Law & Economics Prof Blog

Nguyen on the effects of daughters on CEO job performance

"Does Your Daughter Make You a Better CEO?" 

VINH QUANG NGUYEN, Boston College - Carroll School of Management

This paper investigates the effect of the gender of CEOs' offspring on corporate performance. I collect a dataset of the gender of CEOs' children and employ a firm fixed-effect model to estimate a number of positive effects of CEOs having daughters. First, acquisitions, debt and equity offerings made by CEOs with more daughters are better received by the market. Second, CEOs with more daughters are less likely to overpay the targets and better use newly raised capital. Third, CEOs' daughter(s) decrease(s) corporate litigation risk. In sum, the gender of a child is arguably a random and natural experiment, which shows a clear effect on CEOs' behavior.

[Ed.: Note that these three outcomes are all negatively correlated with measures of overconfidence.  But how random are daughters?  What's the prevalence of IVF and adoption in this demographic?]

Voluntarily Raising a Restaurant's Minimum Wage to $15/hour

 The Associate Press reports: 

Menu prices are up 21 percent and you don't have to tip at Ivar's Salmon House on Seattle's Lake Union after the restaurant decided to institute the city's $15 an hour minimum wage two years ahead of schedule.

   It is staff, not diners, who feel the real difference, with wages as much as 60 percent higher than before. One waitress is saving for accounting classes and finding it easier to take weekend vacations, while another server is using the added pay to cover increased rent.

Seattle's law, adopted last year after a strong push from labor and grassroots activists, bumped the city's minimum wage to $11 an hour beginning April 1, above Washington state's highest in the nation $9.47. Scheduled increases that depend on business size and benefits will bring the minimum to $15 within four years for large businesses and seven years for smaller ones.

      It sounds like a good business move to me. If every restaurant did it, though, business would suffer. 

Schwartz on Who Pays When Law Enforcement Agencies Lose Lawsuits

 

if this message does not display correctly, click here   "How Governments Pay: Lawsuits, Budgets, and Police Reform"   UCLA School of Law Research Paper No. 15-23 JOANNA C. SCHWARTZ, University of California, Los Angeles (UCLA) - School of Law For decades, scholars have debated the extent to which financial sanctions cause government officials to improve their conduct. Yet little attention has been paid to a foundational empirical question underlying these debates: When a plaintiff recovers in a damages action against the government, who foots the bill? [...] beyond anecdotal information about the practices in a few large agencies, there has been no systematic inquiry into the source of funds used by governments to satisfy suits. In this Article, I report the results of the first nationwide study to examine how cities, counties, and states budget for and pay settlements and judgments in cases against law enforcement. Through public records requests, interviews, and other sources, I have collected information about litigation budgeting practices in 100 law enforcement agencies across the country. Based on the practices in these 100 jurisdictions, I make two key findings. First, settlements and judgments are not always — or even usually — paid from jurisdictions’ general funds; instead, cities, counties, and states use a wide range of budgetary arrangements to satisfy their legal liabilities. All told, half of the law enforcement agencies in my study financially contribute in some manner to the satisfaction of lawsuits brought against them. Second, having a department pay money out of its budget towards settlements and judgments is neither necessary nor sufficient to impose a financial burden on that department. Some law enforcement agencies pay millions from their budgets each year towards settlements and judgments, but the particularities of their jurisdictions’ budgeting arrangements lessen or eliminate altogether the financial impact of these payments on these agencies. [...].

Some Real Numbers on Law Review Submissions

I've been begging Expresso, the law review submission service, to share / analyze its data for many years.  They did an in-house analysis more than five years ago, and haven't updated it.   Happily, the folks at Scholastica have a good post looking at their own numbers.  

Since we're now in the fall submission season, here's the key takeaway for law readers: your odds are probably better if you submit in the spring.  Let's compare those graphs of submissions against expedites (the latter of which is probably the best measure of law review offer volume).  Note that, while submissions and "decisions" are evenly distributed between spring and fall, expedites are much more heavily concentrated in the spring.  Since decisions includes rejections for a full volume, what this tells us is that journals are accepting many more articles in the spring.  So the share of acceptances to submissions is much better in the spring season.  

 

Prescott & Spier on Civil Settlement

"A Comprehensive Theory of Civil Settlement"  
Forthcoming, NYU Law Review, April 2016

J.J. PRESCOTT, University of Michigan Law School
KATHRYN E. SPIER, Harvard University - Law School - Faculty, National Bureau of Economic Research (NBER)

A settlement is an agreement between parties to a dispute [...] in reality virtually every dispute is “partially” settled. The same forces that often lead parties to fully settle — joint value maximization, cost minimization, and risk reduction — will under certain conditions lead them to enter into many other forms of Pareto-improving agreements while continuing to actively litigate against one another. We identify three primary categories of these partial settlements: award-modification agreements, issue-modification agreements, and procedure-modification agreements. We provide real-world examples of each and rigorously link them to the underlying incentives facing litigants. [...] Finally, we study partial settlements and how they interact with each other in real-world adjudication using new and unique data from New York’s summary jury trial program. Patterns in the data are consistent with parties using partial settlement terms both as substitutes and as complements for other terms, depending on the context, and suggest that entering into a partial settlement can reduce the attractiveness of full settlement. We conclude by briefly discussing the distinctive welfare implications of partial settlements.

Macey-Dare on an 1856 Transfer Pricing Case

Post v. Jones (US Supreme Court 1856) – A Protype Early Transfer Pricing Type Case (at SSRN)

Rupert Macey-Dare 

University of Oxford - Saint Cross College; Middle Temple; Freshfields Bruckhaus Deringer LLP; Minerva Chambers

July 12, 2015

On 2 August 1849, towards the end of a 3 year voyage, the whaling ship Richmond ran aground with a full cargo of oil and whalebone, on the rocky coastline of the Behring Straits. Three passing ships, the Elizabeth Frith, the Panama and the Junior immediately came to the rescue, both of the Richmond's crew and also of the Richmond’s cargo, which they bought for fire-sale prices at an impromptu auction. The Richmond's owners in due course objected, and 7 years later on, in 1856, the validity of the auction was a key issue before the US Supreme Court. This court pronounced the sale invalid and clarified the key legal principal that a contract is only valid if parties have both the power and real freedom to contract.

However there was a second question considered in detail by the Supreme Court, namely what was the alternative fair remuneration that should be substituted for the salvors? This led to a complex and sophisticated analysis of the business risks and fair returns for both parties. Although the context was admiralty law and commercial salvage rather than international tax, the Supreme Court's analysis is remarkably close modern transfer pricing analysis and Post v Jones can perhaps also be viewed as a prototype early transfer pricing type case.

Dari-Mattiaci & Faure on Disaster Relief

"The Economics of Disaster Relief"  
Amsterdam Center for Law & Economics Working Paper No. 2015-01
Amsterdam Law School Research Paper No. 2015-25

GIUSEPPE DARI‐MATTIACCI, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE), Tinbergen Institute
MICHAEL G. FAURE, University of Maastricht - Faculty of Law, Metro, Erasmus University Rotterdam (EUR) - Erasmus School of Law

We distinguish among three types of actions that can be taken to alleviate the consequences of natural disasters: precautionary efforts (made ex ante), relief efforts (made in the immediate aftermath of a disaster), and recovery efforts (made ex post). We argue that recognizing this distinction lessens many of the problems that the literature attributes to government intervention and hence expands the scope of government action following disasters. Relief is less likely than recovery to generate oversupply by the government and overreliance by victims.

[See also the ed.'s views on these issues.]

Police Using "Pleading Down"

      It is often noted that prosecutors allow defendants to plead down from their real offense to a minor one in order to avoid the costs of trial, which has the effect of making crime statistics less reliable. Police do the same thing. This quote from an interview with Jill Leovy, author of the recent  Ghettoside: A True Story Of Murder In America, talks about that. Is it efficient? It has the effect of increasing the probability of punishment but reducing the penalty.

"LEOVY: Yes. This is a nuance that doesn't get talked about enough because there's I think a general impression that the police are just arbitrarily hammering, for example, drug crimes, possession crimes, probation and parole violations - petty stuff that doesn't do a lot of harm, and yet there's a lot of penalties built behind them and so they must be racist. They must be just trying to give people a hard time. What you see on the ground is that there's a tremendous amount of violence. There's a tremendous amount of impunity, and it's, as I say, semi-furtive. It's well known to everybody in this small enclave who's doing stuff, who's boasting about it, who's dangerous. The police are part of that enclave. They're part of that community. They hear the street rumors, too. They hear so-and-so's a shooter and so-and-so's a rider, and they're frustrated because they cannot put a case on so-and-so for that assault or that homicide. So they think, well, we can get them on a drug offense. He's in a gang. He's selling drugs. If we can just get him on possession with intent to sell, at least that gets him off the street. And so you see certain amount of enforcement that's shaped by a reaction to the impunity for the serious crimes.

It's almost - when you make the prosecution of some crimes very difficult and very expensive, as we have with homicide, it almost pushes the bubble. It's - the cops naturally gravitate towards places where they have more discretion and where it's easier to do the work and stopping and searching and possession and probation, parole - that is low-hanging fruit. It's easy, cheap stuff to prosecute. And so they are seeing these victims. They are seeing people who are paralyzed or in comas for the rest of their life, and they can't make an arrest. But they know that clique from such-and-such gang has been doing this stuff, and everyone knows it. And the graffiti on the wall says it, and they can't make a case. So if we're going to focus a drug-enforcement project tonight somewhere, why not focus on them? It's a compensatory strategy that I think ends up being counterproductive but is also somewhat understandable."

Zaring on How the Fed Makes Decisions

"Law and Custom on the Federal Open Market Committee"  
Law and Contemporary Problems, Vol. 78, No. 3, 2015

DAVID T. ZARING, University of Pennsylvania - Legal Studies Department

The Federal Open Market Committee (FOMC), which controls the supply of money in the United States, may be the country’s most important agency. But there has been no effort to come to grips with its administrative law; this article seeks to redress that gap. The principal claim is that the FOMC’s legally protected discretion, combined with the imperatives of bureaucratic organization in an institution whose raison d’etre is stability, has turned the agency into one governed by internally developed tradition in lieu of externally imposed constraints. The article evaluates how the agency makes decisions through a content analysis of FOMC meeting transcripts during the period when Alan Greenspan served as its chair, and reviews the minimal legal constraints on its decisionmaking doctrinally.

Polinsky on "Good Behavior"

"Deterrence and the Optimality of Rewarding Prisoners for Good Behavior"  
International Review of Law and Economics, Forthcoming
Stanford Law and Economics Olin Working Paper No. 478

A. MITCHELL POLINSKY, Stanford Law School, National Bureau of Economic Research (NBER)

In this article I examine the social desirability of rewarding prisoners for good behavior, either by reducing their sentences (granting “time off”), converting part of their sentences to a period of parole, or providing them with privileges in prison. Rewarding good behavior reduces the state’s cost of operating prisons. But rewarding good behavior also tends to lower the deterrence of crime because such rewards diminish the disutility of imprisonment. I demonstrate that, despite this countervailing consideration, it is always socially desirable to reward good behavior with either time off or parole. In essence, this is because the reward can be chosen so that it just offsets the burden borne by prisoners to meet the standard of good behavior — resulting in good behavior essentially without a reduction in deterrence. While employing privileges to reward good behavior might be preferable to no reward, the use of privileges is inferior to time off and parole.

[Your ed. would have liked to see more comparison between these carrots and the potential stick of punishments for bad behavior.  Polinsky suggests that added prison time would not be optimal because it would add to total social cost, but what of non-incarcerative punitive incentives?]

Specific Performance v. Money Damages: The Importance of Attorney Fees

Yonathan A. Arbel's “Contract Remedies in Action: Specific Performance” (not up on the web yet, it seems. An idea in the paper that particularly caught my attention was this:

"Many contract cases involve some contingency fee component, so that part of the lawyer’s payment is based on a fixed percentage of the amounts the client wins. In specific performance cases, such contingency fees create a problem, as there is rarely a clear metric upon which to assess the value of performance."

Dollar damages are better than specific performance for the legal process, because (a) the lawyer can be sure he's paid, because the damages are routed through the lawyer, and (b) if the lawyer is on contingency, he won't have to argue with his client about the value of winning. (Note that that argument could happen either before he takes the case, or afte the court decision, and either way is a cost.)

Arbel looks at this as an agency problem, with conflict of interest between lawyer and client, but I wouldn't call it that. Efficiency requires that the lawyer be paid, and paid with as little trouble as possible. Money damages reduce transaction costs, and the saving will be shared between lawyer and client. Lawyers, in competing for clients, will offer better terms if they have a bigger probability of being paid for their work without hassle. Difficulty of collection--- whether of damages from the other side, or of fees, is a major concern of lawyers. If collecting the fee that's owed them requires another lawsuit, against the former client, that is tremendously costly.

Private Prosecution of Government Employees

   Prosecutor and police misbehavior is a big problem. Prosecutors have absolute immunity to civil suit, and though police can be sued under civil rights statutes, often the amount at stake is too small to justify that lengthy process. Also, though in theory the criminal process is available, prosecutors are reluctant to use it, since they do not wish to charge themselves and they wish to maintain good relations with police.  The problem extends to other government employees too. Lois Lerner and the IRS may have committed federal offenses, but the Obama Justice Department is not going to investigate, or even indict if the facts are public, especially if the White House was involved in the offenses.

    How about allowing private prosecutions of government employees?   Private prosecutions in general have the problem that we do want prosecutorial discretion very often, even if a crime has been committed, and we want to avoid people using criminal prosecution to harass other people. And, ordinarily we can trust prosecutors to be neutral. But offenses by government employees are different. Especially, it would be useful if  a private person could make a  motion to indict a prosecutor for obstruction of justice. We do not need to, and should not, give investigatory powers beyond those of civil discovery to the private citizen, but sometimes public information is sufficient. 

Are carbon taxes a barrier to energy innovation?

Not intended as a rhetorical question.  Toward the end of this interesting Vox piece on new solar technologies, there's a claim by the policy expert that "Policies like renewable portfolio standards or carbon taxes might sound technology-neutral, but they tend to preference mature technologies that are already on the market."  I can see how portfolio standards might protect incumbents, if the portfolio requirements are written in a way that requires, say, wind or silicon-cell solar but omits the possibility of substituting other technologies that might do better on some weighted measure of cleanliness/cost.  But why would carbon taxes "preference mature technologies"?  

The best answer I can think of is that perhaps our expert is assuming that the government sets the price of a carbon tax at the optimal point based on current costs of compliance.  That is, usually the optimal price is the point where the marginal social damage curve crosses the average private marginal cost of mitigation curve (a more detailed explanation is in Part I here).  If we draw the latter curve using the cost of incumbent technologies, we might be allowing more pollution than would be optimal with a newer, cheaper technology.  This would tend to diminish the returns to cost innovation.

This assumes a regulator that does not dynamically adjust prices.  And maybe that's a realistic assumption.  But one can design a system that dynamically adjusts itself, with cap-and-trade being the most obvious example: if I invent a cleaner way of producing energy, I can sell it to folks who will now need fewer permits, allowing them to sell some of their existing supply.  I tend to think of cap-and-trade as just one version of a carbon tax, but maybe Vox's expert just meant to say  that he prefers cap-and-trade to other forms of carbon pricing?

Student Loans and the Bagehot Rule

As Prof Galle noted a few days ago, this blog has had a number of posts on student loans. I'm interested in the 2008 financial crisis, and I've been running across the Bagehot Rule a lot, which says that a central bank ought to make loans only if they will be profitable because the borrower is essentially sound, with good collateral, and is charged a high interest rate. Student loans sound similar--- the government supplies a missing market, and that ought to be profitable.

We do have the problem there, though, that borrowers might shortsightedly use the loans for consumption. I've talked about that in "Internalities and Paternalism: Applying Surplus Maximization to the Various Selves across Time." Social Choice and Welfare, 38(4): 601-615 (2012). It's abstract: One reason to call an activity a vice and suppress it is that it reduces a person's future happiness more than it increases his present happiness. Gruber & Koszegi (2001) show how a vice tax can increase a person's welfare in a model of multiple selves with hyperbolic preferences across time. An interself analogy of the compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing.

  The multiple selves model, however, suggests that the present self, lacking in sufficient altruism, perhaps should not be allowed to mortgage the lives of his future selves by borrowing for consumption.

A Solution to the Problem of Naive People Overspending on Law School

This solution is simple. Let's go back to the old days, when all you had to do to practice law was to pass the bar exam. That will solve the problem of law school tuition. All the people who think all you need to be rich is the right to practice law will just take bar prep courses before they're disillusioned. 

  This will only address the information problem. A separate problem is short-sighted college graduates who want to put off work for three years and find the government willing to guarantee loans to them to help them delay adulthood. They'll go to law school even if they could skip it and become lawyers right away. 

Or maybe I'm too pessimistic. Those graduates might be happy with the intermediate stage of apprenticing to a lawyer for three years instead of law school. 

What is meritocracy?

 There's a new book out called The China Model (Princeton University Press) by Daniel A. Bell, a government professor. I  read a review  after reading a post about it at Marginal Revolution. The attention in the book and review seem to be on autocracy vs. democracy but phrased as being meritocracy v. democracy, something quite different. Either an autocracy  or a democracy can be meritocratic or not, because it's a different dimension. 

   I don’t know about the book, but when I think of meritocracy, I don’t think of choosing the top leader by examination, which I don’t think has ever been done anywhere. It certaintly doesn’t mean oligarchy, with a group of powerful men at the top running things and choosing who will be the titular head of state. Rather, it refers to having a large amount of the state’s power in the hands of civil servants who are chosen by merit, by some non-political means such as blind examination. The top leaders are still chosen by some other means.

Thus, the real question is whether there should be civil service examinations such as the United States used to have before Jimmy Carter ended them because they were thought to be racist, or overt political choice of employees, or choice delegated to existing employees based on whatever criteria they like, which I understand is our current system. Note that the last is not really non political— it just uses the political views of the existing civil servants rather than of the elected leaders. Thus, we get the highly politicized Justice Dept. Civil Rights Division civil servant hiring.

It *is* a very good question how far down in the ranks political hiring should go. 

 

  But am I right? What is a good definition of meritocracy? And what is our current system of government hiring--- is there a limit on discretion? I do recall someone saying that, for example, having a college degree helps, but it doesn't matter whether that degree is from mail order or from Princeton.    

Gifts for Law and Econ Profs

      I was just ordering some Argentine patacon bills as a gift for a govt. prof. and found that stock and bond certificates can be had on the Web for on the order of $10-30.  Frame one, and you've got a good gift for an economist or  a law prof of corporations, securities, or bankruptcy! Lots of them have nice engravings. 

McCarthy & Daren on the Cost of Satisficing in Health Insurance Choice

"Quality Ratings and Premiums in the Medicare Advantage Market" 

IAN M. MCCARTHY, Emory University - Department of Economics
MICHAEL DARDEN, Tulane University - Department of Economics

We examine the response of Medicare Advantage contracts to published quality ratings. We identify the effect of star ratings on premiums using a regression discontinuity design that exploits plausibly random variation around rating thresholds. We find that 3, 3.5, and 4-star contracts in 2009 significantly increased their 2010 monthly premiums by $20 or more relative to contracts just below the respective threshold values. High quality contracts also disproportionately dropped $0 premium plans or expanded their offering of positive premium plans. Welfare results suggest that the estimated premium increases reduced consumer welfare by over $250 million among the affected beneficiaries.

[Ed.: This is a promising research design for a wide variety of star ratings, at least if the underlying distribution of scores is available to the researcher.]

Our views on federal profits from student loans: a retrospective

Slate and Leiter's blog (both via Mike Simkovic) have returned lately to the profitability of federal loans to law (and other professional school) students.  Interested readers may note that L&E Prof had a three-part series on that issue: 1. A general theory ("the bake sale theory") of profitable government business; 2. distributional issues specific to student loans; 3. a possible argument for why it would be efficient to do redistribution through a student loan program.  Readers interested in the last question may also want to check out this working paper by Jake Brooks. 

Chu et al.: Evidence for the CYA Theory of Compensation Consultants

"Do Compensation Consultants Enable Higher CEO Pay? New Evidence from Recent Disclosure Rule Changes" 

JENNY CHU, University of Cambridge - Judge Business School
JONATHAN FAASSE, University of Cambridge - Judge Business School
P. RAGHAVENDRA RAU, University of Cambridge

In July 2009, the SEC announced additional disclosure rules requiring firms that purchase other services from their compensation consultants to disclose fees paid for both compensation consulting and other services. ... After the rule change, client firms that switched to specialist consultants paid their chief executive officers (CEOs) 7.4% more in median total compensation than a matched sample of firms that remained with multi-service consultants. Compensation consultants retained solely by the board are associated with 15.1% lower median pay levels than a propensity-score matched sample of firms with management-retained consultants....