Law & Econ Prof Blog

Fable of the Keiretsu

Now that the Thanksgiving holiday week has given us a chance to take a deep breath, catch up on piled-up work, and prepare for the last week of classes, I want to report on a marvelous book that a group of us have just read -- Yoshiro Miwa and Mark Ramseyer, The Fable of the Keiretsu: Urban Legends of the Japanese Economy (University of Chicago Press, 2006).  The Asian Program in Law, Politics, and Society; the Illinois Program in Law and Business Policy; and the Illinois Program in Law and Economics purchased copies of the book for all interested faculty and graduate students and invited Professor Ramseyer to come to the University of Illinois College of Law to discuss the book with us. 

The thrust of the book is that our belief that the Japanese business community consists of a few tightly knit family of companies that, although in different lines of business, do the bulk of their business with one another; that there is a "main bank" associated with each of these families of companies and that the bank controls much of the financing and governance of the family -- all of that is factually incorrect.  Indeed, Miwa and Ramseyer demonstrate that the myth of the keiretsu was developed by a Marxist think tank in the 1950s and took hold thereafter.  Their explanation as to why something that is so palpably wrong could be so widely believed to be true is that there are relatively few economists in the West who read Japanese and can do original archival work on the Japanese economy (and, therefore, simply take translated material about the Japanese economy as true) and that until relatively recently the bulk of Japanese university economists have been Marxists, inclined to believe that monopoly capitalism is alive and well in Japan.  Another factor that Professor Ramseyer cited for believing in this mythical form of horizontal and vertical organization is that most Westerners believe that Japan is essentially different from the West, that the usual rules of microeconomics do not necessarily apply to Japan because the culture is so different from ours.  Professor Ramseyer does not believe in this "essential difference" argument; indeed, much of his academic work about Japan has consisted of showing that actors in the Japanese economy behave in accord with the same economic rules as everyone else on the planet. 

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Externalities of driving

Thursday's "Economic Scene" column in The New York Times by Hal Varian, available here, summarizes an article in the Journal of Political Economy by Aaron Edlin and Pincar Karaca-Mandic.  The article, "The Accident Externality from Driving," is available at the BE Press website, here. 

The article identifies an externality or activity-level effect of driving: simply by getting on the road, one increases the likelihood of an accident with other drivers, but people, in deciding whether to drive, almost never take those external costs to others into account.  Edlin and Karaca-Mandic seek to estimate the value of this accident externality.  They recognize that it must be greater in jurisdictions where the density of cars is greater.  That is, the more congested an area is, the greater the externality of driving.  So, in North Dakota, where congestion is minimal, the value of the externality is $10 per driver, while in California, the value ranges between $1,725 and $3,239. Nationwide, the authors estimate that the value of this accident externality may run to more than $200 billion per year. 

Clearly, in densely populated states these externalities can be substantial, and, as a result, the fact that these externalities are not being internalized could lead to far too much driving and, therefore, far too many and too severe accidents.   

The question then is, "How do we induce drivers to internalize this accident externality?"  Edlin and Karaca-Mandic suggest a gasoline  tax.  As Professor Varian points out, one of the shortcomings of the gasoline tax is that it applies equally to good and bad drivers.  One might take account of that by having a separate tax on accident-insurance premiums, hoping that experience rating would have adjusted those premiums to reflect the quality of the insuree's driving. 

Nonetheless, there is, as Edlin and Karaca-Mandic and Varian note, no stomach among politicians for these taxes. 

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Milton Friedman's Death

Milton Friedman died early today at the age of 94.  Here is the obituary in The New York Times.  And here is a brief tribute from Professor Steve Levitt. 
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Secret settlements

Chris Drahozal and Laura Hines have just posted an interesting piece at SSRN, available here, on "Secret Settlement Restrictions and Unintended Consequences."  Here's the abstract: 

"This Article evaluates the likely consequences of restrictions on secret settlements. Both the defendant and an early claimant - a claimant who discovers that he or she has a claim before other claimants do - have a strong incentive to maintain secrecy, and they have a variety of means by which they might do so. First, in many cases, a claimant can circumvent restrictions adopted by a single state or federal court by filing suit in a state or court without such restrictions. Second, parties might circumvent secret settlement restrictions adopted by a single state by choosing another state's law to govern the settlement. Third, parties could avoid restrictions on secret settlements in court by settling before the claimant files suit. Finally, many parties could accomplish much the same result as a secret settlement by use of predispute or postdispute arbitration agreements, taking advantage of the privacy of the arbitration process. Indeed, restrictions on secret settlements not only may be ineffective, but in fact may be counterproductive. To the extent the restrictions encourage parties to settle before the claimant files suit or to choose arbitration instead of litigation, they may reduce rather than expand the amount of information available to the public about the dispute. Currently, if the secret settlement occurs after the claimant files suit, the factual allegations in the complaint are a matter of public record for some period of time (at least until the settlement occurs). If secret settlements are prohibited, and the settlement takes place outside of court or the case goes to arbitration, even that information is lost. Thus, rather than increasing the information available to the public about alleged hazards to public health and safety, restrictions on secret settlements may have the unintended consequence of doing exactly the opposite." 

Very highly recommended. 
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2d CELS Conference

The Second Annual Conference on Empirical Legal Studies will take place at NYU Law School beginning at noon on Friday, November 9, 2007, and all day, Saturday, November 10. 
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Survey

LexisNexis and the Berkman Center at Harvard (which has, I read in yesterday's Chicago Tribune, a presence on Second Life, the on-line, virtual world computer game) are conducting a survey of recent law school graduates "to learn more about how prepared new layers are for today's legal work world."  You can access the survey here. 
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Empirical research on copyright

Ivan Png of the National University of Singapore has just posted on SSRN a short (15 page) article entitled "Copyright: A Plea for Empirical Research," available for download here.  I recommend it very highly.  I'll write a brief review of his article on the effects of copyright duration shortly. 
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Law and Economics in China

I'm just back from a quick trip to Beijing, where my colleague Tom Ginsburg arranged for the two of us to speak at the China University of Politics and Law and Beijing University Faculty of Law.  The scholars at the CUPL who staff the Center for Law and Economics were warm hosts and marvelously well-trained in law and economics.  The students to whom we spoke at CUPL were attentive, well informed, and very grateful.  And they asked for autographs!  Similarly at Bei-Da: the students all knew law and economics well, spoke English beautifully, and clearly thought that law and economics was one of the most important aspects of their legal education. 

There are 100,000 law students in China today, more students than in engineering.  And all of the law students are interested in law and economics.  Why?  I kept asking that question, and here is my digest and interpretation of the answers that I got.  The very rapid development, commercialization, and privatization of the Chinese economy that is going on (of which we saw startling evidence) can be tracked and controlled only lightly by the administrative state.  The government is, I think, relying on private ordering through a vigorous and well-educated legal profession to keep the excesses of this rapid growth to a minimum.  Ron Gilson's marvelous characterization of lawyers as "transaction cost engineers" seems to be at the heart of the Chinese interest in law and economics. 

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