problem that would have to be remedied for the scheme to be possible.

Right now, prediction markets bets on judicial events, like the conviction of Lewis Libby (whose graph is to the right), pay off at 100 for conviction, and 0 for any other ending of this set of charges, including a plea. This creates noise which renders them useless for criminal defendants looking to see if they ought to plea. That is, as I didn’t fully appreciate before, traders must be estimating the probability of conviction, tempered by the likelihood of a plea – prices are lower than the actual market estimate of a guilty verdict independent of a plea. That is, if the current price of Libby’s “stock” is .40, that means that incarceration is not 40% likely. It means that traders think it is 60% likely that Libby will win at trial, receive a mistrial, obtain a dismissal, be granted a pardon, or plea. I imagine that the likelihood of a plea accounts for a large percentage of this figure.

If traders thought that conviction prices affected defendant behavior, then presumably they’d seek to put in sell orders at prices above those where rational defendants would plea. This would put downward pressure on price and make the entire system useless from defense counsel’s perspective.

For my system to work, you’d have to exclude the possibility of a plea (i.e., nullify all bets if there is a plea). Of course, this still would create some dynamic tension, as bettors presumably would become eager to invest time and trade only as pleas become less likely – near trial, or in jurisdictions, like Philadelphia, where the District Attorney has a no-plea policy. But the resulting prices would be more informative than those offered by the current system.

7

Let Markets Help Criminal Defendants

ballandchain.jpgDan’s interesting post on plea bargaining made explicit the informational inequalities faced by criminal defendants and their lawyers. Indeed, one of the advantages public defenders have over private defense counsel is that they can more easily share information internally about the informal norms that “really” govern the system (judge sentencing practices; which cops tell what stories; which labs are sloppy; etc.) But even so, the instruments of law and order almost always will know more about the facts and the law than the defense, at least until the eve of trial and probably throughout the process.

That there are exceptions (Enron; OJ) proves the rule that informational asymmetry is a significant part of the prosecutor’s arsenal – indeed, this asymmetry justifies constitutional attempts to remedy the problem through mandatory discovery procedures. But I’m skeptical that legal rules alone are a panacea to structural problems. Why not try markets?

To be more concrete, the major decision that criminal defendants face is whether or not to plead guilty. The decision depends on a prediction about what will happen at trial. Assuming that defendants are risk averse, they will take pleas when rational actors would not, but generally will go to trial when the expected time served post-trial is less (by some margin) than the actual time proposed in the plea agreement. The problem is that (1) defendants are unsophisticated; (2) defendants’ lawyers are incented to push pleas; and (3) neither defendants nor their lawyers have as much information as prosecutors about likely verdicts.

If I were running a public defender service, I’d consider setting up an online prediction market for the conviction of my clients. Prediction markets did a fantastic job in the Enron trial. At the beginning of the trial, the odds of conviction were about 50% for each defendant; by the end, the odds were significantly higher. Now, I can understand why neither defendant would have pled facing a coin-flip’s chance at conviction. As I argued at the beginning of the trial:

I’d guess that the reason Skilling and Lay have not pled and Fastow has is demographics. Fastow is a young(ish) man, who can serve significant time and still emerge with earning power. Lay and Skilling don’t have the years left to do the time that the government (apparently) would find appropriate.

But for most criminal defendants, 50% odds would translate into a pretty hefty expected sentence that might make a plea more attractive. And, assuming that such markets would be sufficiently liquid, the predictions generated by traders ought to be both more accurate and less prone to bias than defense counsel’s odds. I imagine that the result would be a net decrease in pleas, and in the long term, as prosecutors reacted, less net jail time. That is, the current system is biased by risk aversion and agency problems – as others have observed – toward more jail. This effect may serve the forces of law and order, but it doesn’t necessarily serve the search for truth. Why not try something different?

Obvious objections: (1) the idea is “”utterly repugnant to a civilized society“; (2) thin markets are prone to manipulation; (3) incentives would increase to violate the attorney-client privilege; (4) it would look like public defenders are selling out their clients. Of these objections, I’d be most worried about #3.

Incidentally, if you are interested in thinking more about criminal law and the Enron trial, the Conglomerate is hosting what promises to be a great forum on the topic for the next two days. Check it out!

7

Six Flags Syndrome: Price Discrimination In Plea Bargaining

Six Flags.jpg Price discrimination occurs when any seller charges two different buyers a different price for the same product. Coupons are one obvious method of price discrimination. Airline advance purchase requirements are another. The term sounds ugly, but it’s basic marketing. One major area of price discrimination occurs between sophisticated and unsophisticated consumers. Uninformed car buyers often pay more for their autos than those who arrive with the newest pricing data from Edmunds. And while many web buyers routinely pay full price, others of us consult Coupon Cabin, Mom’s View, or XP Bargains before ordering online. We don’t do anything special for the discount; we just know enough to check for coupons.

In a blunt admission of price discrimination based on consumer sophistication, Six Flags’ VP for ticketing, Steve Brown, stated) “any guest paying full pirce at our parks is probably not doing their homework.”

Perhaps all is fair in love and sales, but what about plea bargaining? Would we feel OK if US Attorney Patrick Fitzgerald announced that “anyone pleading to ten years on a marijuana charge probably didn’t do his homework”? As a public defender, I often discovered that a DA’s “best” offer wasn’t on the table initially. I had to request it. Sometimes I provided good reasons for a better deal – I cast the client in a new light, for example, or discussed an extenuating circumstance. But often I simply scrunched up my face and said “come on, you can do better than that”…and he or she would serve up a better offer. I understood the game; as a public defender, I played it every single day.

But it turns out that clients – and more importantly lawyers – are often surprisingly unsophisticated in the negotiation process and will not demand the best posible offer. I’m reminded of a friend who was handling his first serious felony. His client faced a mandatory 6 year bid for the gunpoint robbery, but the DA was offering 10 years. My friend planned to ask for seven years. After we talked, I explained that in my jurisdiction (we were in different states), a first time offender facing these charges would usually receive the mandatory minimum. I encouraged him to ask for six years. And that’s exactly what his client got. But if he’d asked for seven years – his initial plan – the client would have served an extra year.

So should prosecutors “take advantage” of unsophisticated opponents by jacking up offers?

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1

This Post Will Be Barely Illuminating

Thanks to a reader of my recent paper on puffery, I recently came across the work of Andrew Ward and Lyle Brenner, Accentuate the negative: The positive effects of negative acknowledgment (forthcoming 2006; presentation link here). It is a neat paper, that examines the extent to which we credit messages that contain obvious warnings of their fallibility, and like messengers who introduce themselves with self-deprecation. Obviously, the study of deflation is less developed that that of optimism – and puffery – but it is an odd finding nonetheless that we seem to want any sales message except the unvarnished truth. I wonder if how the law can best take into account this psychological part of consumption. If we feel less cheated by, say, the purchase of stock which has been exposed as partly susceptible to a downturn through strategic pessimism, should the anti-fraud regimes of the ’33 and ’34 Acts account for this feeling?

More generally, it strikes me on first glance that the negative attribution effect may help to explain otherwise strange corporate events like the success of the self-deflating google IPO. (For Vic F’s branding theory, see this post; Ribstein’s comments here.)

It also helps to explain the odd persistence of the “shameless self-promotion” tag to law article announcement posts, even when the promotion benefits friends. Bill S., at TOTM, recently lamented this phrase, and said that “I don’t feel at all ashamed of doing this nor do I feel it is unseemly. Hence, I propose we drop the custom of including a “shameless self-promotion” reference when engaging in self-promotion.” I think Bill is leaving some money on the table here. Deflation, like puffery, moves flawed products.

2

On the Milberg Indictment

MW.gifI’ve been mulling over the Milberg indictment. Since I waited a weekend to post, I have the advantage of having read lots of other folks’ views. Quick summaries follow:

  • Michael Dorf: Kickback payments slaved the named plaintiffs to MW, bloating agency costs.
  • Steve Bainbridge:Kickbacks encourage “nuisance claims.” We may need criminal sanctions to crank the Hand formula to optimal levels, but only against individual lawyers.
  • Walter Olson:”[MW was] taking no chances on the watchdogs staying pacified: It threw regular chunks of raw liver into their cages.”
  • Larry Ribstein: Who cares? Lawyers are fungible.
  • Ed Morrissey: Bad for Democrats and ambulance chasers.
  • Christine Hurt: It’s high noon, and MW can’t blink.
  • And let’s not forget MW itself: It was just a referral! And the theory is overreaching! And our interests remained aligned!

Wow. Lots of words. So here is what I think.

First, I still don’t particularly understand the economics of outrage here. I’ve seen two arguments about why kickbacks are bad (apart from their being unlawful, which we’ll put aside briefly). First, I’ve heard the argument that they “capture” the lead plaintiff, making that person less able to monitor the lawyer’s work. As Dorf points out, however, plaintiffs in securities class actions are sort of like shareholders stockholders: they have deputized oversight and management to lawyers, in return for fiduciary duties. Some folks seem to have in mind a more active role for lead plaintiffs – something like a controlling stockholder(?) – but given the relatively low bonuses awarded in settlements for lead plaintiffs, why would anyone want to play that role? That is, you can’t have distributed, small-stakes, high-impact, governance by private actions and have plaintiff management at the same time. The capture argument is another way of saying that these types of claims are not in the public interest. But we don’t criminalize inefficient lawyering. Not usually.

The second argument I’ve seen is related to the first – it is Bainbridge’s – and it suggests that kickbacks encourage securities actions that are (on the merits) weaker. Yup, that sounds right. But that isn’t an argument against kickbacks, it is an argument that judges aren’t doing enough to raise hurdles to weak actions at early stages, as the PSLRA was designed to accomplish. To the contrary, I have found that judges are quite hostile to securities claims.

The argument that I haven’t seen on the blogs, but which is larded through the indictment, suggests that MW was, in effect, selling out the rest of the class to benefit the folks at the head of the line. And in a way, this is (for me) the strongest argument against the practice. If MW really did countenance paying referrals-as-kickbacks to named class members out of their portion of the settlement, then we know that dollars were being taken out of the mouths of the rest of the class pretty directly. On the other hand, one might argue that MW had to pay off the named plaintiffs to bring the cases in the first place – that it is a an expense like overhead.

Two additional aspects of the case trouble me. Obviously, indicting the entire firm feels excessive. I don’t agree with Larry R. that reputational effects won’t follow MW’s innocent lawyers. I know lots of counsel at MW – I litigated against them – and I thought they were incredibly hard working, tough, honest, passionate adversaries. One of my worst days as a lawyer came across a deposition table from an experienced Milberg partner: he taught me a great lesson on how to get one’s opponent to hang himself on the record. And I’d be shocked if more than a handful of lawyers at the firm had any knowledge of the activities charged. If the USAO is really indicting out of pique for failure to roll over as most corporations would do in response to a patently unreasonable discovery demand, well, many folks who think of themselves as white knights are going to be tarnished unfairly.

Second, I have some problems with the continued federalization of state practice ethical rules. Although the indictment doesn’t come out and say this, some of the illegality is premised on state fiduciary duty and referral laws. (Some, granted, is based on Rule 23.) Shouldn’t this type of prosecution be the job of Elliot Spitzer and his imitators? Which raises a question: why didn’t Spitzer get here first?