Wednesday, April 10, 2013
Alex Raskolnikov (Columbia University - Law School) has posted Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc (Georgetown Law Journal, Forthcoming) on SSRN. Here is the abstract:
This article defines and explores irredeemably inefficient acts — a conceptually distinct and empirically important category of socially undesirable conduct. While inefficient behavior is, no doubt, pervasive, the standard view holds that inefficient conduct may be converted into efficient one by forcing actors to internalize the external harms of their decisions. For some acts, however, such conversion is impossible. These acts are not just inefficient forms of otherwise socially beneficial activities — they are not just contingently inefficient. Rather, they are inefficient at their core; they reduce social welfare no matter what the regulator does. These irredeemably inefficient (or just irredeemable) acts are private, intentional, non-consensual transfers of money. While this definition certainly describes theft, it also covers churning and price fixing, market manipulation and option backdating, insider trading and tax shelters, to name just some examples.All these acts are socially undesirable in any form and at any level, yet all may be overdeterred if enforcement is imperfect. Overdeterrence is possible for two reasons. First, enforcement increases the costs of irredeemable acts that remain undeterred. Second, enforcement burdens efficient conduct that yields outcomes indistinguishable from those produced by irredeemable acts. These considerations (along with no need for the standard cost-benefits comparison) underlie the unique optimal deterrence analysis of irredeemable acts. Antitrust law, corporate law, and criminal law largely reflect the divide between contingently and irredeemably inefficient acts, as well as some of the more specific prescriptions following from this article’s inquiry. Securities and commodities regulation fails to recognize the same distinction despite a wide variety of irredeemable acts among securities and commodities law violations. While the tax policy implications of the proposed framework are limited, this framework helps to resolve a long-standing debate about tax shelter regulation.