Wednesday, November 5, 2014

Spinoffs and Incentive Pay: A Puzzle

eBay is putting PayPal up for sale, which raises some interesting questions.  First, will eBay put a big timer on its home page announcing how many minutes are left in the auction?  (Readers who suspect this entire post is just an excuse to make that joke are not entirely wrong).    And second, well...why?

Researchers have known for a while that spin-offs are quite good for the newly freed firm.  You can imagine a few stories here.  One is that the spin-off business was a neglected child whose old managers didn't "focus" on it enough; allowing for spin-offs extends the market for corporate control down into the firm, increasing efficiency.  Or maybe the opposite -- managers are really good at identifying diseconomies of scope (the classic example is the baby food company owned by the pesticide firm), and spin-offs create value by eliminating the baggage.  Finally, maybe for some reason investors can't accurately value firms when they're stuck together--for example, because firm disclosures report aggregate results--although if so, one wonders why firms wouldn't voluntarily disclose sub-unit data.   

Another interesting recent theory, from a working paper by a young Wharton prof, not publicly available but reported recently in the New Yorker, is that it's some combination of incentive pay and moral hazard in teams stories.  Firms that use stock of the parent firm to reward all their employees are, in effect, paying everyone based on the average productivity of all the sub-units.  Spin-offs allow more precise pay for performance, and, in the case of the high-performing spin-off (like PayPal) probably help retention.

Except that theory makes no sense, does it?  Why the heck would the firm use a single pay instrument for everyone?  Couldn't you just use bonuses instead, designed to track the value of the unit that would otherwise be spun off?  Firms already construct compensatory stock "units," which are pay contracts that mirror the economics (but not voting rights) of the underlying equity shares.  Why not do that  for the sub-unit?  I suppose there are transaction costs, but given the enormous value implied by the spin-off studies, those costs have to be small in comparison.  If there are other good fundamental reasons to keep the firm together, splitting up over the bluntness of the stock-as-incentive-pay instrument seems a bit nutty.

Probably there are subtleties to the story that are impossible to capture in a 1,000-word column.  But what could they be?

November 5, 2014 | Permalink | Comments (0)

Tuesday, November 4, 2014


 Preparing for my regulation economics class, I decided to use guano as an example. Guano is the bird excrement that piles up on deserted ocean islands.  It  has a high concentration of urea, and hence of nitrogen in a form crops can use.  I wanted to use it as an example of how natural resources should be used up, though used up at an efficient rate.  It was heavily mined in the 19th century, and this was appropriate, especially since in 1909 Fritz Haber discovered how to synthesize ammonia cheaply as a substitute. Looking at Wikipedia, I discovered another good feature for an economics class, though: the Guano Islands Act of 1856. 48 USC 1411, 1414 still says: 

1411. Whenever any citizen of the United States discovers a deposit of guano on any island, rock, or key, not within the lawful jurisdiction of any other government, and not occupied by the citizens of any other government, and takes peaceable possession thereof, and occupies the same, such island, rock, or key may, at the discretion of the President, be considered as appertaining to the United States....

1414. The discoverer, or his assigns, being citizens of the United States, may be allowed, at the pleasure of Congress, the exclusive right of occupying such island, rocks, or keys, for the purpose of obtaining guano, and of selling and delivering the same to citizens of the United States, to be used therein, and may be allowed to charge and receive for every ton thereof delivered alongside a vessel, in proper tubs, within reach of ship’s tackle, a sum not exceeding $8 per ton for the best quality, or $4 for every ton taken while in its native place of deposit.

Midway and Johnston Atolls, in the general vicinity of Hawaii, were claimed for the U.S. this way. 

November 4, 2014 | Permalink | Comments (0)

Friday, October 31, 2014

SSRN Top Ten Lists, 10/31/2014

RECENT TOP PAPERS for all papers first announced in the last 60 days  
1 Sep 2014 through 31 Oct 2014

Continue reading

October 31, 2014 | Permalink | Comments (0)

Monday, October 20, 2014

The Origination Clause and Obamacare: Origination as Deliberation

I saw fellow blogger Brian Galle today at a seminar, and he properly chided me for not following up my post of a  couple of days ago with my promised second post on Hotze, the Obamacare case on whether the statute is unconstitutional because it is a revenue bill that originated in the Senate, not the House.

The case is an example for the maxim, "Fiat Justitia, Caelum Ruat": "Let Justice Be Done Though the Heavens May Fall" (On that maxim, see the good Wikipedia article).  It is interesting to think about your attitude toward a bald hypothetical of the situation: If you did agree that Obamacare violated the Origination Clause, would you be willing to strike it down anyway? Some people want to adhere strictly to the rule of law; others do not. These things are a bit like a game of Chicken: the government may do something relatively inoffensive but unconstitutional forecasting that even opponents may not want to undo the action because the consequences would be so severe.

Anyway, much of the case is about whether Obamacare was a revenue bill, since other bills can originate in either house of Congress. I wouldn't have thought so, in general, except that the Supreme Court did base the constitutionality of the mandates on the taxing power. Let's not go further into that for now. We at least know that the bill's medical devices tax is a severable component whose purpose is to raise revenue. So let's think about how to make sense of the Origination Clause. What purpose could it possibly have?

The purpose can't be to prevent the House from being forced to agree to revenue bills it opposes. The House already has the power to vote No, as does the Senate. So why does it matter which house the bill originates in?

The answer lies in the details of procedure. A bill is not simply proposed, debated, and voted on. Rather, it is introduced, sent to a committee, amended, debated, and perhaps becomes the subject of hearings. It then may die in committee, especially if the committee chairman or majority party leadership wants to kill it. If it comes out of committee, the majority party leadership might agree to allow amendments to be made, but might not. Especially in the House, with its four times as many members and shorter terms, the leadership holds much power through its influence on the procedure.

Though the House did vote in favor of the medical device tax and the rest of the Obamacare bill, none of the text went through the committee and amendment process. The House leadership decided that the Senate version, take-it-or-leave-it, was better than risking a filibuster to come up with a version the House truly had deliberated on. This, I think, is what the Founders were concerned about. The ordinary process does not let the House Speaker say dictatorially, "This is the bill, and if you don't want it, you get nothing." Nor does it allow the Senate to say that.

If the Senate were to propose language for a bill, and that language miraculously survived unaltered in a bill that genuinely went through the usual House committee and amendment procedures, that would not violate the Origination Clause. Nor would the clause be violated if the President, or Professor Cutler, wrote a health care bill and somebody introduced it into the House in the usual way. What matters is that the House members have a genuine chance to alter the bill.

I'm not satisfied with my write-up, but perhaps someone can improve on it, and come to grips with the question of what to do in closer cases, where some but not all of the House procedures are skipped.

A good book on the subject of procedural control is William Riker's The Art of Political Manipulation. It's short and lots of fun, because it consists of ten or so stories of how things like the order of votes determined the outcome. It's a nice approach to doing history with informed speculation about the numerical ordering of each player in the game's preferences over outcomes.

October 20, 2014 | Permalink | Comments (0)

Sunday, October 19, 2014

Surowiecki on Payment for Environmental Services

James Surowiecki is the economics correspondent for the New Yorker.   Lots of times he does a nice job explaining difficult concepts in ways that are accessible to the lay public.  Last week’s column on “payments for economic services” (PES, in the lingo) wasn’t one of those times.  Humblebrag disclosure: I’ve written 25,000 words on why PES is a bad idea.  Here’s the shorter version.

The basic idea behind PES seems like a good one: rich countries should pay poorer developing nations to be environmentally responsible.  It’s cash for conservation.  Surowiecki calls it a “win-win”: developing nations get the economic aid they need, and rainforests don’t get clear-cut as quickly. 

It would indeed be a great policy if it were a one-shot deal.  But of course that isn’t the case.  We don’t want the Amazon basin to smolder today, and we still won’t want it smoldering next year, either.  This year we cut a deal with Bolivia, next year Malaysia. 

Think about the incentives PES sets up for developing nations. 

Continue reading

October 19, 2014 | Permalink | Comments (0)

Saturday, October 11, 2014

The Origination Clause Obamacare Case

          Since Friday I gave a talk at Hillsdale on Halbig, and Monday I give a talk at Notre Dame about Hobby Lobby, I wondered if I had anything to say on Sissel v. HHS (DC Circuit,   No.13-5202) and  Hotze v. Sebelius, (5th circuit pending, No. 14-20039).   The issue is whether the ACA, the Obamacare bill,  is a revenue bill and, if so, whether it originated in the House as revenue bills must according to the U.S. Constitution. 

   I think the revenue bill part can be severed--- the medical devices tax and the 40% surcharge on high-quality health insurance. What's interesting to me, though, is the Origination Clause. What does it mean? 

    First, we need some history.  Obamacare originated as several bills-- at least two versions in the Senate and one in the House. Then, the Democrats unexpectedly lost one seat when Senator Kennedy died and was replaced by a Republican. Now, they had to fear a filibuster from the 41 Republicans.  The District Court Hotze opinion gives a good description of what happened. I've removed some cites and reformatted:


On October 8, 2009, the House of Representatives (the “House”) passed H.R. 3590, otherwise titled at the time the “Service Members Home Ownership Tax Act of 2009.” H.R. 3590, 111th Cong., § 1 (Oct. 8, 2009). H.R. 3590 was a bill to make certain changes to the Internal Revenue Code. Specifically, the bill extended or waived the recapture of a first-time homebuyer credit for certain members of the armed forces.  The bill also expanded exclusions from gross income of certain military-related fringe benefits.   Finally, the bill increased the penalty for failure to file a partnership or “S corporation” tax return from $89 to $110, and    increased certain estimated corporate taxes by 0.5%.

 Upon receipt, the Senate struck out the entirety of H.R. 3590 aside from its enacting clause. In its place the Senate inserted new text under the title “Patient 2 Protection and Affordable Care Act.” H.R. 3590, 111th Cong., § 1(a) (Dec. 24, 2009).

The bill passed the Senate on December 24, 2009.

The amended H.R. 3590 was then sent back to the House. On March 21, 2010, the House passed H.R. 3590 as amended.

     Hotze doesn't say, but here are some other things I think are true (I might be wrong) that are relevant. First, the House had its own health care bill, which it let die. The Senate had its own  health care bill, which is the "new text" that it inserted as an amendment. Since the amended HR 3590 was almost identical to the previously passed Senate health care bill (or maybe because it was sent to the Senate as a budget bill not subject to filibustering, I forget which was the reason), Republican senators weren't allowed to filibuster it. It went straight back to the House and passed by a full House vote without going through any committees and without any opportunity to offer amendments.  For some more detail, though  not enough to satisfy me I've got it right, see John Cannan, A Legislative History of the Affordable Care Act:  How Legislative Procedure Shapes Legislative History*LAW LIBRARY JOURNAL Vol. 105:2 [2013-7] . 

   As far as labelling goes, this bill originated in the House.  The  ultimate law, though, had almost no words from the House version and was about a different subject entirely. On the other hand, the House didn't object to this.  So did the bill originate in the House?

  I'll post this now, and add my analysis later. 

October 11, 2014 | Permalink | Comments (0)

Wednesday, October 8, 2014

More on Incentives for Organ Donation

Last post, I suggested that mean-reversion in states that enact organ donor incentives may have been casting a statistical cloud over any effort to measure the real impact of those incentives.  There are some other issues in earlier papers, too -- for example, rather imprecise coding of the real dollar value of tax incentives, inattention to the possibility of omitted variable biases, and so on.  So my co-author and I first repeat the earlier papers while correcting these smaller problems.  And, like the earlier papers, we find a negative correlation between enactment and some forms of kidney donation: that is, it looks as though the laws reduced donations.

Our next step is to come up with a way to measure the impact of state laws without having to assume that the trend lines of non-enacting states represent a valid control group.  But the non-enacting states are the only control group we have!  So instead of using the real states, we (in essence) make some up.  We construct “synthetic controls,” which is to say that for each enacting state, we try to build a mirror-image non-enacting state out of weighted combinations of the real non-enacting states.  With enough math, we are able to get a year-by-year pattern of donations from the weighted combination of other states that almost exactly matches the pattern for New York, which enacted its statute in 2006 (we had a tougher time creating good-enough matches for other enacting states).  We then compare New York to the weighted combination of control states.

Here’s what happens:

NY synth control image

That is, it looks as though New York's enactment prevents the significant decline that "synthetic New York" would have experienced.  While we don't want to draw strong conclusions from just one state, at a minimum our results suggest that other researchers may have been too quick to conclude that tax incentives for organ donation don't work.

October 8, 2014 | Permalink | Comments (0)

Monday, October 6, 2014

Parallel Lines and Organ Donations

     In his 1970 book The Gift Society, British social scientist Richard Titmuss criticized the American practice of paying for donations of whole blood. He contrasted Great Britain, which relied on donors, and which seemingly faced far fewer shortages. Paying for other-regarding behavior, the book suggested, could crowd out more purely altruistic acts. Titmuss’s work attracted a lot of attention on this side of the Atlantic, including a book review by Kenneth Arrow, and the U.S. soon shifted to the British model.

    But there has been some movement in the last decade back towards monetary incentives for donations of human body parts. More than a dozen U.S. states now offer tax incentives for living organ donors, although the incentives allow deductions only for the actual costs of lost wages and medical care.

    Past studies of these state laws have mostly found, much as Titmuss suggested, that they are ineffective or even reduce donations. (Though one study found that tax incentives do encourage donations of bone marrow, which is among the least costly and invasive of the possible procedures).

    These studies have all followed the basic difference-in-differences design common to empirical studies of U.S. legal change. The researchers draw a trend line for “treatment” states, and a trend line for “control” states that didn’t enact an incentive, and look for statistically significant differences in the slopes of the lines post-treatment. A key assumption, of course, is that any observed difference is the result of the treatment; that is, one assumes the lines would have been parallel if not for the legal change.

    What happens if there are good reasons to suspect that assumption is false? For example, what if states that enacted organ-donor incentives were states where attention to the need for organ donations had recently surged? After enactment of the law, those states might regress to the mean, particularly if advocates relaxed, assuming that the new law would do some of their work for them. Comparing trend lines would then give our researcher a “spurious” negative correlation: it would look like enacting the law reduced donations, when actually the drop was the result of other forces. If those other forces were powerful enough, they might conceal any positive contribution of the law itself.

    In other words, even though prior literature has reached a consensus that tax incentives for organ donation don’t work, or even reduce voluntary donations, we should be very skeptical of those papers. In a new project, my co-author Firat Bilgel and I try to study the impact of these laws in a way that doesn’t depend on the assumption of parallel state trends. Tune in next time for more details!

October 6, 2014 | Permalink | Comments (0)

Saturday, October 4, 2014

Contract reading costs and mandatory default terms for LLC’s

     I was just reading a paper by Chief Justice Strine and Chancellor Laster that is forthcoming in Cornell Law Review. An idea in thepaper is that

(a) a lot of LLC equity is sold to outsiders (that is, investors not involved in setting up the firm), and

 (b) outsiders should want certain protections such as the “duty of loyalty”, yet

(c) LLC articles often waive the duty of loyalty.

     The question then arises of why LLC articles would choose an inefficient clause like that, because it would reduce the attractiveness of LLC equity to outside investors and make capital more expensive to the LLC founders. One answer is that maybe the clause isn’t inefficient after all; a duty of loyalty causes too much litigation. Let’s rule out that answer and suppose the clause is inefficient. The paper’s answer is, I think, that it’s hard to write in all the specific provisions for zillions of future contingencies that one would need to replace the judicial doctrine of the duty of loyalty. That’s true, but it doesn’t explain why the  Duty needs to be made mandatory.

     I have a suggestion. It’sthat the reason for incomplete contracts is contract-reading costs, not contract-writing costs. This applies to LLC’s very well. A big reason to have an LLC is to write special clauses into the articles beyond what could be written into corporate articles. As the article notes, the LLC articles get very long and intricate as a result.  It also notes that they are written by the founders, and not by the investors. But that means the articles are hard to read.  Investors must fear they contain a “boobytrap clause”. Even if the Duty of Loyalty is not waived in boldface as the first article, a waiver might be snuck in somewhere in the middle, with clever phrasing. Thus, each investor would have to read every sentence of the articles to look for boobytraps. Moreover, since the founders might use very clever lawyers as drafters, each investor has to hire very clever lawyers as readers. That’s expensive, so investors assume things like the Duty of Loyalty are going to be waived somewhere, and the founders might as well put the waiver in boldface at the start. But this means the equity owned by minority investors is not so valuable, and so the founders can’t sell it for as much, and so both founder and investor lose out. Both would prefer a mandatory default of a duty of loyalty. 

  Or, more mildly, both would prefer a rule that if the duty of loyalty is waived, it must be waived in the first 50 words of the articles, so the waiver will be easy to find.

      Contract-reading costs is also a theory of boilerplate. Boilerplate, if it is truly word for word, is safe.  The problem is that it is inflexible.  And contract-readings costs can perhaps explain why so much of the work of a young lawyer is boring. One escape from the trap of inefficient boilerplate or incompleteness is that big companies will commit in advance to having their lawyers read every word of long contracts.  If both sides know the lawyers are going to do that, though,  the associates will never find anything and will feel like their long hours of reading are completely useless. That’s why the reputational commitment to always spending thousands of dollars on young lawyers is reading; ex post, it’s useless because they never find anything wrong.  The problem for LLC’s is that investors can’t commit to hiring  good lawyers to read the contracts, so they’ll be tempted to skip the reading, which means the writers are tempted to put in the boobytrap clauses. That’s game theory stuff, which my paper works out (without too much complexity in the math).

   The Strine-Laster paper cites Mohsen Manesh and  Marcel Kahan &  Michael Klausner on contracting costs. I took a quick skim just now, and they don’t seem to include my contract-reading cost idea. Kahan and Klausner’s article is 4 years earlier than mine, of course, and I published mine in a rather obscure economics journal, so law profs will not have read it and it hasn’t gone viral yet in the scholarly world.  See Mohsen Manesh, Express Contract Terms and the Implied Contractual Covenant of Delaware Law, 38 J. Corp. L. 1 (2013); and  Marcel Kahan & Michael Klausner, Standardization and Innnovation in Corporate Contracting (Or “The Economics of Boilerplate”), 83 VA. L. REV. 713   (1997) . My article is:

Eric Rasmusen "Explaining Incomplete Contracts as the Result of Contract- Reading Costs," in the BE Press journal,Advances in Economic Analysis and Policy. Vol. 1: No. 1, Article (2001).  Much real-world contracting involves adding finding new clauses to add to a basic agreement, clauses which may or may not increase the welfare of both parties. The parties must decide which complications to propose, how closely to examine the other side's proposals, and whether to accept them. This suggests a reason why contracts are incomplete in the sense of lacking Pareto- improving clauses: contract- reading costs matter as much as contract- writing costs. Fine print that is cheap to write can be expensive to read carefully enough to understand the value to the reader, and especially to verify the absence of clauses artfully written to benefit the writer at the reader's expense. As a result, complicated clauses may be rejected outright even if they really do benefit both parties, and this will deter proposing such clauses in the first place.



October 4, 2014 | Permalink | Comments (1)

The Craigslist Case (2010) and Permissible Majority-Shareholder Corporate Objectives

   At my talk on the Hobby Lobby regulations last week (which, by the way, anybody in South Bend can go hear at Notre Dame Law on Monday October 13), Professor S. (suitably ambiguous)  brought up eBay Domestic Holdings, Inc. v. Newmark, 16 A. 3d 1 - Del: Court of Chancery 2010.

      This is a fascinating case. One    feature  is  weak lawyering by large companies with reputations for brilliant managers. Ebay neglected to allege breach of contract, the judge observes, while devoting huge effort to proving all its elements. Craigslist neglected to   assert  the business judgement rule, and instead claimed it was protecting a special corporate culture, an argument legally and factually feeble.   

     Here's my story for what happened.  Ebay bought a minority stake in Craiglist, thinking it could use its one  seat on the board to intimidate the two founders into first accepting its policy recommendations and then selling out all their  remaining shares. Ebay was fantasizing.  Ebay found that all it had gotten was a board seat and the right to dividends. The founders ignored all its advice and were telling the truth when they said they didn’t want to sell out.  Ebay then used its director position to get information to   use to start a competitor to Craiglist. (Why no Craiglist counterclaim of breach of fiduciary duty by the Ebay director, by the way?--- maybe because the stealing was the subject of a simultaneous California lawsuit, though I don't know why it couldn't argue the facts in both.) The Craiglist founders got mad and rechartered in a way that took away Ebay's board seat and made selling it stock complicated.  

   The judge said that the Craigslist founders violated their fiduciary duty when they rechartered, because they were just doing it to punish the minority shareholder. The judge also said that the Craigslist owners couldn't sacrifice minority monetary interests to satisfy their own non-value-maximizing goals, but that was really confused dictum. This fight wasn't over company policy; it was over a board seat. It wasn't even over control--- Ebay had no chance of ever getting control--- so company policy was irrelevant.

  Yet the judge did have some strong words to say about majority shareholders who use their position to achieve non-monetary objectives undesired by the minority (my boldfacing, throughout this post):

      I will review Jim and Craig's adoption of the Rights Plan using the intermediate standard of enhanced scrutiny, typically referred to as the Unocal test. Framed generally, enhanced scrutiny "requires directors to bear the burden to show their actions were reasonable."[83] The directors must "(1) identify the proper corporate objectives served by their actions; and (2) justify their actions as reasonable in relationship to those objectives." ...

    Jim and Craig simply disliked the possibility that the Grim Reaper someday will catch up with them and that a company like eBay might, in the future, purchase a controlling interest in craigslist. They considered this possible future state unpalatable, not because of how it affects the value of the entity for its stockholders, but rather because of their own personal preferences. Jim and Craig therefore failed to prove at trial that they acted in the good faith pursuit of a proper corporate purpose when they deployed the Rights Plan. Based on all of the evidence, I find instead that Jim and Craig resented eBay's decision to compete with craigslist and adopted the Rights Plan as a punitive response. They then cloaked this decision in the language of culture and post mortem corporate benefit. Although Jim and Craig (and the psychological culture they embrace) were the only known beneficiaries of the Rights Plan, such a motive is no substitute for their fiduciary duty to craigslist stockholders.

    Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim's and Craig's desire to be of service to communities. The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The "Inc." after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means[106] or a corporate titan of online commerce. If Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig's actions affect others besides themselves.

     The Craigslist founders  indeed talk about how they want  the company to perform a public service, but this is exactly the kind of talk that a court should dismiss as useful for business but not necessarily sincere:  

        "See, e.g., Tr. at 1572:23-1573:3(Jim) (testifying that craigslist's community service mission "is the basis upon which our business success rests. Without that mission, I don't think this company has the business success it has. It's an also-ran. I think it's a footnote.")."

   It's  easy to believe that providing services for free was the long-term way to maximize dollar profits. It got them up to a value of $100 million dollars or so, right?  They do not  make money charging fees to everybody using their service, but they do make money selling access to certain employers and landlords, at least,  and there’s plenty of potential for future profit.  An owner interested purely in dollar profit might well act exactly the same way, with the intention of cashing in when the network has reached the right size in, say, ten years, and using its small cash flow from current fees and stock sales to finance maintenance and the owners’ consumption.  

  The judge did rule correctly as a bottom line. He said that it was OK for the Craiglist owners to set up a staggered board that would remove Ebay's ability to elect a director. That wasn't necessarily an anti-takeover measure, and minority shareholders have no entitlement to a director anyway. He said that it was NOT okay to do various poison-pillish things that made it hard for Ebay to sell its share, so he rescinded those. The measures weren't to forestall a takeover. A hostile takeover was impossible anyway. Rather, it was either (a) to keep Ebay from selling to some other even more obnoxious minority shareholder (hard to conceive), or (b) to be mean to Ebay by making their shares illiquid so they'd have to sell  at a lower price, or to be able to themselves pay that lower price. Obviously, taking a measure to be mean to the minority shareholder is a breach of fiduciary duty. Also, there was no connection between that action and ANY legitimate goal--- not to profit, but not to public service either.

     Thus, it was irrelevant what the Craiglist founders said  about maximizing profits. The case wasn't about company policy anyway. It wasn't even about control. It was about keeping Ebay from stealing company secrets and about illegally punishing Ebay for its stealing.


Postscript: I mentioned the weak lawyering. The opinion has a very nice section on that:

“Throughout this dispute, I have repeatedly read and listened to what look and sound like breach of contract arguments, which eBay uses not to prove Jim and Craig breached a contract, but rather to prove Jim and Craig breached their fiduciary duties. This has been an odd exercise, and I admit I am puzzled by eBay's decision not to bring a breach of contract claim or, more promising perhaps, a claim for breach of the implied covenant, considering eBay expended significant effort arguing that the 2008 Board Actions violated both the technical provisions and the spirit of the SPA and the Shareholders' Agreement. The fact remains, however, that eBay asserted neither a breach of contract claim nor a claim for breach of the implied covenant. Therefore, I make no ruling on whether Jim and Craig breached the SPA, the Shareholders' Agreement, or the implied covenant of good faith and fair dealing by implementing the 2008 Board Actions.”

  If it were an unsophisticated party, I would want the custom to be that the judge help out by considering claims not pleaded, or at least by suggesting some pleadings, but a big company should pay for an advocate to make all its arguments. As for Craigstlist, it argued that it was defending a corporate culture: 

Giving away services to attract business is a sales tactic, however, not a corporate culture. Jim, Craig, and the defense witnesses advisedly described craigslist's business using the language of "culture" because that was what carried the day in Time. To the extent business measures like loss-leading products, money-back coupons, or putting products on sale are cultural artifacts, they reflect the American capitalist culture, not something unique to craigslist. Having heard the evidence and judged witness credibility at trial, I find that there is nothing about craigslist's corporate culture that Time or Unocal protects. The existence of a distinctive craigslist "culture" was not proven at trial. It is a fiction, invoked almost talismanically for purposes of this trial in order to find deference under Time's dicta.”




October 4, 2014 | Permalink | Comments (0)

Friday, October 3, 2014

Society for Environmental Law and Economics 2015, Groningen, the Netherlands -- Call for papers

Society for Environmental Law and Economics (SELE) 2015 Conference

Call for Papers

The seventh annual meeting of the Society for Environmental Law and Economics (SELE) will be held on 21-22 May 2015, at the University of Groningen, the Netherlands.

We hope to build upon the great success of past SELE meetings, and continue to build a community of scholars interested in working at the intersection of law, economics and environmental issues. We welcome both theoretical and empirical papers, ranging from local to international themes. While all topics are welcomed, this year we in particular invite scholars to submit papers on how to balance sustainability and competition: should competition authorities allow for restrictions of competition that benefit the environment?

In a spirit of collegiality, the meeting will take place in a workshop format in which all sessions will be plenary. We strongly encourage all attendees to attend all presentations. Our goal is to create a program that includes a variety of disciplinary perspectives, ideally consisting of about 20 papers over the two-day period.

As in past years, no funding will be available for travel or lodging expenses, but food and drink will be provided during the workshop for the participants and a dinner will be hosted on the first day of the conference.

Further information regarding accommodation, the conference program and other logistic matters will be posted on Inquiries can also be sent to (this year’s local organizer) Edwin Woerdman (

To submit a paper, please email a Word or PDF file to Edwin Woerdman with the subject line “SELE SUBMISSION”, by November 17, 2014. We will review all the papers and get back to you by December 15.

Hope to see you in Groningen!

Edwin Woerdman, Associate Professor, University of Groningen

Daniel H. Cole, Professor, Maurer School of Law and SPEA, Indiana University

Shi-Ling Hsu, Professor, Florida State University College of Law

Jonathan R. Nash, Professor, Emory University School of Law

Josephine van Zeben, Fellow, Worcester College, University of Oxford


October 3, 2014 | Permalink | Comments (0)

Thursday, October 2, 2014

Writing Abstracts, with illustrations from two recent papers on LLC Law

     Economics professors aren’t as good as law professors at writing, but we can be proud of one stylistic standard of our profession: the abstract. (Another is the table of references at the end, but we’ll save that for another day). Practicing lawyers do a lot of useful summarizing and abstracting at the start of briefs, but law review articles often do not. Sometimes they do, though, and I hope that becomes universal, especially for working papers. I’m seeing more of them, but one thing that needs instilling into the culture of law is the idea that an abstract should ordinarily be just one ordinary-sized paragraph, setting out the article’s topic and its contribution but not necessarily its reasoning. An abstract is like pleadings; it is an invitation to the reader to go further, but the reader, like the judge signing off on a motion to dismiss, will breathe a sigh of relief if the abstract doesn’t promise enough to merit spending any more time on the matter. Of course the judge wants to do justice and the reader wants to read good papers, but everyone is busy. And if the choice is between reading an abstract that is a paragraph long and one that is a page long, we’ll choose the short-abstract paper, partly because we can hope for more concise writing if we decide to read further.

If you’re still with me, I’ll use as examples two papers which I noticed on the web today, both of them on the topic of the evolution of limited liability companies towards being more like corporations. They are: "The Siren Song of Unlimited Contractual Freedom"   and  “Fundamental Changes in the LLC: A Study in Path-Divergence and Convergence,”     It is presumptuous of an economist to suggest edits , I know, but  good writers always welcome feedback, even though they know enough to ignore most of it.

"The Siren Song of Unlimited Contractual Freedom" has a three paragraph abstract.


One frequently cited distinction between alternative entities — such as limited liability companies and limited partnerships — and their corporate counterparts is the greater contractual freedom accorded alternative entities. Consistent with this vision, discussions of alternative entities tend to conjure up images of arms-length bargaining similar to what occurs between sophisticated parties negotiating a commercial agreement, such as a joint venture, with the parties successfully tailoring the contract to the unique features of their relationship.

As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound. Based on the cases we have decided and our reading of many other cases decided by our judicial colleagues, we do not discern evidence of arms-length bargaining between sponsors and investors in the governing instruments of alternative entities. Furthermore, it seems that when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps. A lack of standardization prevails in the alternative entity arena, imposing material transaction costs on investors with corresponding effects for the cost of capital borne by sponsors, without generating offsetting benefits. Because contractual drafting is a difficult task, it is also not clear that even alternative entity managers are always well served by situational deviations from predictable defaults.

In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities. In this chapter, we propose a framework that would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations: (i) the elimination of double taxation at the entity level and (ii) the ability to contract out of the corporate opportunity doctrine. For managers, this framework would provide more predictable rules of governance and a more reliable roadmap to fulfilling their duties in conflict-of-interest situations. The result arguably would be both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors.

I would shorten it, but also add the particular framework the authors are proposing. I hope I got it right below; summarizing a paper’s conclusions is especially difficult, though it is perhaps the most important part of the abstract.


Limited liability companies (LLC’s) have greater contractual freedom than corporations. We think of LLC’s being formed via sophisticated bargaining over the tailoring of terms, as in a corporate joint venture. In the cases we’ve read as judges, we don’t see this bargaining between founders and mere investors. Indeed, it seems expansive contracting can hurt more than it helps, and actually raises the cost of capital for the founders. Thus, we think LLC’s and such entities need
a sensible set of fiduciary default clauses. Any such set needs to avoid threatening the two key advantages of LLC’s: (i) elimination of double taxation, and (ii) the ability to contract out of the corporate opportunity doctrine. We propose (1) a default that no liability exists for breach of the duty of care absent explicit provision for it; 2) that where the governing instrument of a managing member or general partner specifies that certain directors have a duty solely to consider the best interests of the LLC and its investors they will be entitled to the same deference as corporate independent directors, and (3) that the traditional duty of loyalty be nonwaivable.

This is a fascinating paper, and I’d like to say some things about the virtues of mandatory defaults, but I’ll save that for a separate post.

   “Fundamental Changes in the LLC: A Study in Path-Divergence and Convergence,” is a description paper rather than a proposal paper. It doesn’t have any abstract included with the paper [bad!], but it does have an abstract on the SSRN website:


Issues relating to fundamental changes in LLCs—matters such as amendments to organizational documents, mergers, conversions, domestications, and dissolutions—have received little consideration in the law literature. While they are regular occurrences in the lifecycle of a firm, they are not in front of an LLC’s management or legal counsel every day. Having said that, they are critically important aspects of the law governing LLCs, especially in transformative times. This draft book chapter, written for the forthcoming Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations (Robert W. Hillman & Mark J. Loewenstein eds., Edward Elgar Publishing, forthcoming 2015), reviews the current state of fundamental change doctrine in the LLC form in the United States, collects and describes key observations on the current (and continually evolving) U.S. laws governing these important transactions, and draws related summary conclusions.

Here's a rewrite, that gives the potential reader some bottom line (again, I hope I've got it right!).


Over the lifetime of a limited liability companies (LLC), mergers, conversions, domestications, and dissolutions, and “charter” amendments are important if nonroutine events, but the law literature ignores them. I review the current state of “fundamental change doctrine” under the state law that governs them. Actual statutes differ importantly and variously among the states compared to the model statutes. In particular, states have employed ideas from corporate law such as majority owner default rules instead of unanimity default rules. Both legislatures and judges have looked to corporate law, while keeping in place the contractual flexibility of the LLC.


 October 3. Revised to be more discreet and avoid distraction. 


October 2, 2014 | Permalink | Comments (0)

Monday, September 29, 2014

L&E Seminar Series, We'd Like to Blog About You

If you, reader, run a L&E colloquium/seminar/whatnot at your institution, let us know.  We'd like to share schedules of upcoming speakers and the titles of presented papers (along with links, if authors opt in) with our readership.  You can e-mail links to me at brian ~dot~ galle ~at~ bc ~dot~ edu.

September 29, 2014 | Permalink | Comments (0)

Thursday, September 25, 2014

Saul Levmore on Piketty

Saul Levmore has posted on SSRN his review of Thomas Piketty's Capital in the Twenty-first Century. In it, he raises a question that others have raised: is there a problem with inequality, per se? We exchanged emails, and I raised this point: severe enough inequality creates a sitution in which the poor have a comparative advantage in violence. Even if the rich are able, with their resources, able to buy enough security to obtain a sizable absolute advantage in violence, the poor may have such low opportunity costs of violence that they may freely engage in it. Professor Levmore replied that if we are afraid of violent revolution, then we are in a pretty dark place and we are not quite there yet. Agreed. But we may not need to be at a point of violent revolution in order for the threat of inequality-induced violence to impose costs. Is our American gun fetishism part of that? If so, that is pretty costly. Everybody talks about Ferguson as if it were about race, only. Is it? Maybe. But is some of it a fear of the other, that other being quite possibly poor enough to entertain rational thoughts of violence? I dunno. But possibly.

September 25, 2014 | Permalink | Comments (0)

Wednesday, September 24, 2014

"Un poème n'est jamais fini, seulement abandonné"

   Today I'll talk to my regulation students about the importance of having the attitude that you can improve the situation around you. I thought of that because I was reassigned to Harvard Hall 102, which is a nice room, without the construction noise of Littauer, the lack of blackboard, or then noisy air conditioner, but which is a lecture room with the old-fashioned forward facing rigid chairs with fold-up writing boards. I use lots of discussion. The seating situation is crucial for discussion. There were, however, a number of loose chairs in the room, and, if truth be told, in the classroom next door (which used to have a nice little table too). So I had the students rearrange those to make a semicircle. It was not ideal, but it worked OK, and I even had the pleasure of a self-moving discussion igniting about Uber and a new service, just banned in Boston, for people to sell information about empty parking spots, which coujld keep going while I fixed a comptuer problem.

So I will make the point to them that there are two kinds of people: those who take their situation as given, and those who look for improvements they can make. Actually, there is a third kind, I guess: those who look for improvements and complain that nobody is making them. I have some recollection that psychologists can test for this personality attribute and it's correlated with success even conditioning on IQ and such things. I think there might be a good aphorism on that, but I can't remember it, so I'll make some up:

"You'll succeed if you don't about what is, but what might be because you're there."

"Don't think about what is, but what might be."

"Don't think about what's wrong, but about how you can fix it."

Where's the economics in this? Well, it pertains to any activity, so it pertains to economics research too. To do good research, you need to (1) See what's wrong, and (2) Try to fix it, and (3) Stop and write it up. (Just as the good is the enemy of the perfect, so the perfect is the enemy of the good.) Thus we get to the Verlaine quote that is the title of this blog post, a quote which can be loosely translated as:

"An economics paper is never finished, only published."

P.S. I thought of a couple of variants on the Verlaine quote, nicely pointed because of how he treated his wife and how he doesn't seem (from Wikipedia) to have written much in the last decade of his short life:

"Un poèt n'est jamais fini, seulement abandonné."

"La femme d'un poèt n'est jamais la finalée, seulement abandonnée."

September 24, 2014 | Permalink | Comments (0)

Monday, September 22, 2014

Endowment Spending: The Costs of Waiting?

Last time I suggested that the arguments in favor of very low rates of spending by philanthropic organizations are not particularly great.  But law encourages and promotes low spending rates in a few ways.  For example, most states require nonprofit boards to respect donor wishes in perpetuity, and to manage the organization's funds in ways that ensure the organization's perpetual life.  Federal law gives donors a tax break at the time they donate, regardless of when the organization actually spends their money.  Foundations have to spend 5% of their investment assets each year, but administrative and overhead costs (including, say, a fancy office for the executive) count towards the floor; other tax rules encourage living donors to park money in the firm for long periods.

These rules seem contrary to some fiscal basics.  A dollar today is worth more than the promise of a dollar in the indefinite future, unless the marginal utility of that dollar will be way higher to us later (and we expect that if we had it now we'd fritter it away).  Since (as Eric pointed out in his comment) we expect that if anything future folks will be even wealthier than us, granting tax deductions now for philanthropy in the 22d Century seems a bad deal.  But admittedly measuring the exact extent to which this is a bad deal -- deciding on what we might call the "social discount factor" is tricky.

So let me focus on two other costs of waiting that are more tangible.  One is the deadweight loss of giving.  Sometimes, donors want to do the best thing for the world, but they don't know exactly how to get there.  Even purely redistributive charities often deliver in-kind benefits instead of cash; they must think they know better what to do with the money than their beneficiaries.  And they might!   But sometimes they might not, as the folks at Give Directly argue.  As time passes between when the donor writes down the permissible uses of her funds and their ultimate disposition, these gaps will get wider and wider.   

Similarly, time worsens the problem of the separation of the donor's "ownership" of the contributed funds and managers' control over them.  You think shareholders have it tough?  They can go to a board meeting.  What about the decades-dead philanthropist?  I guess she...what?  Sends her poltergeist to rattle the chandelier at the slacking trustees?  

Nonprofit law, like other forms of organizational law, is designed to mitigate these problems.  But the law is far from perfect, and long waiting times between donations and expenditures put it under great strain.   

September 22, 2014 | Permalink | Comments (1)

Wednesday, September 17, 2014

Pay It Forward?: Some Normative Considerations Pt. I

            We’ve seen that U.S. foundations spend a very small portion of their investment assets each year.  As it turns out, that amount is actually less than net-of-inflation appreciation and new contributions, so the philanthropic sector is constantly growing.  Both state and federal law, if anything, tend to discourage larger payout amounts.  And most contributions to foundations are heavily tax subsidized.  Should current law be doing more to encourage faster use of philanthropic funds?  Although I think there are strong arguments on both sides, my present inclination is to answer “yes.” 

            Let’s start today with arguments in favor of charitable savings --- that is, arguments against faster-payout rules. 

Continue reading

September 17, 2014 | Permalink | Comments (1)

Monday, September 15, 2014

Wind and Sun, Conquerors of Fossil Fuels

The New York Times ran an article Sunday about how Germany is rapidly expanding its wind energy capacity, and realizing unexpectedly lower costs because of economies of scale never before seen in any non-hydro renewable energy industry. Large demand from Germany, Denmark, and a hanful of climate-conscious countries has helped induce the entry into the sector from Chinese businesses, which of course benefit from government support.

The question that hangs over environmentally-focused groups is why don't American utilities seem to be so intransigently wedded to fossil generation? This article seemed to point to the unease of utility executives. My theory is that in addition to a lot of physical capital in the industry, there is a lot of human capital tied up on fossil fuel extraction, transmission, and combustion. Economist and former Enron official John Palmisano used to talk about how he went around the country talking to utility executives, and made what he thought was a pretty strong case for switching to natural gas away from coal. The objection that seemed most heartfelt was that "[Utility Company X] was a company that is the coal-burning business, not the natural gas-burning business. Assuming we could retrofit coal plants to accept natural gas, what would do with all the people that know how to handle coal but not gas?" Add to that the infrastructure demands (gas pipelines, e.g.), it starts to look very difficult to switch from coal to natrual gas, or anything else. If it is that hard to get utility execs to think hard about another fossil alternative, it becomes even harder to think about non-hydro renewable energy sources. But it is not narrow-mindedness per se; it is form of capital that is specific to one way of doing things, and is not easily transferable to another way of doing things. That difficulty may be illusory, but it at least appears to those embedded in the fossil industries as very difficult.

September 15, 2014 | Permalink | Comments (1)

Paying It Forward: An Empirical Perspective

BC is hosting an exciting conference this week on the future of philanthropy.  One of our major focuses will be on whether current law has gotten the right balance between current and future spending.  For example, should we be doing more to encourage large foundations to pay out their considerable fortunes, rather than hoarding them for the future? 

I'll blog a bit more with some of my thoughts on those questions this week.

Let's start today with some background.  Descriptively, most foundations pay out a small fraction of earnings; the law imposes penalty taxes on those that pay out less than five percent, but the median firm pays distributes slightly less than that:

Found exp by ptile

What you're looking at are the proportions of private foundation's investment assets distributed annually for charitable purposes.  The dashed line is the five percent "minimum payout" encouraged by a federal tax on foundations that distribute below that threshold.  The upshot, for me, is that three-quarters of the 80,000 or so private foundations tracked in these data spend less than 6% of their investment assets each year.  In other words, their spending plan is massively slanted towards future, rather than current, payouts.  

What, if anything, justifies that pattern?



September 15, 2014 | Permalink | Comments (1)

Sunday, September 14, 2014

Informality and Formality in Cost-Benefit Analysis

Professor Amy Sinden at Temple has posted a paper titled Formality and Informality in Cost-Benefit Analysis. This is an important paper that seeks to transcend a debate about cost-benefit analysis that has gotten intellectually (though not politically) stale in recent years. Professor Sinden points out that there are many levels of cost-benefit analysis, formal and informal, precise and imprecise, analyzing many alternatives and few. The mistake that is made according to Professor Sinden, (who is a critic of how CBA is used in environmental law and related fields) is that the case for CBA is often made by appealing to the intuitive usefulness of informal CBAs, while the formal but falsely precise formal CBAs actually bend public policy. I wonder if this is just a variant of the "false formalism" critique of CBA, but even if it is, it deserves some attention because of the nuance with which it treats different CBAs. Here is the abstract:


Cost-benefit analysis (CBA) is usually treated as a monolith. In fact, the term can refer to a broad variety of decision-making practices, ranging from a qualitative comparison of pros and cons to a highly formalized and technical method grounded in economic theory that monetizes both costs and benefits, discounts to present net value, and locates the point at which the marginal benefits curve crosses the marginal costs curve. This article develops a typology that helps to conceptualize and analyze the multiple varieties of CBA along the formality-informality spectrum. It then uses this typology to analyze the treatment of CBA by the academic community and the three branches of the federal government. In academic and policy circles, the formal end of this spectrum generates far more controversy than the informal end. Additionally, the law (federal environmental statutes and federal case law) seems to favor informal over formal varieties of CBA. Nonetheless, the executive branch appears to be moving toward the formal end of the spectrum. Executive Orders and guidance documents direct agencies to conduct a highly formal mode of CBA. And anecdotal evidence suggests that agencies often go out of their way to give their CBAs the trappings of formality, sometimes in ways that lead to irrational results. I argue that 1) failing to distinguish between formal and informal CBA, and the many varieties in between, has led to muddled thinking and to misuses of CBA; and 2) the trend toward formality in the executive branch is a bad development, in part because it can, and often does, lead to what I call "failed formalism" — a corruption of CBA that can occur when agencies fail to clearly and consistently define where on the formality-informality spectrum a particular CBA falls.

September 14, 2014 | Permalink | Comments (0)