Posts filed under ‘Law and Economics’
Greif Under Fire Again
| Peter Klein |
We noted previously Jeremy Edwards and Sheilagh Ogilvie’s challenge to Avner Greif, contenting that he misread his primary source material, and Greif’s response. Now Charles Rowley has published a paper in Public Choice accusing Greif of academic dishonesty, namely by failing to cite Janet Landa’s prior work on the economics of identity and trust:
This commentary demonstrates that Avner Greif, through his citation practices, has denied Janet Landa her full intellectual property rights with respect to her contributions to the economic analysis of trust and identity. He has done so by systematically failing to cite her published papers in this field, incidentally promoting his own publications as meriting priority. In consequence, he has effectively blocked out Janet Landa’s work from the mainstream economics literature, albeit not from the literature of law and economics, where his own writings have not been directed.
It’s an odd piece. I’m not sufficiently familiar with Landa’s work to evaluate its place in the history of thought in this area, or to judge whether Greif has appropriated her ideas without attribution. Rowley doesn’t accuse Greif of plagiarism, only of failing to cite an important predecessor and overstating the novelty of his own work. This is a difficult claim to substantiate; obviously the evaluation of prior contributions in one’s own area is highly subjective. And the implication (later in the piece) that Greif’s citation practices contributed to his Genius Award seems like a cheap shot. It is true, however, that contemporary economists tend to be woefully ignorant of the history of economic thought (and, as Rowley implies, that game theorists have what might be called a “healthy sense of self”).
Update: I missed earlier discussions of the Rowley piece at Monkey Cage and Crooked Timber. The Monkey Cage commentary is disappointing, mostly ad hominem snarks at Rowley, the field of public choice, and (most bizarre, but it’s Brad Delong), the Mont Pelerin Society. Henry’s analysis at Crooked Timber is more serious, and I think he gets it right.
Coasean Bargaining Around Wrigley Field
| Peter Klein |
While enjoying the Phillies’ 12-inning victory over the Cubs Tuesday night Joe Mahoney, Jongwook Kim, and I talked about the implications of the Coase Theorem for the Wrigley Rooftops. The rooftop seats are still there — and some are quite fancy — despite many attempts by the Cubs over the years to have them removed, as beneficiaries of an unwarranted positive externality. Apparently a few years back the Cubs sought an injunction against the rooftop owners on grounds of copyright infringement, and most of the owners agreed in an out-of-court settlement to pay royalties to the team in exchange for official endorsement.
One can imagine other ways to internalize the externality — the team could build a wall to obscure the view, buy out the rooftop buildings’ owners, or pay them to take down the seats. There are only a dozen or so buildings, so I don’t imagine that the bargaining costs are very high, suggesting that the current arrangement is the one that maximizes joint surplus, but some of you readers must be much more familiar with the details. What’s going on, from a Coasean perspective? Certainly this is an interesting example for a classroom discussion of property rights and the Coase Theorem. I thought I’d find several online discussions but a quick Google search came up with just one law-review article. It seems that more recently, the club has been going after the rooftop owners not for selling seats, but for using the Cubs logo without permission.
Attack of the Public Finance Utility Monsters
| Dick Langlois |
I just saw this amusing abstract from Greg Mankiw. I think it will be far too subtle for most people.
The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution
Should the income tax include a credit for short taxpayers and a surcharge for tall ones? The standard Utilitarian framework for tax analysis answers this question in the affirmative. Moreover, a plausible parameterization using data on height and wages implies a substantial height tax: a tall person earning $50,000 should pay $4,500 more in tax than a short person. One interpretation is that personal attributes correlated with wages should be considered more widely for determining taxes. Alternatively, if policies such as a height tax are rejected, then the standard Utilitarian framework must fail to capture intuitive notions of distributive justice.
Extra credit: how would such a tax affect NBA salaries — like that of UConn’s seven-foot-three Hasheem Thabeet, who was taken number two in the recent draft?
Organizations, Markets, and Health Care Reform
| Russ Coff |
Amidst the fierce debate about the U.S. health care system is a raving lack of clarity. At the core, is whether organizations and markets fail to produce an optimal solution. Even the most neoclassical of economists these days acknowledge that market externalities exist and that these should be the focus of government intervention. Unfortunately, I don’t feel that the debate has been rigorous or well-informed in defining the market failure or why a government run system would be superior.
Liberal Economist Paul Krugman explains why markets fail summarizing Kenneth Arrow’s arguments (here). Basically, the third-party payee system and the information asymmetries render comparison shopping ineffective (and hence competition fails to yield an optimal solution).
Indeed, there is a good bit of inefficiency in the current U.S. system. A recent NY Times article notes that health care costs the average U.S. household $6,500 more each year than other comparable wealthy nations. Unfortunately, looking at many of the important outcomes, it appears that consumers are not getting much for their money on many dimensions (e.g., chronic disease outcomes). So it should be possible to lower costs and improve outcomes. Of course, this ignores the question of whether costs are higher to subsidize R&D that ultimately spills over into other countries.
Unfortunately, the article continues to point out how the reform efforts seem to ignore this low-hanging fruit. (more…)
Organizations or Markets in Morality?
| Benito Arruñada |
Moral codes can be produced and enforced through markets or through organizations. In particular, Catholic theology can be interpreted as a paradigm of the organizational production of morality. In contrast, the dominant moral codes are now produced in something resembling more a market.
The organizational character of Catholicism comes from its centralized production and enforcement of the moral code by theologians and priests and the mediation role played by the Church between God and believers. The epitome of both features is the old institution of confession of sins, a cultural universal that reaches full sophistication — for good and for bad — within Catholicism. My forthcoming JSSR paper argues that confession was a strikingly organizational solution to the production and enforcement of morality, something that Western societies now do mostly through markets. (more…)
Pioneers of Law and Economics
| Peter Klein |
Profiles of the leading scholars in contemporary law and economics, now out from Edward Elgar. Congratulations to Josh Wright and Lloyd Cohen for putting this together. Table of contents below the fold. (more…)
Capitalism’s Challenges: Cycles of Expropriation
| Benito Arruñada |
Following up my previous entry on cycles of statism, I ask next: How important are cycles of expropriation? Consider, for example, how Bolivia has nationalized foreign oil firms every 34 years. In the most recent round, the nationalizing decree read:
Consider that Bolivia was the first country on the Continent to nationalize ts hydrocarbons, in 1937 with Standard Oil Co, a heroic measure, and done again in 1969 with Gulf Oil, leading the present generation to carry on the third and definitive nationalization. (Supreme Decree 28701, Evo Morales, President, May 2006).
In an experiment with Marco Casari we find similar patterns under more “democratic” circumstances. You may download the paper here.
De Figueiredo on Political Strategy
| Peter Klein |
We’ve previously mentioned the chapters by Nicolai and Nils Stieglitz and by Lasse and me in the forthcoming Advances in Strategic Management volume titled Economic Institutions of Strategy. John de Figueiredo’s chapter, “Integrated Political Strategy,” is now available as an NBER Working Paper. John is a leader of this emerging field, which studies how firms attempt to influence the legal and political environment to achieve competitive advantage. As he points out:
Legal and acceptable competitive behavior is determined endogenously by legislators, regulators and judges who are influenced, positively and negatively, by the very same firms the regulations are designed to control. By understanding the theories of how firms affect politics, one can better determine how to gain competitive advantage through political institutions. This is a natural extension of the traditional tools of strategic management. Moreover, for young scholars, this is an area in which the lines of investigation are clear and the openings for serious research opportunities available. In this sense, it is robust area for future research and major contributions to understanding firm performance.
World Bank’s “Doing Business” Changing Course
| Benito Arruñada |
Thanks to O&M for the opportunity to join the conversation. I plan to be blogging about some issues discussed in my book.
One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 2007, 2009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings. In many developing countries, registers produce documents that judges do not trust and, therefore, registration does not facilitate impersonal transactions that it should be supporting. Reducing the explicit cost of registers and speeding production of useless paperwork will not help. The priorities of reform policies should therefore be thoroughly reviewed, aiming first for registers to achieve a minimum reliability. (See this discussion).
In April, following continuing pressure by Barney Frank, chairman of the US House Financial Services Committee, the World Bank decided to drop Doing Business’s “Employing Workers Indicator” and develop a new “Worker Protection Indicator” after concluding that the first indicator “does not represent World Bank policy and should not be used as a basis for policy advice or in any country programme documents that outline or evaluate the development strategy or assistance programme for a recipient country” (Aslam, 2009).
In line with my argument about registration, meaningful indicators of institutional quality should be comprehensive of costs and values. Therefore, an indicator of the quality of employment regulation should consider not only workers’ protection but other aspects, such as, most prominently, unemployment rates.
Introducing Guest Blogger Benito Arruñada
| Peter Klein |
We’re delighted to announce Benito Arruñada as our newest guest blogger. Benito is Professor of Business Organization at Pompeu Fabra University in Barcelona, a former President of ISNIE, and a prolific researcher in the areas of organization, law and economics. Most of his work focuses on the organizational conditions that facilitate impersonal exchange, from property titling or business regulation to moral systems. He has published widely in journals such the Journal of Law and Economics, Industrial & Corporate Change, Harvard Business Review, Journal of Law, Economics, and Organization, Journal of Economic Behavior & Organization, Journal of Comparative Economics, and International Review of Law and Economics.
Benito will be blogging about his new book on property and business formalization, Building Market Institutions: Property Rights, Business Formalization, and Economic Development, coming out next year from the University of Chicago Press, and other topics that strike his fancy. Welcome, Benito!
A Second Act for the CAFE Standards
| Peter Klein |
From former guest blogger David Gerard:
As you have no doubt learned, President Obama and Governor Schwarzenegger have teamed up for a healthy bump in the federal Corporate Average Fuel Economy (CAFE) standards, forcing automakers to boost their fleet averages to 35 miles per gallon by 2016. The announcement will dismay many economists, who for many, many reasons have advocated steeper gasoline taxes instead. Lester Lave and I argued that that there were some solid reasons to support some form of CAFE standards in conjunction with higher gasoline taxes. On pragmatic grounds, the CAFE standards have enjoyed public support and gas taxes decidedly have not, so CAFE has carried the day.
The original CAFE measures did not do much in terms of pushing the envelope of vehicle technology, as a change in consumer tastes toward more fuel efficient vehicles in the late 1970s. As a result, the standards were met by altering the mix of vehicles sold, not by any radical improvements in technology. It wasn’t until the early 1980s when oil prices tanked that the CAFE became a serious binding constraint. In contrast, the CAFE standards announced Monday are very aggressive. However, setting the standard is only the first part of the story. The real action takes place during the second act. What happens as the deadline approaches if firms are unable to meet the stricter standards? (more…)
My “No New Economy” Slides
| Peter Klein |
Here, for the curious, are my slides from this morning’s talk at the Law and Economics of Innovation conference, titled “Does the New Economy Need a New Economics?” (Short answer: no.) This will eventually morph into a paper so comments are most welcome (and thanks to those who have already helped). I’m looking forward to Susan Athey’s keynote later today.
M&A Bloggers Needed
| Peter Klein|
The Law Professors Blogs Network needs someone to take over its Mergers and Acquisitions Law Blog. Details here.
The Ethics of Bankruptcy
| Peter Klein |
I like this 2003 HBR piece from Joe Bower and Stuart Gilson on bankruptcy. Substitute “Chrysler” and “foreign auto makers” for “WorldCom” and “competing telecom firms” and you’ll get the idea:
WorldCom’s bankruptcy, however, highlights an important, potentially very large social cost of the U.S. bankruptcy system. Competing telecom firms, which have played by the accounting rules and have used more prudent financing, now find themselves — once again — at a competitive disadvantage relative to the company. Unlike WorldCom, these firms had to stay current on their debt and service their lease obligations. They did not get to write down their assets and debt, nor have they been able to reduce taxes by claiming that their profits never existed.
Is this fair? Do the benefits of the system outweigh its costs? The system works well to protect assets and employees, to be sure. But are WorldCom’s assets and employees really the ones that should be protected? What about those of more efficient firms? In capital-intensive industries like petrochemicals, steel, telecoms, and airlines, doesn’t bankruptcy law make it harder for efficient companies to drive inefficient assets out of business? In the majority of bankruptcy cases in these industries, the top managers are gone, but old capacity returns to the market with an improved balance sheet. This can easily prolong a period of industrywide overcapacity as well as unfairly disadvantage competitors.
Their focus is bankruptcy resulting from corporate fraud, but the question applies equally well, in my view, to bankruptcy resulting from managerial incompetence.
BTW, for a primer on bankruptcy, Michelle White’s 1989 Journal of Economic Perspectives paper, “The Corporate Bankruptcy Decision,” is a good place to start.
The Symbolic Uses of Politics
| Dick Langlois |
One of the most interesting law-and-economics scholars out there is Amitai Aviram at the University of Illinois, whom I met at a conference a few years ago. I only just discovered his recent work on what he calls bias arbitrage, “the extraction of private benefits through actions that identify and mitigate discrepancies between objective risks and the public’s perception of the same risks.” The idea is that people often misperceive the risks of various events. This creates an entrepreneurial opportunity for someone who can benefit from manipulating those misperceptions.
In some ways, this is an elaboration of Murray Jacob Edelman’s The Symbolic Uses of Politics (1964). In Edelman’s story, the citizenry are worried about various large issues about which they have no control: the Russians, global warming, swine flu, or — Edelman’s example, as I recall — the threat of business monopolies. In most cases, these fears are exaggerated or have no basis at all in fact — like the fear of spontaneous monopolies. But politicians can advance themselves by taking symbolic steps to allay these fears — like passing the Sherman Antitrust Act. (As Tom DiLorenzo, Jack High, Tom Hazlett, and others have suggested, the Sherman Act was also about diverting attention away from the McKinley tariffs, which would indeed transfer income from consumers to producers.)
Aviram’s spin is that there can be a welfare-improving effect to this process, to the extent that, by changing people’s perceptions of the underlying risks, entrepreneurs can bring people’s assessments in line with the actual underlying risks and thus get people to behave more efficiently. One example he uses is security measures at airports. After 9/11, people overestimated the probability of highjackings and shifted away in droves from air travel and toward automobile travel, which is actually a less-safe alternative. By instituting the ceremony of airline security, the government might have persuaded people that the probability of highjackings went down — even though it probably didn’t go down and was already low anyway — and therefore got them to return to (safer) air travel, an efficient outcome even taking into account the costs of the ceremony. (If you don’t believe that the ceremonies of the Transportation Security Administration are purely symbolic — or even if you do — check out this interesting piece in the Atlantic Monthly a while back.) Aviram understands perfectly well that this process can also lead to bad outcomes: the much-discussed case of seatbelt laws making car travel less safe might be an example. Whether the placebo effect (as Aviram calls it) has good or bad effects is a case-by-case question. One might well wonder whether today, eight years almost since 9/11, it isn’t the case that airport security ceremonies actually serve to remind people of terrorist threats and therefore to raise their assessments of the probabilities (?)
I thought of all of this recently in my own local context. Because of the recession, the State government has imposed on the University a variety of purely symbolic measures to demonstrate our frugality to the voting public. At least in principle, faculty can’t travel out of state even on money that came from grants or awards. And the library and museums were recently instructed to shorten their opening hours, even though those shorter hours don’t in fact save any money.
Knights, Raiders, and Targets
| Peter Klein |
When doing my dissertation research long, long ago I was influenced by an edited volume called Knights, Raiders, and Targets: The Impact of the Hostile Takeover (Oxford University Press, 1988). It collected the proceedings of a 1985 Columbia Law School conference that must have been terrific. The authors include Robert Shiller, John Coffee, Mel Eisenberg, Oliver Williamson, David Ravenscraft and F. M. Scherer (previewing results of their important 1987 book), Richard Roll, Michael Bradley, and Gregg Jarrell, among others, with several contributions appearing in a comments-and-replies format. I just learned that one of the editors, Louis Lowenstein of Columbia Law, passed away this month. I’m not familiar with his best-known book, What’s Wrong With Wall Street: Short-Term Gain and the Individual Shareholder (1988). Apparently it proposes a tax on short-term trading profits to reward buy-and-hold investors, which doesn’t sound great to me.
Take My Joke, Please
| Peter Klein |
Like other boring professors, I try to liven up my lectures and after-dinner speeches with a few jokes. Naturally, this effort is plagued by radical uncertainty. And of course I steal the jokes. Indeed, I maintain a computer file of one-liners and funny stories — none original — for possible future use. Then again, as Fabio notes, many stand-up comedians are known as prodigious copiers. Milton Berle once said another comedian made him laugh so hard, “I nearly dropped my pencil.”
Good thing I’m not a professional comedian. According to this paper by Dotan Oliar and Christopher Jon Sprigman, the community of stand-up comedians is characterized by strong social norms that take the place of formal rules in enforcing “ownership” of jokes. A complex system of norms has emerged over the last half-century that “regulates issues such as authorship, ownership, transfer of rights, exceptions to informal ownership claims and the imposition of sanctions on norms violators. Under the norms system, the level of investment in original material has increased substantially.” Presumably the community of professional comedians satisfies the Ellickson requirements of being a small, well-defined, close-knit group. Lucky for me I’m not in it. (HT: orgtheory commentator Johann.)
Vive la Révolution!
| Peter Klein |
So says the all-star team of Acemoglu, Cantoni, Johnson, and Robinson in “The Consequences of Radical Reform: The French Revolution.” Check it out:
The French Revolution of 1789 had a momentous impact on neighboring countries. The French Revolutionary armies during the 1790s and later under Napoleon invaded and controlled large parts of Europe. Together with invasion came various radical institutional changes. French invasion removed the legal and economic barriers that had protected the nobility, clergy, guilds, and urban oligarchies and established the principle of equality before the law. The evidence suggests that areas that were occupied by the French and that underwent radical institutional reform experienced more rapid urbanization and economic growth, especially after 1850. There is no evidence of a negative effect of French invasion. Our interpretation is that the Revolution destroyed (the institutional underpinnings of) the power of oligarchies and elites opposed to economic change; combined with the arrival of new economic and industrial opportunities in the second half of the 19th century, this helped pave the way for future economic growth. The evidence does not provide any support for several other views, most notably, that evolved institutions are inherently superior to those ‘designed’; that institutions must be ‘appropriate’ and cannot be ‘transplanted’; and that the civil code and other French institutions have adverse economic effects.
Think of this as a fixed-effects model estimating the within-country effect of legal origin; what happens when a society’s institutional (particularly, legal) environment changes suddenly and unexpectedly? If a common-law country is invaded and occupied by a civil-law country, what happens to financial-market development? An interesting counterpoint to the cross-sectional studies that are the norm in this field.
Antitrust and the Theory of the Firm
| Peter Klein |
Josh has a nice post at Truth on the Market on the place of antitrust research and practice within the legal academy. “[C]ontrary to the conventional wisdom I hear from the legal academy, it is an incredibly exciting time to practice, think about, and write about antitrust issues. . . . I suspect that right now is one of the most intellectually active antitrust eras in history.” Josh proposes several hypotheses on the increasingly popularity of antitrust analysis in law schools and within the law-and-economics movement.
Josh’s post got me thinking about the economic theory of the firm. The pioneers in this field — Coase, Williamson, Klein, Alchian, Demsetz, Teece, Masten — were actively interest in antitrust issues. The subtitle of Williamson’s Markets and Hierarchies (1975), after all, is “Analysis and Antitrust Implications.” In the more recent literature, however, antitrust doesn’t make much of an appearance. None of the leading scholars, such as Oliver Hart, Bengt Holmström, Jean Tirole, John Moore, Bob Gibbons, George Baker, Kevin Murphy, Tom Hubbard, or Steve Tadelis works juch on antitrust (please correct me if I’m wrong). Even giants like Foss, Klein, Langlois, and Lien are not active in this area.
One might respond that antitrust is an economic policy issue, not a firm-strategy issue, and note that transaction cost economics (TCE) has migrated from economics departments to business schools, where it joins the resource-based view (RBV) as a leading theoretical perspective on the the firm. Indeed, while the people mentioned above are economists, mostly teaching in economics departments, Williamsonian TCE has largely been supplanted by the Grossman-Hart-Moore model among mainstream economists, while it remains highly influential within the fields of strategic management, organization theory, and marketing.
This leaves us with two questions: (1) Why isn’t the property-rights or Grossman-Hart-Moore approach to the firm more influential in antitrust economics? (2) Why isn’t antitrust a bigger topic within strategic management (e.g., as part of a firm’s legal and political strategy)?
Law and Economics of Innovation
| Peter Klein |
I’m speaking at this year’s edition of the Law and Economics of Innovation, organized by Geoff Manne and Josh Wright and co-sponsored by GMU Law and Microsoft. It’s May 7 in Arlington. Check out the slick conference website (and Geoff’s post at ToTM). If you don’t want to hear me, at least come for Susan Athey’s keynote. Tom Hazlett has the best paper subtitle: “Of Newtons, Blackberries, iPhones & G-Phones.” How many of you youngsters have heard of the Newton?
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