Wednesday, April 30, 2014

Tax Returns: "to the best of my knowledge and belief, they are true, correct, and complete."

From Procedurally Taxing:  Donald Rumsfeld submitted a letter with his tax return saying

  “I have absolutely no idea whether our tax returns and our tax payments are accurate”, and “I know that I cannot have any confidence that I know what is being requested and therefore cannot and do not know…whether or not [my] tax return is accurate.”  

Mr. Olsen asks

Upon reading the letter, besides being mildly amused, I immediately wondered if the statements by Mr. Rumsfeld could actually have caused his return to be invalid.  When you execute your Form 1040, you sign off on a jurat stating, “[u]nder penalties of perjury, I declare that I have examined this return and the accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”   It would seem awful hard to swear something is true and correct if you “have absolutely no idea whether [it is] accurate.”  So, did Mr. Rumsfeld’s comments cause him to negate the jurat and fail to timely file his return?

Here is an example of a situation compatible with Mr. Rumsfeld’s.

Continue reading

April 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 28, 2014

Thomas Piketty's "Capital in the Twenty-First Century"

French economist Thomas Piketty's book, only recently translated into English (and on 2-3 week back order at Amazon) has clearly struck a nerve. Income inequality in the United States has become like climate change -- just too emotional for most people to discuss rationally. It should surprise no one that Paul Krugman loved it, and it should not surprise very many people that David Brooks was more skeptical. You might guess at the political preferences of a French economist who was hired by M.I.T. at the age of twenty-two, but opted to return to France to research and teach, and someone who writes that "the discipline of economics has yet to get over its childish passion for mathematics and for purley theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences." (p. 32) You could guess, but you'd be wrong. I don't actually find Piketty's book particularly ideological. He seeks to convince us that the capital-to-income ratio will, over time and assuming an absence of a shock like a world war, asymptote to some level. For the Krugmans of the world, Piketty's message that capital will become even more important in the future, exacerbating inequality, allows them to say, "see, I told you so!" Unsurprisingly, those critical of Piketty's wealth tax -- a tax on capital, which is hardly a new idea -- label him a Marxist. But Piketty is very critical of Marx, while acknowledging that he did not have the benefit of data that succeeding economists had. At times Piketty verges on the snide in criticising socialists and modern-day quasi-socialists ("Unfortunately for the people caught up in these totalitarian experiments, the problem was that private property and the market economy do not serve solely to ensure the dominatino fo capital over those who have nothing to sell but their labor power. They also play useful role in coordinating the actions of millions of individuals ... human disasters caused by Soviet-style centralized planning illustrate this quite clearly." p. 532). Piketty is not naive, so the fact that his book as caught the sails of a highly partisan and largely fact-free debate about inequality cannot be a surprise to him. In this vein, I find this book refreshing in its balance and humility.

What I wish Piketty did more was to explain why countries were destined to asymptote to some pre-determined capital-to-income ratio. And here, I wish he would have spent just a little more time thinking about the role that law and legal institutions have in shaping capital formation. A paper by Paul Beaudry and David Green at the University of British Columbia suggests that technological change is not just an exogenous shock, as Katz and Goldin seem to imply, but one that has some endogeneity, adjusting toward relative factor supplies, including education. My own work does not delve into the nature of capital accumulation itself, but the role that legal rules and institutions play. That law and legal institutions play a role in capital formation is obvious, but exactly how it affects, and in what areas, is more complicated.

April 28, 2014 | Permalink | Comments (0) | TrackBack (0)

A Compromise Immigration Bill

     Suppose some people are  more concerned about the plight of poor Mexicans and others are more concerned about worsened job opportunities for poor Americans and increased transfer payments, so they disagree about immigration. (Immigration is from more places than Mexico, but let's use that country for concreteness.) How about this for a solution--- tighten immigration, but transfer funds from the US government to Mexico.  

This ends the problems with immigration, and would be preferred by the Mexicans, who would not have to leave home. It would costsome billions, to be sure, but less than the cost of social services for poor immigrants (3 million children (to take a guess) times $10,000/year and we're up to a cost of $3/billion from immigration immediately.) 

       It would be interesting to see how people lined up on this proposal. It would miserably fail to address two of the motives for immigration: 

1.  Higher profits and service-consumption utility for  firm owners and consumer employers in the United States. 

2. An increase in the number of  uninformed voters who will vote according to the preference of the ward bosses. 

         Both of those were very strong motives for immigration before the 1917 immigration act was overwhelming passed by essentially of Congress except the big-city representatives.  Claudia Goldin has a paper on the political economy of that act and the previous 20 years. 

Much of rural America was prorestriction from the 1897 vote. But the mid-
section of the nation-for example, Minnesota, Iowa, Wisconsin, Michigan,
Nebraska-was deeply divided on the issue, as was much of the far West. The
South switched sides, certainly by the 1906 vote, joining much of rural
America in its opposition to unrestricted immigration. The big cities moved
strongly into the pro-immigration camp as their ever-increasing foreign-born
constituency gained the vote or influenced the vote in other ways. In most other
urban and industrial centers, workers experienced downward pressure on
wages from the new immigrants but not the political pressure from the vast
numbers that clustered in the big-city districts. Eventually much of the rural
midsection moved against unregulated immigration, as did most of the smaller
and midsized cities. Capital maintained its pro-immigration stance to the bitter
end, when all but the big-city vote went to the anti-immigrant camp.

   Her paper focuses on aggregate effects too much, though. A lot of the paper is about how much wages fell because of immigration, but it's no news that native labor opposed immigration and big-city employers supported it.  Rather, there are tyhree things I'd like to see discussed:

 A.  Why didn't big-city employers have more influence, especially in the Republican Party?

B. Why did the Solid South oppose immigration, when immigration helped the Democratic Party? Prof. Goldin's paper points to part of the answer: Southern employers and industrial workers didn't want the competition from Northern immigrants and their employers. I wonder if another part was fear of losing influence within the Democratic Party, where its veto on race legislation was crucial to the South. 

C. What was the influence of the Progressives? They were opposed to the big-city machines, which were based on immigrant votes. Some Progressives were Republican, some Democrat, and they were espeically strong in elite opinion. Did that neutralize the big-city employer money? 

April 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 27, 2014

Order of Authors: The Problem with Vague Norms.

 Having written a few papers on legal uncertainty, I want to raise some concerns regarding the apparent vagueness of the order of authors’ norm in legal scholarship. With various modifications related to student vs. instructor and the like, there are two main approaches to order of authors, alphabetical norm and contribution based norm. Economics is a classic example of alphabetical order, while psychology in an example of contribution based order. Each of these approaches have a history and one can easily think of the advantages of each norm. One might argue that given the fact that both norms are well-known, there is no importance to the norm you choose to apply and people will simply adjust their views of each author based on the chosen norm. However, a paper I thought is an urban legend, but actually exists (L Einav, L Yariv - The Journal of Economic Perspectives, 2006) suggests that even within economics, where the norm is alphabetical and relatively clear, there is a significant effect to one’s surname both on their collaboration practices and on their academic success measured by tenure, fellowships etc. Some even account for the various psychological effects of names on preference (e.g. Nelson and Simons, 2007), these effect are very surprising and to some extent disturbing. The difficulty raised by the findings above is exacerbated when one deals with disciplines that don’t have a clear norm, where people might mistakenly attribute a relative contribution rule to a case, where the authors were under the impression that their order is alphabetical. In my understanding the norm in law used to be strictly alphabetical, but is increasingly changing, and therefore examples of the use of contribution based norm in law can also be seen. It seems that the law, as an evolving field where collaborations are on the rise, should create some more explicit norm of either, having one agreed upon order strictly followed, or at the least having some mandatory comment of what was the chosen norm. With all the advantages of uncertainty in law (e.g. Feldman and Smith, 2014 --order was alphabetic) the order of authors is not the right case to implement such principle.

April 27, 2014 in Science | Permalink | Comments (0) | TrackBack (0)

Friday, April 25, 2014

Top Recent Downloads, L&E - Private Law, 4/25/14

1 394 The Three Justifications for Piercing the Corporate Veil 
Jonathan R. Macey and Joshua Mitts 
Yale Law School and Sullivan & Cromwell LLP 
Date posted to database: 19 Feb 2014 
Last Revised: 7 Mar 2014
2 334 Will Ticket Scalpers Meet the Same Fate as Spinal Tap Drummers? The Sale and Resale of Concert and Sports Tickets 
Gregory M. Stein 
University of Tennessee College of Law 
Date posted to database: 21 Feb 2014 
Last Revised: 7 Apr 2014
3 306 The International Market for Contracts -- The Most Attractive Contract Laws 
Gilles Cuniberti 
University of Luxembourg 
Date posted to database: 11 Feb 2014 
Last Revised: 24 Feb 2014
4 177 The Disappearing Small IPO and the Lifecycle of the Small Firm 
Steven M. Davidoff and Paul Rose 
Ohio State University (OSU) - Michael E. Moritz College of Law and Ohio State University (OSU) - Michael E. Moritz College of Law 
Date posted to database: 26 Feb 2014 
Last Revised: 1 Mar 2014
5 171 The Demand for Out-of-Print Works and Their (Un)Availability in Alternative Markets 
Paul J. Heald 
University of Illinois College of Law 
Date posted to database: 15 Mar 2014 
Last Revised: 11 Apr 2014
6 143 Text and Context: Contract Interpretation as Contract Design 
Ronald J. GilsonCharles F. Sabel and Robert E. Scott 
Stanford Law School, Columbia University - Law School and Columbia University - Law School 
Date posted to database: 13 Feb 2014 
Last Revised: 12 Mar 2014
7 126 Coasean Keep-Away: Voluntary Transaction Costs 
Jordan M. BarryJohn William Hatfield and Scott Duke Kominers 
University of San Diego School of Law, University of Texas at Austin and Harvard University 
Date posted to database: 4 Mar 2014 
Last Revised: 2 Apr 2014
8 124 The Futility of Cost Benefit Analysis in Financial Disclosure Regulation 
Omri Ben-Shahar and Carl E. Schneider 
University of Chicago Law School and University of Michigan Law School 
Date posted to database: 23 Mar 2014 
Last Revised: 25 Mar 2014
9 116 Symbolic Corporate Governance Politics 
Marcel Kahan and Edward B. Rock 
New York University School of Law and University of Pennsylvania Law School 
Date posted to database: 5 Mar 2014 
Last Revised: 20 Mar 2014
10 106 Contractual Innovation in Venture Capital 
John F. Coyle and Joseph M. Green 
University of North Carolina School of Law and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP 
Date posted to database: 30 Mar 2014 
Last Revised: 7 Apr 2014

April 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Top Recent Downloads, L&E - Public Law, 4/25/14

RECENT TOP PAPERS for all papers first announced in the last 60 days  
24 Feb 2014 through 25 Apr 2014

RankDownloadsPaper Title
1 358 As American as Apple Inc.: International Tax and Ownership Nationality 
Chris William Sanchirico 
University of Pennsylvania Law School 
Date posted to database: 11 Feb 2014 
Last Revised: 21 Mar 2014
2 262 The Maker-Taker Pricing Model and Its Impact on the Securities Market Structure: A Can of Worms for Securities Fraud? 
Stanislav Dolgopolov 
Independent 
Date posted to database: 24 Feb 2014 
Last Revised: 23 Mar 2014
3 220 Uncertainty, Evolution, and Behavioral Economic Theory 
Geoffrey A. Manne and Todd J. Zywicki 
International Center for Law & Economics (ICLE) and George Mason University School of Law 
Date posted to database: 9 Mar 2014 
Last Revised: 24 Mar 2014
4 155 Economic Analysis of Legal History 
Daniel M. Klerman 
University of Southern California Law School 
Date posted to database: 9 Apr 2014 
Last Revised: 9 Apr 2014
5 116 Curb Your Enthusiasm for Pigouvian Taxes 
Victor Fleischer 
University of San Diego School of Law 
Date posted to database: 23 Mar 2014 
Last Revised: 2 Apr 2014
6 102 The Fair Income Tax 
Joseph M. Dodge 
Florida State University - College of Law 
Date posted to database: 5 Mar 2014 
Last Revised: 5 Mar 2014
7 92 The Evolution of U.S. Cartel Enforcement 
Vivek Ghosal and D. Daniel Sokol 
Georgia Institute of Technology and University of Florida - Levin College of Law 
Date posted to database: 23 Mar 2014 
Last Revised: 23 Mar 2014
8 92 History of Law and Economics 
Martin Gelter and Kristoffel R. Grechenig 
Fordham University School of Law and Max-Planck-Institute for Research on Collective Goods 
Date posted to database: 8 Apr 2014 
Last Revised: 8 Apr 2014
9 70 Market Definition in Differentiated Goods When the Final Consumer Buys the Good: Insights from the H&R Block Case 
Malcolm B. Coate 
U.S. Federal Trade Commission (FTC) 
Date posted to database: 14 Feb 2014 
Last Revised: 14 Feb 2014
10 68 The Worst Test of Truth: The 'Marketplace of Ideas' as Faulty Metaphor 
Thomas Wuil Joo 
University of California - Davis Law School 
Date posted to database: 22 Feb 2014 
Last Revised: 22 Feb 2014

April 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 23, 2014

Paroline v. US: Restitution to Victims of Child Porn from Views of It

  I haven't had time to read it, but Paroline v. US, which came out today, is an interesting and hard case about causation and burdens of proof.   Paroline illegally possessed a pornographic image of Victim as a child. A statute says offenders need to pay restitution.  Victim's life was ruined by her knowledge that her image is spread all over the internet.  So what should Paroline,  the only one of thousands of offenders to be caught, pay? The Roberts dissent says he should pay nothing, because it's too hard to prove what damage is attributable to Paroline. That sounds reasonable to me in practice, but that difficulty is what makes this an interesting case for theorizing.  

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 21, 2014

Successor Liability

    I'm on a bankruptcy email list that's lately had some interesting discussion of the liability of the new  General  Motors for torts caused by the old General Motors before bankruptcy but not known at the time to the victims. What happened was that old GM entered bankruptcy in 2009 and sold most of its assets to the new GM with a disclaimer of liability for the new GM, under the approving eye of the bankruptcy judge.  Old GM retained some assets and was eventually liquidated, with a trust fund being set up to pay tort victims. The question is whether the disclaimer in the sales contract has any legal effect, and whether under general principles of "successor liability" new GM is liable for old GM's torts. 

     I don't know the law of successor liability.  I did find a powerpoint presentation by Amit Singh, a practitioner.  Google Scholar turns up a few titles that sound like economic analyses. Does anybody know if these are the best articles?  This strikes me as a potentially useful and interesting research area. 

Taking Future Claims Seriously: Future Claims and Successor Liability in Bankruptcy F Tung - Case W. Res. L. Rev., 1998 .

Corporate Successors under Strict Liability: A General Economic Theory and the Case of CERCLA MB Fox - Wake Forest L. Rev., 1991.

Successor Liability and Asymmetric Information AH Choi - American Law and Economics Review, 2007.

April 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 17, 2014

How Much Should Government Profit from Student Loans?

            Slate’s Jordan Weissman has an interesting story on CBO’s projections for the profitability of the three main federal direct student lending programs.  The projections are reasonably big -- about $15 billion per year, of which $12 billion comes from graduate (including law school) loans.   That’s about the same money we currently give up by allowing homeowners to deduct the cost of their mortgages (see here and scroll down to p. 35).   Does that combination of borrowing rules make sense?  Should government profit off of some people to give a tax break to others?

            I think of the student loan programs as a really big bake sale. 

 

Continue reading

April 17, 2014 | Permalink | Comments (1) | TrackBack (0)

Wednesday, April 16, 2014

Paul Krugman Takes a Full-Time Position To Study Inequality

 Paul Krugman is moving from Princeton to City University of New York to an inequality institute. Here is his announcement in his column "The Conscience of a Liberal":  

So, why am I doing this? It is in no sense a commentary on Princeton, which has been a wonderful place for me professionally and personally. In particular, I can’t praise Princeton’s intellectual quality enough: it has been a great honor to be affiliated with a superb public policy school and an equally superb economics department.

Instead, my move reflects some hard thinking about how I can best make use of my time....

 ... the answer seemed clear: more and more of my work has focused on issues of income inequality, and nobody does more important work producing the hard data on which all of this work relies than the Luxembourg Income Study, directed by Janet Gornick, professor of political science and sociology at the Graduate Center of CUNY. So I approached Janet about the possibility of some kind of affiliation with LIS that would give me both an office and the ability to interact with the excellent group LIS has assembled in New York.

"So why am I doing this?" Well, a salary of $225,000/year combined with a courseload of one seminar per year (after the first year's zero teaching) might have something to do with it. He's worth it on the market, of course, but conservatives are having a lot of fun with the story of the former Enron consultant's latest career move. 

   I don't know whether this is hypocritical, because I don't know details of what Professor Krugman thinks about income inequality.  If  his   position is the common one of liberal economists that   inequality in income is unjust but should be tolerated because human nature requires monetary incentives to encourage effor ​, then he should not himself engage in injustice, even if his ideal policy position would still allow other, selfish, people to earn high salaries so as to encourage them to work harder.  I'd make an exception if he donates most of his income to charity, but I wouldn't give him the benefit of the doubt on that.   

    Am I correct, though? Is it hypocritical for someone who thinks income inequality is unjust to accept more than the  pay of the average American?     (As a Christian, I am troubled about my own high salary, but  the Christian has no objections to inequality per se, only to  love of money and poor use of it. We can leave that discussion for another day.)  Note that this moral question is different from the policy question. There is no hypocrisy in thinking that unequal income leads to poor social outcomes  but  accepting a high salary oneself, so long as you don't think there is any injustice involved, just as there is no hypocrisy in opposing tax breaks while taking advantage of them so long as they still exist. 

 

 

April 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 14, 2014

The Bundy Ranch Confrontation

    Many on the  Right have been discussing the Bundy Ranch Confrontation, which seems to have ended with the surrender of the federal government. Breitbart is one place to look, and has links to legal documents.  Mr. Bundy has not been paying his grazing fees for 20 years or so, because he thinks the State of Nevada is the legitimate owner of the land, not the federal government. That is clearly a crazy position, but many people sympathize with him because he is a rancher whose family has been there for generations. He also seems to be arguing that anyone should be able to graze there for free. To me, his position seems literally communist (as does the associated fact that as it turns out he's the one who ends up making all the  money from the communist policy).  From the blog comments I've seen, though, many western libertarians actually don't believe in property rights and do believe they should have the right to live off of the government. Conservative commentators that I've seen treat the subject are a bit perplexed as to what to say, since they realize the situation but don't want to call other conservatives communists. 

      If everyone were forced to learn law and economics, we wouldn't have this problem. Then people would realize that government ownership, common ownership by neighbors, and lack of property rights are three different things. 

 

 

April 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 13, 2014

ALEA Early-Bird Registration Deadline Approaching

For readers who may not already be on the ALEA e-mail distribution list, information on this year's meeting of the American Law & Economics Association (to be held May 8-9 in Chicago), can be found at their web site.  As the site notes, those registering after April 30 pay a $25 late registration fee.  Or should that be a $25 early-registration bonus?

April 13, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 9, 2014

A Tax Idea: Pay Bonuses for Clean Audits

        Everyone dreads a tax audit. Some people have cheated on their taxes, so they obviously are running scared. Others have pushed close to the line in making deductions, and expect to have some of them disallowed. Still others need have no fear of paying more, but have to expend time and effort showing that to the auditor.

    This is easily remedied.  Our objective is to catch the cheaters, make the aggressive deductors step back from the line, and reward the good citizen who pays just what he’s supposed to. Let’s start with the good citizen. I propose that we pay anyone who gets a clean audit. If you are audited, and the auditor gives you a clean bill of health, he also presents you with a $1,000 check.  Perhaps it should be more, perhaps less, but the aim should be to make someone pleased with the chance to prove his honesty to the government.

  Will the auditors manufacture defects in your return so as to block your bonus?  They could, but it’s not their $1,000; it’s the Treasury’s. The Treasury could announce a policy of rewarding auditors who find defects, but there’s no way that policy wouldn’t become public, and the Treasury is, after all, a political organization. Anyway, if the Treasury is out to make people pay illegally high taxes, that’s a problem regardless of whether we adopt the bonus scheme; even now, Treasury could instruct its auditors to charge fake taxes and increase the revenue.

  What about the  second group--- the aggressive deductors?  With this scheme in place, they’d have less incentive to be so aggressive. It would be easier to be conservative with deductions and take the occasional audit bonus instead.

 And what about the third group--- the cheaters? They, too would have more incentive to clean up their act. But we might combine the bonus program with stepped-up penalties, as a  way to make it revenue neutral. It’s hard to object to tax cheats paying more so that honest taxpayers bear less of the burden of the audits the cheats make necessary. 

April 9, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 7, 2014

State carbon taxes in the works?

Adele Morris, fellow and policy director for Climate and Energy Economics at Brookings, has posted on the Brookings Tax Policy blog, TaxVox, a discussion of the possibility that the EPA, in issuing a proposed rule due out in June on what states may do to reduce greenhouse gas emissions under section 111(d) of the Clean Air Act. She thinks that EPA should, and maybe could, allow states to implement a state carbon tax to comply with whatever rule EPA issues in June. There is much unexplored territory here, and I expressed skepticism as to whether a statute that is fairly detailed in its prescriptions, and that has been interpreted by courts to be restrictive in its menu of allowable policies, could be interpreted to allow for something as radically flexible and sensible as a carbon tax. I remain skeptical, but hopeful. It would be politically meaningful if some red states actually seized on a carbon tax as being more efficient and sensible than the usual command-and-control-like standards issued under the Clean Air Act, while Congress continues to fight last century's fight (whether climate change is a problem or not), and continues to oppose carbon taxes on emotional grounds, not economic ones.

April 7, 2014 | Permalink | Comments (1) | TrackBack (0)

Revealing Loopholes: Including Loopholes in Legal Rules for Purely Strategic Reasons

Suppose that a lawmaker is designing a system of legal rules, such as a tax code or financial regulations.  Regulated parties have an incentive to find and exploit loopholes, as long as the expected benefits exceed the expected costs.  These search/exploitation investments are purely redistributive and thus wasteful.  A loophole depends both on the legal rule and the characteristics of the regulated parties.  One can envision a legal code drafted in two steps.  In its first iteration, the code will be replete with loopholes that are easy to identify and exploit.  Regulated parties that partake of the loopholes will reveal information about their types that the lawmaker will then use to draft a second iteration of the code, with fewer loopholes.   

Most likely the lawmaker will need more than two periods to reduce loopholes to the optimal number.  However, the point is that instead of drafting a system of rules that tries to minimize loopholes from the start, it is better for the lawmaker to strategically include loopholes that, when exploited, will reveal information.  In fact, a lawmaker should use information-revealing-loophole-rules even when they are superfluous, from a purely regulatory standpoint.

Of course, sophisticated regulated parties will know that the lawmaker is trying to trick them into revealing information.  If there are unsophisticated parties that are sufficiently similar to the sophisticated ones (in all things but their level of sophistication), the lawmaker can use the information revealed by the unsophisticated parties.  If the number of sophisticated parties is large and a failure to exploit the loophole will put a party at a competitive disadvantage, then colluding to confuse the lawmaker becomes difficult due to collective action problems.  But suppose that regulated parties can reach a self-enforcing agreement to collude—i.e., they agree not to exploit the loopholes.  So be it: that was the goal all along. 

In fact, a lawmaker can speed things along by announcing: “I have adopted a legal code with strategically placed loopholes.  Please exploit them.  Doing so will reveal private information about yourselves that I will use to redraft the code.  My goal is to reduce the aggregate costs from loopholes.  I just need your help, so I can do it efficiently.  I will always include information-revealing-loopholes.  So if you ever come across a loophole, ask yourself—‘Do I feel lucky?’”

April 7, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 6, 2014

The Promise and Perils of Individual Differences in Law

A while ago, in the beginning of the previous decade, as a doctoral student of law and behavioral economics, I was looking for a topic for my PhD dissertation and I had suggested my advisor to write on whether individual differences could be a factor in legal policy making.

 Having studied the huge importance of individual differences and personality theories in psychology, I felt it has been a huge omission of the newly emerged law and behavioral economics[1]. At the time, my advisor thought the idea is too premature and hence risky, and I have decided to study the interaction between law and social norms. A decade later I am pleased to see that the interest in individual differences seems to be on the rise. This interest appears to be developing from various directions.

Firstly, research on big data has led some to suggest the potential for a more fine-tuned approach to default rules. See for example, Porat and Strahilevitz (2013). Secondly the rising nudge approach obviously raises the importance of individual differences to a higher level, given the areas of life it attempts to regulate Sunstein’s (2013).

Thirdly, newly acquired knowledge about individual differences in areas such as risk or intuition are disseminating into legal theories. My wonderful colleague, Avishalom Tor is organizing a terrific conference on individual differences in law that will be held in London in June, and I hope to report more on the topic following the conference.

Naturally, adopting individual differences in law is not a dichotomist decision, as it could be adopted only in areas where the theory is strong and the impact is significant. Furthermore, while I think we should be excited with the development of these lines of reasoning and the dramatic potential to its impact on both private law and public law[2], a few words of caution are necessary:

First, how much of the individual differences can we identify ex-ante?  This is obviously highly important for most private law contexts. Second, is the categorization offered by the different personality theories reliable and stable enough? Third, how substantial are the differences and whether the benefit from being sensitive to them, outweighs the cost of acquiring the information and the uncertainty associated with incorporating it into law. Fourth, how to relate between psychological based individual differences and demographic based differences. The latter might be more identifiable and reliable but more controversial from a normative standpoint.

The last point, emphasizes an obvious fact. The more we will care about individual differences in law, there will be a need not just to improve the social science aspect of it but also the jurisprudential infrastructure, in terms of concepts such as equality, fairness and welfare.

 

Reference

 

Strahilevitz, L., & Porat, A. (2013). Personalizing Default Rules and Disclosure with Big Data.

 

Sunstein, C. R. (2012). Impersonal default rules vs. active choices vs. personalized default rules: A triptych.

 

Sunstein, C. R. (2013). Deciding By Default. University of Pennsylvania Law Review, 162(1).



[1] This omission, might have been related to the dominance of economics to which I have referred to in my previous blog.

[2] To some extent, it is already widely used in criminal law, especially, when it comes to theories of punishment.

April 6, 2014 in Science | Permalink | Comments (0) | TrackBack (0)

Price Instruments and Insider Trading Rules

Say I’m the CEO of a company with toxic waste buried in our back yard.  One day on my way into work, I spot John Travolta climbing over our fence holding a chemistry kit and a spade.  After I press the button that releases the hounds, my next step should be…calling my broker?  Until John files A Civil Action, I have a window in which I can sell my stock with no market discount. 

            That has to be a problem for deterrence theories of tort law, doesn’t it?  Read on, friend.

Continue reading

April 6, 2014 | Permalink | Comments (0) | TrackBack (0)

"Trouble in Turkey’s Elections" by Erik Meyersson

Local elections were held in Turkey last week. Many people were wondering whether AKP, the dominant party in Turkish politics, would allow fair elections or whether they would try to illegitimately influence them. Weeks before the elections many interesting developments took place, including the dissemination of audio recordings of stigmatizing phone conversations (allegedly) between the prime minister and other parties (including his son). Many were under the impression that these developments would lead AKP to lose a significant share of their votes, since these developments cast doubt on the legitimacy of the ruling party and their leaders. When the election results came out, many people were surprised to see that AKP had maintained power in many big cities (including Istanbul, the most populous city in Turkey). This led many, including academics, to question whether the elections were fair.

An interesting study by Erik Meyersson attempts to empirically address this question. He finds a positive “relationship between the share of invalid ballots and higher voting share of the ruling AKP government in last week’s local elections in Turkey.” He explains his analysis and findings here

He concludes as follows: “All together, these last results further supports the hypothesis that Turkey’s most recent elections may have been implemented with substantial irregularities. Until a valid explanation for these results is presented that does not include voter fraud it is difficult to imagine what else could be going on.”

I wanted to bring this noble attempt to uncovering facts about the recent elections to your attention, and any comments by empirical economists would be appreciated. 

April 6, 2014 | Permalink | Comments (2) | TrackBack (0)

Reducing Inequality

    A  full-time minimum wage worker--- a burger flipper, say---  earns  $15,000 annually.  The median doctor earns $190,000. The average pay of a Fortune 500 CEO is $10.5 million.  Is this inequality bad? Ought we to tax the doctor to give money to the burger flipper, and tax the CEO to give money to the doctor?  Many, probably most, people think so, though I personally wonder why redistribution, as opposed to "equal sacrifice in taxation" or "taxation for benefits"  is justified. 

   If it is, though, should we be taking from the CEO to give to the doctor? Or should the transfer go straight from CEO to burger flipper, with no transfer to the doctor? It depends on your theory of why inequality is bad, I suppose--- and I'd be interested in hearing answers in the comments. 

      Of course, ought redistribution to benefit anybody in the United States? Median household income in Russia is $12,000, in India it is $3,000, and in Liberia it is $1,000. 

April 6, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 3, 2014

Confusion Regarding Paternalism versus Negative Externalities: The Case of Cigarette Bans

I quit (or took a break from) smoking about half a month ago. During that time, I’ve come to understand some of the dynamics of pubs that allow smoking versus those that do not. I’ve realized that these places provide an informative case study for crystallizing a frequent confusion that arises in law and economics discussions, namely the labeling of paternalistic arguments as externality based arguments.

[For those readers who are not familiar with these terms, here are brief and informal definitions. Paternalism essentially refers to the limiting of people’s freedoms to act under the theory that without such limitations these individuals will act in ways that are contrary to their self-interests. Negative externalities refer to costs incurred by (third) parties who did not engage in the activity that caused those costs.]

In my law and economics class, when I ask my students to question whether there is a utilitarian justification for a given rule or practice, they rarely rely on paternalistic arguments. There’s a simple reason for this: I do not teach them much about paternalism, and I do not provide them with any analytical tools to study paternalism. (I explain the concept and discuss how it may affect analyses etc., but never formally cover it.) However, I do teach them about negative externalities.

I have noticed over the last few years that some students, and unfortunately also some law professors, mistake paternalistic arguments as arguments based on negative externalities. Some may call this an unimportant semantic problem;  I believe that this problem not only makes it hard for two people to communicate with and understand each other, but it also disguises an argument that relies on the existence of some behavioral problems as one that could exist in a world where every individual is acting completely rationally. Due to this ‘disguising effect’ the rule for which the justification is provided appears to be desirable under a broader set of circumstances than is actually the case.

The policy of banning cigarettes or smoking in pubs provides an excellent example to illustrate this point. Consider two potential rules: (i) the owner of the pub gets to decide whether or not people can smoke in the pub, and (ii) smoking is prohibited in pubs. Imagine that I ask my students to provide an efficiency based justification for rule (ii). That is, are there any reasons to believe that rule (ii) would generate higher social welfare than rule (i)?

The following (hypothetical) dialogue is close to what I had with some of my students in the past (S=student, M=Murat)

M: “Is there a good justification to choose rule (ii) over rule (i)?”

S: “By banning smoking in pubs we’re eliminating the negative externality that smokers impose on non-smokers in those pubs where the owner would otherwise allow smoking.”

M: “Okay. So, let’s step back a second. What is the pub-owner presumably trying to maximize?”

S: “Profits.”                          

M: “Under rule (i) will he not choose that policy that maximizes his profits?”

S: “I guess so.”

M: “If the negative externalities imposed by smokers on to non-smokers are sufficiently high, would you not, as a profit maximizing pub-owner, choose to compete with smoker-pubs, by opening up a non-smoking-pub, and attract all individuals who suffer great negative externalities in smoker-pubs?”

S: “Probably.”

M: “So under rule (i), if we observe pubs that allow smoking, does this not imply that (1) non-smokers who go to those pubs do not suffer great negative externalities, and/or (2) the competitive process leads to a good distribution of smoker/non-smoker pubs in town?”

S: “Maybe. But, you are making an implicit assumption that need not be true.”

M: “Most likely. What is that assumption?”

S: “That people can accurately tell how much negative externalities they suffer. And more importantly, when there are smoking-pubs, more people tend to become smokers. We’re incentivizing bad-habits.”

M: “Those are excellent points. But, both of these points rely on people not accurately knowing themselves. The first point you raise is basically that people do not accurately estimate the cost of becoming a second-hand smoker, and the second point is that people do not accurately estimate the cost of being a smoker. Is that right?”

S: “Sounds right.”

As this dialogue demonstrates, the hypothetical student starts off by making a negative externality argument and then quickly switches to a paternalistic argument. The distinction is important. Negative externality arguments are valid to the extent that we believe regulatory responses are legitimate ways of protecting people from others. Furthermore, negative externalities can exist in situations where all individuals are rational. Paternalistic arguments, on the other hand, are valid to the extent that we believe regulatory responses are legitimate ways of protecting people from themselves. Perhaps more importantly, problems that give rise to paternalistic arguments commonly require individuals who act irrationally. 

April 3, 2014 | Permalink | Comments (5) | TrackBack (0)