Monday, September 1, 2014

Argentina's Pari Passu Clauses (with lengthy additions, September 11)

  Argentina defaulted on its government debt about 15 years ago. It offered a take-it-or-leave-it writedown to the bondholders, and most of them took it. The others got nothing. Now, the U.S. courts have ruled that the dissenting bondholders are entitled to full repayment, and have enjoined any bank with Argentine government money not to pay out anything unless all are paid equally. This is because of what is called the "pari passu" clause in the bond contract, which I read from Mark Weidemaier's Credit Slips post, " Argentina's (not so) unusual pari passu clause,"  says: 

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September 1, 2014 | Permalink | Comments (2)

Saturday, August 30, 2014

French Economists Are Fashionable

Paul Caron posted on the TaxProf Blog a link to the IMF's list of the top 25 economists under the age of 45. Of course, elite institutions and economics departments are heavily represented, but am I the only one to have noticed that seven out of the 25 are French? They include Thomas Piketty, whose book has become a blockbuster (and which I reviewed), and his comrade in arms, Emmanuel Saez (Berkeley). Esther Duflo (MIT), Emmanuel Farhi (Harvard), Xavier Gabaix (NYU), Thomas Philippon (NYU), and Helene Rey (London Business School) complete the list.

What's going on here? Don't they just teach socialism in France?? Are there any OECD countries in greater need of labor reform? Why does a country with just five percent of the population of OECD countries produce seven out of the top 25 young economists? My speculation is that the work of these French economists have taken on increased relevance: poverty and  inequality, the causes and effects of the financial crisis, and exhorbitant executive compensation. That, plus they're really good.

August 30, 2014 | Permalink | Comments (0)

Friday, August 29, 2014

What does law do in Thomas Piketty's Capital in the Twenty-first Century?

There is not a lot of law discussed in Thomas Piketty's book Capital in the Twenty-first Century. Piketty drops a few hints here and there about what laws he thinks likely contributes to widening wealth inequality (the advent of dynastic trusts, the lowering of marginal rates for the highest personal income tax brackets, which contribute to executive "super-salaries"), but his basic policy prescription is a small global wealth tax.

There is something elegant about such a tax, if the international tax haven problem can be solved. But in my review of the book, I suggest that some examination of the legal order is in order. Legal rules and institutions contribute to wealth inequality indirectly. In Piketty's world, wealth inequality increases when the rate of return on private capital is greater than the rate of economic growth, or r > g in his vernacular. My review examines several areas of law in which legal rules and institutions drive up rates of return on private capital (r in Piketty-speak) without doing much to increase overall economic growth. These areas are financial regulation, antitrust law, oil and gas tax policy, electric utilities regulation, and the generic practice of grandfathering. In my view, a rather simplistic faith in trickle-down economics has caused policy-makers to support any policy in which Δg > 0, however speculatively, and if Δr >> 0, well then, God Bless. Of course, Δg very often turns out negative, after all.

August 29, 2014 | Permalink | Comments (0)

Tuesday, August 26, 2014

Could a Qui Tam Suit Be Brought Based on the Unlawfulness of the Bergdahl Prisoner Exchange?

     Professor Solmin at Volokh Conspiracy has a post on how the General Accounting Office has announced that the Obama administration violated   federal law when it exchanged five  Taliban leaders for  the  U.S. deserter Private Bowe Bergdahl without giving Congress  the  30 days   notice required by law. The GAO also said this violates the Anti-Deficiency Act. The GAO report  was in response to a request by a number of Republican senators.  The Department of Defense lawyers told GAO that Obama’s action was legal under the relevant statute and that the statute is unconstitutional anyway. GAO was asked in 2010 about another Obama use of funds for the Secret Service and found that it violated the Anti-Deficiency Act. The current report says: 

Like the Secret Service, DOD obligated funds that were not legally available for obligation because DOD did not satisfy the notification requirements under section 8111. Accordingly, DOD violated the Antideficiency Act. See 31 U.S.C. § 1341(a). If Congress specifically prohibits a particular use of appropriated funds, any obligation for that purpose is in excess of the amount available.[7] B‑321982. Here, DOD obligated at least $988,400 in excess of available appropriations. 

So what happens next?   ---A qui tam suit!

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August 26, 2014 | Permalink | Comments (0)

Political Diversity in Economics in 1960: Stigler, Coase, Goldwater, Buchanan, and the Ford Foundation

Sunday, August 24, 2014

Update on Stock Prices & Political Activity

Readers may recall we recently reviewed a draft paper on the effects of political activity on the stock price of British firms. One of the authors, David Primo of U. Rochester, dropped a gracious note to your blogger with news that there’s now an updated version of the paper on-line.  The paper accounts for some of my concerns about method (see esp. p. 18), and Prof. Primo notes that resolving my point about selection bias still leaves most of their main results intact.  I continue to differ with the authors on the interpretation of their results.  But at least now we are closer to having results we agree on before we fight about what they mean.  

August 24, 2014 | Permalink | Comments (0)

Thursday, August 21, 2014

A Few More Special Topics in the Final Tax Whistleblower Regulations

   I’m posting again on the August IRS final regulations for tax whistleblowers,  whose principal author is Melissa A. Jarboe of the Office of theAssociate Chief Counsel (Procedure and Administration). This could be a very boring post, because what I’ll do is compare what I suggested and what was done on several unrelated topics. If you’re interested in whistleblowing, in how little details require regulations because statutes don’t include them, or in how notice-and-comment works,   you might like this blogpost.  

Relevant links are my previous blog post  that used these regulations to illustrate the usefulness of public comment on technical details,  my public comment on the proposed regulations,  the final regulations,  Dean Zerbe’s article arguing that awards should be paid for violation of reporting requirements and on the basis of criminal fines for violation of laws not in the Tax Code, and   Erica   Brady’s nice blog summaries of (a)  the Pro’s and Con’s of the final regulations,  and (b) the important new procedures for rejections and appeals.  I agree with Erica Brady that these final regulations are an improvement over the proposed regulations and a huge improvement over the status quo. I am heartened by them; the IRS has shown distaste for the whistleblower statute in the past, but these regulations will make it run better rather than worse. 

The topics follow. 

(1) How to treat whistleblower information about false tax attributes such as net operating loss carryforwards (NOL’s).

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August 21, 2014 | Permalink | Comments (0)

Wednesday, August 20, 2014

Final Tax Whistleblower Regulations Were Recently Issued

      I’m experiencing the thrill of influencing national policy--- something Law-and-Econ-Blogger Gamage is well acquainted with, since he worked on government health care regulations.  It’s a modest thrill, though. The regulations for whistleblowers who provide information on tax underpayment for a reward have just been issued. The IRS is notoriously hostile to whistleblowers (Congress forced the program on them in 2006), but these regulations are an improvement over the transition period. Lots of law firms and lawyers submitted detailed public comments, as did I, on both practical and policy matters.  I’ll use this post as a way to talk about the comment process in administrative law, as something I can have my undergraduates read when I teach them about regulation starting two weeks from now. I’ll just talk about one comment in this post, and maybe write a second post once I’ve read through the entire regulations and reminded myself of what my other comments were. 

   My thrill comes from definitely improving the regulation, even though the IRS didn’t do exactly what I suggested.

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August 20, 2014 | Permalink | Comments (0)

Do preventive law enforcement methods increase type-I errors?

I've recently been working on an article on preventive law enforcement methods. By preventive law enforcement methods, I mean any kind of pre-crime intervention that has the goal of preventing crime before it actually occurs. A good example is law enforcers interrupting a larceny while the attempt is ongoing. Another common example is a simple Terry stop. 

While thinking about these methods, I thought that one of the most important costs that come with the use of such methods is increased wrongful conviction or wrongful intervention costs. I collectively refer to these and similar errors as type-I errors. It seemed quite intuitive to me that the use of preventive methods would increase the frequency of type-I errors. This is because, convictions for interrupted attempts, or interventions due to suspicions, require less evidence than convictions for completed crimes. Therefore, preventive methods, compared to non-preventive methods, are likely to increase type-I errors. 

A friend, after I ran my ideas by him, told me that this need not be true: preventive enforcement also reduces the amount of evidence available, therefore, such methods can reduce type-I errors. After thinking about his comment, I agreed that as a theoretical matter the 'evidence reduction effect' can be greater than the 'reduction in the amount of evidence required'.  

However, as an empirical matter, I still believe that the more frequent use of preventive methods is very likely to increase type-I errors for two primary reasons. First, preventive methods increase the number of people who are candidates for being subject to type-I errors: everyone can be subjected to a Terry stop, the same is not true for post-crime investigations.  Moreover, the unfortunate presence and frequency of law enforcer misconduct suggests that allowing preventive methods to be used liberally is likely to increase the instances in which police officer can misuse their powers.

I am unable to locate conclusive data for my assumption. However, the numbers quoted in Floyd v. City of New York appear quite convincing:

    -4.4 million Terry stops were conducted between 2004-2012 by the NYPD.

    -By 2009, for 36% of the stops the officer could not state what specific crime he was suspecting

     -94% of all stops did not result in an arrest. 

    -52% of them were followed by a protective frisk for weapons. 1.5% of the frisks resulted in the finding of a weapon.

    -About 350,000 stops led to a search into the person's clothing, based on the officer's belief that the person was concealing a weapon, or an object immediately perceived to be contraband. 91% of the time, the object was not a weapon.  86% of the time the object was not contraband. 

I am not aware of any study that compares error rates associated with preventive vs. non-preventive enforcement methods. But, are we safe to assume that preventive law enforcement methods increase type-I errors? 

This is of course not to suggest that we should only focus on costs, and not focus at all on benefits. Such methods surely result in benefits by preventing harm before it happens. In fact, are these benefits not, at least theoretically, exactly what we should be balancing against type-I error costs in figuring out how often preventive enforcement methods ought to be used?

August 20, 2014 | Permalink | Comments (0)

Monday, August 18, 2014

Why Is Insider Trading Illegal?

I’ve been reading up on insider trading recently (as part of a project on what happens when government applies price instruments to limited-liability firms), and it’s tough to find academics who think trades by insiders should be universally prohibited.  This is odd not least because every modern economy that I know of in fact bans insider trading.  What gives?

(UPDATE 8/20: Bainbridge points you to some much more thoroughly thought-out answers here:

The academic defense is fairly straightforward, as I understand it.  For one (per Carlton & Fischel), it allows managers to hedge, which should help to make them more risk-seeking, reducing the need for other forms of costly incentive pay.  Defenders also still sometimes say that inside sales can send signals to the market, which is potentially useful information that would otherwise be unavailable or slower to arrive (Henry Manne is the go-to cite for this one).

Well, sure, maybe. How costly would insider trading be as an incentive-aligning device, though?  The costs would be off the books, which would look nice to rationally ignorant shareholders.  But the costs could be quite large.

As a Columbia guy, I tend to agree with John Coffee that the big cost here is the lemons problem.  If I know the manager *could* be trading on bad news known only to her, I discount the value of the stock; the fact that she is willing to sell even at my discount price tells me the stock really is a lemon.  (Sung Hui Kim also offers a recent spin on this point.)

Carlton & Fischel acknowledge the lemons argument, and they say in response that traders always know that there is someone better informed than them, and yet this does not seem to paralyze markets.  Jon Macey also makes a version of this point.  I’m not sold.  

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August 18, 2014 | Permalink | Comments (0)

Thursday, August 14, 2014

What if the Problem is Not Global Warming, but Continued High Temperatures?

    We were discussing global warming at the Indiana Law and Economics Lunch, and the curious path of world temperatures.  From NASA data, which is standard, the pattern is that temperatures rose from 1980 to 2000 and then stopped increasing (but stayed high). This doesn’t necessarily mean we can forget global warming as a problem, though--- something I hadn’t thought about before--- because maybe the continued high temperatures will cause big problems even if temperatures don’t rise any more.  It could be, for example, that Greenland’s ice will melt and raise the sea level. Whether that would happen or not, if the temperature stays constant, I don’t know.







But this implies current suggestions for global warming policy are totally misguided.

      If temperature has stalled, but we still have  a big problem because of continued high temperatures, then carbon taxes, cap-and-trade, etc.  won't help in the slightest. Restricting carbon output is only good for keeping the temperature from rising, and if it's not rising any more, that’s addressing the wrong problem. Rather,  we'd need to actually REDUCE the amount of carbon in the atmosphere (if carbon was  indeed the cause of the 1990's warming, and it has stopped only because of negative feedback via clouds, etc.), which absolutely nobody proposes. Rather,  if we need to actually reduce the temperature rather than stop it from increasing, the only solution would be climate manipulation via putting some kind of particulate in the atmosphere. 

The Supreme Court decided in EPA vs. Massachusetts in 2007 that  carbon dioxide was a pollutant and needed regulating, regardless (if I remember rightly) of whether the regulation would make any detectable difference to the global temperature (or the Massachusetts seashore, the plaintiff's alleged source of injury).  Suppose the global temperature continues to stall for 30 years, or even decline. Would that affect the Supreme Court decision? Or would it be like  with Brown v. Board of Education, where the experiments with black and white dolls and self esteem wasn't really the key to the holding? 


August 14, 2014 | Permalink | Comments (4)

Regulating Greenhouse Gas Emissions Under the Clean Air Act, Version 0.0

There has been so much clamor about the Environmental Protection Agency's introduction of a proposed rule for regulating greenhouse gas emissions from power plants, it's hard to shout above it all. And yet, not much has really been added to the conversation from a policy point of view, and not much can be said. The rule sets an emissions reduction target for each state, but is very vague (or, in EPA's words, "flexible") about how states can achieve those targets. There has been so much sky-is-falling nonsense that one loses sight of the fact that the rule doesn't actually do all that much. The rule provides neither much guidance nor much admonition. Under this part of the Clean Air Act, states will be required to submit for EPA approval State Implementation Plans that set out a regulatory scheme by which they intend to carry out the broader mandates set out by EPA. The required emissions reductions are the product of complicated formulas, but have their ultimate root in emissions rate standards for coal-fired power plants, which were then adjusted for a number of political factors, like individual state efforts to reduce emissions before this rule. The vagueness is intentional. Former EPA general counsel Roger Martella characterizes EPA's posture towards states as "any way you want to reduce greenhouse gas emissions, we'll find a way to make it work." EPA is bending over backwards to let states do whatever they want to do, at the price of perhaps accomplishing too little. Charles Komanoff of the Carbon Tax Center estimates that the implicit price of emitting carbon dioxide under these targets is about $2.15 a ton. That's trivial.

My friends at Element IV, a consulting group founded by a former oil executive and a former Sierra Club lobbyist (!), are not optimistic about the survival about this much-ado-about-not-much rule. They cite legal challenges that were filed within moments of the publication of the rule. 

Despite the disappointment with the ambition of the rule, this rule is important for several reasons. Although Bailey and Bookbinder minimize the significance of what this rule can accomplish -- "give the President something concrete to say at the Paris climate talks next year," and "claim a political legacy beyond that" -- there is real game-theoretic significance to being able to say something "concrete." I noted a few years ago that international climate negotiations are extremely fragile, and that signals of cooperation were very important in preventing the unraveling of agreements. This greenhouse gas rule does allow leaders from other countries, if they are so inclined, to be able to say to skeptical constituents that the United States has done something. Not much, but something. So the facile dismissal that we should do nothing because anything we do will be canceled out by the fact that "China" -- whatever they mean about a nation of 1.3 billion people -- will do nothing, is far too simplistic. Like it or not, the nature of climate negotiations is going to have to be the taking of unilateral steps that are necessary, but not sufficient conditions for international agreement to take place. 

I would like to see a carbon tax, too, but little steps will have to do for now.



August 14, 2014 | Permalink | Comments (0)

Tuesday, August 12, 2014

An "All of the Above" Taxation approach

I wish to call attention to a paper written by my co-blogger David Gamage, Analyzing the Optimal Choice of Tax Instruments: the Case for Levying (all of) Labor-Income taxes, Value-Added taxes, Capital-Income Taxes, and Wealth Taxes. His argument is that although different taxes may be distortionary, there are some real-world issues with the purely theoretical treatments as a basis for policy. Enforcement is one of those pesky real-world problems. 

I see only one problem with wealth taxes: international tax havens. Otherwise, it seems
straightforward to tax wealth. Am I wrong? If not, then it is true that wealth taxes could be a central part of Treasury diet, if some international coordination could be achieved. That doesn't seem politically crazy to me.

It seemed that for a time, there was this notion that using the tax code to implement policy was a dangerous and wrong-headed thing. That concern seems to me to have disappeared entirely. It would seem to make sense, however, to reduce the number of objectives of tax law. I have just two in mind: revenue raising and wealth distribution. Hence, a wealth tax. 

August 12, 2014 | Permalink | Comments (1)

Friday, August 8, 2014

Danny Markel, parent

I have been struggling to figure out what to write about my fallen colleague, Danny Markel, the Sandy D'Alemberte Professor of Law at the Florida State University College of Law. He was shot in his home on July 18, and died later that night. The assailant has not yet been identified.

I could acknowledge Danny's contribution to criminal law and the legal academy. But that seems too easy, and I would guess that although he did not peddle himself as law and economics scholar, his work was already appreciated in these circles. What I found most human about Danny was not his sizable commitment to intellectual life, but his commitment to his two children. Danny's children were slightly younger than our children, and they shared a daycare with our younger child. Danny would do anything for his two sons. That sounds like a cliche, but often when I dropped off my own son at daycare, I would see him there, sitting at a table full of children, singing songs or sharing breakfast. He taught me a lot, too, like Brian, but I think I will try to remember above all else that mental picture I have of him, not a giant of a scholar, but just a grown-up scrunched into a children's chair, making himself small so he could truly be there with his children.


August 8, 2014 | Permalink | Comments (0)

Thursday, August 7, 2014

Halbig and How To Decide Whether a Phrase in a Statute is a “Typo"

     In an earlier post I showed how to analyze the Obamacare state subsidies of the Halbig decision using game theory (or, if you, like, how to analyze the earlier Health version of the bill that everybody agrees would have ruled out federal subsidies for 4 or 6 years--- I’ve seen both numbers). Game theory thinking led me to another angle on the case.

  The Halbig   case, with its issue of what it means for an insurance exchange to be “established by a state,”  brings up the general question of how to decide whether a phrase in a statute is enough of a mistake that a judge should take action and change it. Sometimes it is easy--- if the bill says that “3 mtrillion dollars” shall be spent on a bridge, everyone would agree that it was meant to be 3 million dollars, even though it sounds more like 3 trillion.

Here is one test. The judge should ask himself what the legislature would have done if someone had pointed out the phrase and asked them to re-vote on it as it was worded.

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August 7, 2014 | Permalink | Comments (0)

Wednesday, August 6, 2014

The Politics of Halbig and Making Obamacare Voluntary for States

  Professor Gamage and I have been blogging on the law and legislative history of the Halbig Obamacare case, but the political economy is interesting too. Our governor in Indiana is Governor Pence, a   conservative former U.S. Representative with a lot of talent and ambition (and a legislature controlled by his party).  One of my law-and-econ colleagues said, “My guess is that Governor Pence’s refusal to set up an exchange will last only as long as his presidential ambitions.” 

If Indiana residents can’t get Obamacare subsidies because there’s no state exchange, as Halbig says, then there are going to be some angry voters here! But some people will be happy too, because if people in  Indiana don’t get the subsidies, Hoosiers don’t have to comply with  the individual or employers mandates to buy health insurance. So how does the political calculus work out?


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August 6, 2014 | Permalink | Comments (0)

Monday, August 4, 2014

38% of American men are arrested by age 23

  The topic of arrest rates came up in my church small group yesterday, and I found an interesting paper.  According to Brame et al’s 2014 article, by age 23 49% of black men have been arrested and 38% of white men.  The 2010 FBI stats show 2.2 times bigger arrest rate for black men than white. So it must be that while blacks and whites have about the same percentage of men ever arrested, many more of the blacks who are arrested have multiple arrests.    Incarceration statistics bear this out; the fraction of black men incarcerated is far higher than for white men.   I wonder how many of the white arrests are for drunk driving or disorderly conduct or wife beating?

  It was interesting to me that this article, in a top criminology journal, was really just figuring out summary stats from a well-known national sociology dataset. That's certainly worth doing. 

 Note that having an arrest on your criminal record does not prevent you from obtaining employment.  If it did, over 38% of middle-aged men in America would be out of the labor force for that reason.  

Demographic Patterns of Cumulative Arrest Prevalence by Ages 18 and 23, Crime and Delinquency, 2014,  Robert Brame Shawn D. Bushway Ray Paternoster Michael G. Turner.




August 4, 2014 | Permalink | Comments (0)

Wednesday, July 30, 2014

More on Halbig

Eric Rasmussen makes interesting points below.  In all honesty, I’m impressed and somewhat persuaded by some of the arguments that commentators are now raising.  Although I ultimately don’t find the majority’s reasoning in Halbig to be persuasive, I think the majority makes a far better argument than anything that was written until very recently.  With apologies for being frank to the point of rudeness, I thought the arguments originally made in support of the majority’s position to be so poorly reasoned as to be jokes.  If the arguments being made today had been made years ago, I would have taken these arguments far more seriously.

This brings us back to why I don’t think the inquiry here should be based on some narrow notion of legislative intent.  There are numerous reasons why courts should defer to agency rulemaking.  Agencies are much better positioned than courts to evaluate a regulatory framework as a whole and to interpret the language of a statute so as to make that language workable in light of implementation and administrative concerns.

Again, the State government officials who decided to go with the federal Exchange infrastructure rather than creating Exchanges on their own had no reason to expect that this decision would have implications for whether State citizens would be eligible for the premium tax credits.  If allowed to stand, the majority’s decision in Halbig would create chaos and very real hardship.  It’s not clear who would benefit politically from this chaos and hardship, or whether the ultimate effect would be to undermine or strengthen Obamacare.  But it seems undeniable that adopting the majority’s position today—after both States and individual taxpayers have made important decisions based on an expectation that premium tax credits would be available on the federal Exchanges—would create hardship and disaster that no one intended.

Adler and Cannon deserve credit for raising an innovative argument.  In a draft of one of their writings on the topic, they write: “We were both surprised to discover this flaw in the law, and characterized it as a ‘glitch’”.  (Jonathan H. Adler & Michael F. Cannon, Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits under the PPACA, Case Research Paper Series in Legal Studies, Working Paper 2012-27, July 2012, at 4.)  They then say in a footnote (id.) that they “were first made aware of this aspect of the PPACA by a presentation by attorney Thomas Christina at the American Enterprise Institute in December 2010. See Thomas Christina, What to Look for Beyond the Individual Mandate (And How to Look for It) (Dec. 6, 2010), available at:” 

Note that this presentation is dated December 6th, 2010, over eight months after the legislation was signed into law.  The draft Regulations interpreting the statutory language in question were already well developed by December 2010, and many States had already decided whether to establish their own Exchanges or whether to instead rely on the federal infrastructure.  Moreover, this date is when Adler and Cannon first heard the argument.  Again, I don’t remember when Adler and Cannon first took to radio and print media to start popularizing the argument, but it was clearly after December 6th, 2010. 

The situation today might have been different if the arguments that are now being raised had been articulated years ago, when the Regulations in question were being written and when the States were deciding whether to establish Exchanges on their own.  But, it is just plain ridiculous to argue that the unambiguous plain reading of a statute requires interpreting the statute in a way that almost no one thought was even a possible interpretation only a few years ago. 

I continue to believe that the best reading of the plain language of the statute is that premium tax credits are to be available on the federal-run Exchanges.  Yet, even if I am wrong, this is clearly an instance where the courts should defer to agency rulemaking.


July 30, 2014 | Permalink | Comments (2)

The back-and-Forth Treatment of Subsidies in Federal Exchanges in Legislative History

 We've got a discussion going. Excellent!  In “The Problematic Halbig Decision: Why “Intent” is Too Narrow an Inquiry”, David Gamage tells us that he and  others who were making regulations based on the new statute didn’t even hear mention of the possibility that non-participating states wouldn’t get subsidies for many months.  That’s what the House oversight report   says about Treasury at the time too.   So the Executive branch didn’t see any problem till it was pointed out to them from outsiders.

     This evidence cuts both ways, though. Notice that nobody says that Treasury officials read the subsidy clause and said, “Hey, there might be a problem because that language seems to exclude subsidies for federal exchanges.”  Why, when so many people now see a problem? My guess is that they were working frantically to implement the bill (remember  the federal exchange rollout fiasco  and all the deadline changes) and not looking for new problems.

     Let’s go back to   intent  , though.  As a bill progresses, clauses are inserted to please this and that group, and often  to get just one legislator’s vote. The people who draft the final bill may know very well what they’re doing, and hate the result compared to the draft-before-final, but insert the obnoxious clause knowingly because they need it to pass the bill.   They may then employ a useful bureaucratic trick: put the clause in the document to get agreement, but ignore it in implementation and hope the people who pushed for it don’t notice. (I’ve had that used  successfully against me myself more than once!)

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July 30, 2014 | Permalink | Comments (0)

Tuesday, July 29, 2014

The Rational Minority?

I have recently read an interesting paper, which was just published in Psych Science called In Search of Homo Economicus. The paper takes an individual difference approach to the concept of rationality and demonstrates consistent behavioral differences among people across various behavioral and personality measures. While the classical approach to the study of rationality is aimed at finding the situations in which people deviate from what rational choice approach would predict, the described paper attempts to identify who are the people who deviate from rationality and who are the people who follow the prediction of rational choice.

The researchers have used a combination of dictator and prisoner dilemma games, as well as various personality, intelligence and demographic measures on a sample of Tokyo residents (which is not argued to be representative). They found that 7% of their sampled participants are Homo Economicus (HE) who have kept all of their endowment in the dictator game, and that 8.7% of the participants are quasi–Homo economicus (qHE) who gave away only 15% of their endowment. Moreover, the HE participants were found to be smarter, more individualistic and more likely to engage in long-term investments.


As suggested in some of my previous posts, this approach holds a very promising direction for the law and behavioral science movement. One example, is the idea of differential regulation regarding the usage of monetary measures vs. non-monetary measures [see for example my paper on Intrinsic and Extrinsic Compliance Motivations]. One can speculate that in some legal contexts we might expect a higher ratio of HE and qHE (e.g. corporate taxation) who might then receive a different treatment relative to regulatory contexts with lower ratio of HE and qHE (e.g. Transportation law, Labor law). Naturally, these last examples require further empirical investigation and are not part of the described paper, however, they definitely show potential advantages of an individual difference approach to bounded rationality, an approach which is definitely not common within the legal scholarship.

At the same time, a word of caution is required when moving from theory to policy in the context of individual difference. In contrast to what is sometimes being understood, even very stable differences between people do not mean that these types of people care only about money while others don’t care about it at all. We need to recognize that the differences are of magnitude and hence the policy requirements that followed are important but still relatively limited.  

July 29, 2014 in Science | Permalink | Comments (0)