Category: Economic Analysis of Law

The Locust and the Bee

LocustBeeFables have been in the politico-economic air of late. The FT’s Martin Wolf considered the locust part of a master metaphor for the future of the global economy. He concluded that “the financial crisis was the product of an unstable interaction between ants (excess savers), grasshoppers (excess borrowers) and locusts (the financial sector that intermediated between the two).”

Now Geoff Mulgan has entered the fray with the excellent book The Locust and the Bee: Predators and Creators in Capitalism’s Future. As Mulgan observes,

If you want to make money, you can choose between two fundamentally different strategies. One is to create genuinely new value by bringing resources together in ways that serve people’s wants and needs. The other is to seize value through predation, taking resources, money, or time from others, whether they like it or not.

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Gently Nudging with Liability Rules?

No Smoking symbolWhy have sexual harassment and anti-smoking laws been so successful in changing entrenched social norms in the U.S. over the past few decades? In a 2000 U. Chicago Law Review article, Dan Kahan observed that combatting these ills took the approach of “gentle nudges,” imposing moderate remedies that were within the range of what decisionmakers (e.g. judges and juries) thought was reasonably proportional to the violation. Because these moderate remedies were enforced, norms shifted, and lawmakers could ratchet up the remedies. By contrast, Kahan observed that “hard shoves” imposing remedies substantially exceeding social norms fail to be enforced or to change norms. For example, France tackled sexual harassment by making it a criminal offense, which French society saw as vastly disproportionate. As a result, French sexual-harassment law went unenforced against conduct that would have easily incurred liability under U.S. law, and French norms barely shifted.

There is an underexplored connection between Kahan’s “gentle nudge” vs. “hard shove” dichotomy, and Calabresi & Melamed’s “property rule” vs. “liability rule” dichotomy. Calabresi & Melamed observed that remedies are either (1) liability rules, such as compensatory damages, or (2) property rules, such as injunctions or prison, which aim to deter. Liability rules generally overlap with “gentle nudges” in that they aim for proportional compensation. Property rules largely overlap with “hard shoves.”

The debate over the relative merits of property rules and liability rules has raged in academia and the courts. Bringing Kahan’s observations into the mix weighs in favor of liability rules, which are more likely to be enforced – and to shift norms.

I explore the relationship between these two dichotomies in sections II.C.3 and IV.C of a forthcoming article looking at IRS enforcement (or lack thereof). But their interrelationship is promising for anyone interested in either the property-rule/liability-rule debate or in altering social norms.

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LSA Retro-Recap Days 2-3: Leisure, Law & Econ, and Liberalism

Day 2 of the conference saw a spirited panel (featuring Scott Shaprio, Ken Ehrenberg, Michael Guidice, and Brian Tamanaha) about the (ir)reconcilability of legal anthropology and sociolegal studies with analytic jurisprudence. Much of the discussion (not to mention the spirit) here concerned the appropriate definition of a “concept.” If that kind of question does not induce somnolence for you, then read on! Read More

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The IRS Scandal, Property Rules, and Liability Rules

IRS LogoRegardless of your take on the IRS targeting conservative groups applying for 501(c)(4) status, the episode demonstrates once again that Congress, the Administration, and the media have multiple avenues to pressure the IRS to act or to reconsider earlier actions. This susceptibility to political pressure has broad, counterintuitive implications for how to best deter violations of requirements throughout tax law.

In their path-breaking law & economics article, Calabresi & Melamed observed that every entitlement can be protected by either a property rule (e.g. injunctions, disgorgement of profits) or a liability rule (e.g. compensatory damages). The same is true in tax law. When a taxpayer violates a requirement for a favorable tax status, the tax code either imposes additional tax proportionate to the harm (a liability rule) or imposes the draconian penalty of taking away the tax status entirely (a property rule).

Which rule is most likely to deter a well-connected organization from violating a requirement imposed on it by tax law? At first glance, property rules (i.e. yanking the organization’s favorable tax status) appear to be the most effective deterrent. But the IRS routinely hesitates to take this draconian step, which would result in complaints to Congress, the Administration, the media, and other organizations. Even if the tax code, as written, imposes this property-rule remedy, the IRS can and often does decline to impose it in practice.

Examples of this problem abound throughout tax law. My favorite example is a real estate investment trust (or “REIT”) that had its IPO in 2007 and revealed in its SEC filing that it was in clear violation of one of the requirements (I.R.C. § 856(a)(2)) to qualify as a REIT for tax purposes. How brazen! But what was the IRS to do? The requirement is protected by a property rule: the only remedy available to the IRS was to take away the REIT’s favorable tax status entirely. This would have been draconian. All the REIT’s shareholders would have complained to their congresspersons, the financial press would have run stories, and the National Association of Real Estate Investment Trusts would have raised a ruckus. The IRS didn’t dare impose this property-rule remedy. The IRS did nothing, and the REIT suffered no consequences for the violation.

Would this REIT have been so brazen if the requirement had, instead, been protected by a liability rule, which would merely have imposed additional tax proportional to the violation? Almost certainly not. And that is the counterintuitive result: liability rules are often more effective in practice than draconian property rules in deterring taxpayers from violating tax-law requirements.

The relative merits of property rules and liability rules in tax law are explored in depth by this forthcoming Virginia Law Review article.

 

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Corporate Political Speech, Rent-Seeking, and Political Extortion

Before I sign off, I’d like to thank Danielle et al. for their hospitality.  I’m very glad to have had this opportunity to share some of my thoughts, and to get some great feedback.  Let me finish up by offering an alternative rationale – grounded in public choice theory – for limited shareholder authority over corporate political spending.

Shareholder regulation of corporate political activity may not only decrease agency costs within the firm, it may improve overall societal welfare.  First, diversified shareholders might be able to constrain the costs of rent-seeking behavior that merely redistributes wealth between portfolio firms. Second, all shareholders may want to reduce the possibility of political extortion by removing from management the final say on certain kinds of political expenditures.  Allowing shareholders to regulate corporate political activity could limit these social welfare-decreasing activities, and channel corporate resources to more productive uses.  I sketch these arguments in more detail below. Read More

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The Efficiency of Corporate Political Speech Bylaws

Nearly half a century ago, Albert Hirschman formalized two ways in which members of organizations could express their displeasure: exit and voice.  Exit is market-based expression, and is typically quiet, impersonal and cheap.  Voice, by contrast, is political expression — it is usually loud, messy, and expensive.  From an efficiency perspective, exit is thus generally favored as a matter of institutional design.

Corporate law largely track Hirschman’s theory.  Shareholders’ voice rights are, by default, quite constricted, and the business judgment rule imposes an important limitation on seeking judicial remedies.  In most cases, unhappy shareholders’ only practical method of expressing their discontent is to exit the firm by selling their shares.

But Hirschman warns that in certain circumstances, such as where the barriers to exit are sufficiently high, it is preferable to adjust institutional design to facilitate or strengthen members’ voice rights.  Corporate political activity presents exactly such a case, because the standard shareholder remedies – suing, voting for the board of directors, and selling their shares – are either unavailing or exceptionally costly.  I treat this range of options in more detail elsewhere, but below I will briefly describe these problems with a focus one key area in which corporate political activity differs markedly from other types of corporate action, and then turn to an important objection. Read More

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Judge Posner’s Surveillance Argument Would Not Withstand An Economic Analysis

Judge Richard Posner took the occasion of the Boston bombing to remind us of his view that privacy should lose out to other values.  Privacy, argues Judge Posner, is largely about concealing truths “that, if known, would make it more difficult for us to achieve our personal goals.”  For instance: privacy helps the victims of domestic violence achieve their personal goal of living free from fear; it helps the elderly achieve their personal goal of staying off of marketing “sucker lists;” and it helps children achieve their personal goal of avoiding sexual predators online.

To be fair, Judge Posner acknowledges that some concealment is fine and that privacy laws may even “do some good.”  He worries rather about civil libertarians who would limit the expansion of surveillance to the point that we can neither deter, nor apprehend terrorists like the men responsible for bombing the marathon.  “There is a tendency to exaggerate the social value of privacy,” Judge Posner believes, and it just might get us killed.

Judge Posner is a founding member of the law and economics movement and, as such, it would seem fair to analyze his claim from the perspective of incentives.  Does video surveillance deter crime in general?  Empirical evidence suggests that cameras merely displace crime, and Judge Posner concedes that picking terrorists out of a crowd before they act is impracticable.  Does video surveillance help with identification?   Sure.  But the quick identification of the Boston bombers from private footage suggests we have enough surveillance.   Moreover, hardened terrorists have proven willing to die in an attack, making identification moot.

Then there are the unintended consequences—a mainstay of economic analyses of the law.  The fact that an act of terrorism will be caught on video and spread to every screen in America greatly enhances its intended impact, which in turn makes the option more attractive to our enemies.

One can quibble with my data points.  But any honest, empirically-informed cost-benefit analysis of additional surveillance will yield at best a mixed picture.  I submit that Judge Posner’s argument yesterday is dead wrong by the terms of the very movement he founded.

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Stand-ins for Justice?

The original title for this post was The People’s Supreme Court? because it was triggered by an article in last week’s New York Times about the increased use by law firms of place-holders (paid stand-ins) for seats at the United States Supreme Court.  According to the article, “place holding is common at Congressional hearings and is on the rise at the Supreme Court, where seats for last month’s arguments went for as much as $6,000.”  An earlier piece, published around the time the same-sex marriage cases were argued, noted that the practice has its detractors, including former Congressman Barney Frank, whose proffered remedy is televised Supreme Court arguments.

I changed the title of this post after an incident on Friday.  While returning to my law school midday I passed a scraggly group picketing in front of a neighboring Marriott Hotel.  The signs said that the protesters were picketing because the Carpenters Union had a beef with the management.  As my very general description suggestions, I did not look at the signs too closely.  I was distracted because many of the protests were so drunk or drugged that they could not walk in a circle.  A colleague with whom I was walking informed me that some labor unions now hire homeless people to walk picket lines for them.  Surely the Union did not think that the picketing would be effective.  I was astonished that actual Union members were shirking their membership responsibilities, but did I have a right to be appalled?

Hiring stand-ins for pay is a very American institution.  Read More

Addictive by Design

I was honored to see Prof. John Banzhaf weigh in on a recent post on wellness programs. That post suggested parallels between the addictiveness of tobacco, and that of many food products. Little did I know the NYT was about to publish a blockbuster article on exactly that issue:

[In a 1999 meeting of food industry leaders,] [t]he first speaker was a vice president of Kraft named Michael Mudd. . . . As he spoke, Mudd clicked through a deck of slides — 114 in all — projected on a large screen behind him. The figures were staggering. More than half of American adults were now considered overweight, with nearly one-quarter of the adult population — 40 million people — clinically defined as obese. Among children, the rates had more than doubled since 1980.

Mudd then did the unthinkable. He drew a connection to the last thing in the world the C.E.O.’s wanted linked to their products: cigarettes. First came a quote from a Yale University professor of psychology and public health, Kelly Brownell, who was an especially vocal proponent of the view that the processed-food industry should be seen as a public health menace: “As a culture, we’ve become upset by the tobacco companies advertising to children, but we sit idly by while the food companies do the very same thing. And we could make a claim that the toll taken on the public health by a poor diet rivals that taken by tobacco.”

Fast food lawsuits are looking more prescient by the day.

Illustration: Via Engadget article on interactive ad patents.

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Bye, Bye Big Brands, Twinkie, Ding Dong: Hostess Brands, Inc. Liquidating

Ghostbusters, Die Hard, my lunch in grade school all had Twinkies (OK my lunch also alternated with Ding Dongs). In Ghostbusters the Twinkie symbolized psychokinetic energy, in Die Hard it substituted for a cop’s doughnuts, in my lunch it was I guess dessert but substituted for real food. The Wall Street Journal reports, however, that the era is over. Hostess Brands, Inc. is seeking permission to liquidate the company. It’s attempt at reorganization has failed. According to WSJ, “A victim of changing consumer tastes, high commodity costs and, most importantly, strained labor relations, Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.”

There are real people, places, and assets behind these brands. 18,000 workers will lose their jobs. 36 plants will close. The facilities and land will be sold. There is product inventory too. “Loaves of bread and plastic packages of icing-filled desserts” need to go. WSJ suggested that big box stores will be where the food stuff ends up. I remember when Coke changed its formula and folks hoarded the original Real Thing. I wonder whether that will happen with Twinkies. (Given the supposed shelf-life of a Twinkie, a strange pastry cellar built for and owned by some fanatic seems plausible to me).

And, Hostess Brands will sell…its brands. That is where the most money may be made. As I point out in From Trademarks to Brands, brands are not the same thing as trademarks. In the early days of trademarks, one could not sell a brand without the facilities. Today the brand as assest is a given. Selling it as thing is sanctioned by the law even though such practices do not do well within the law economics explanations for trademarks. I argue that a way to understand the move from direct competition to anonymous source, the growth of goodwill, and the expansive view of merchandising and licensing can be explained by brand practices much more than Landes and Posner’s law and economics view. (64 Florida L. Rev. 981, 1009-1019).

I wonder how folks will perceive the sale. If a company buys the name Twinkie or Ding Dong and then makes the cakes with different ingredients or sources for the ingredients, will that matter? What if the taste varies? What if in a year people think Hostess still makes Twinkies and buys the brand based on that error? Is that confusion we care about? Maybe we should not care about any of these. Then again if someone buys Twinkie and uses a new recipe, and then someone makes Twinkies with the original recipe, should that be allowed? Probably not but why is unclear. A healthy market that assumes rational consumers should be able to let information about such variances drive the market, right? Of course we don’t do that in trademark law.

Hmm, perhaps some sugar will help fuel thinking through these points. Better get Twinkies and Ding Dongs before this incarnation is gone.