Further to the interdisciplinary focus on debtors, what is the difference between getting foreclosed and walking away from your house?  See this interesting post at Calculated Risk.

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Josh Wright weighs in interestingly here.  Meanwhile, Ngan Dinh collects advice for young economists here (HT: ND).  I find the tenor of the advice to be pretty different than the sort usually given to non-interdisciplinary law professors - and that's pretty interesting too.

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Corporate law scholars overwhelmingly posit efficiency as the measure of the effectiveness of legal rules when doing normative analysis.  They almost never defend this choice; it goes without question.  Yet, is efficiency really all that matters in setting the rules of corporate law?

Law and economics scholars have a standard argument, due to Kaplow and Shavell, for focusing only on efficiency in setting all sorts of legal rules.  This double distortion argument contends that setting legal rules at their efficient level and then achieving whatever level of redistribution is desired through tax and transfer policies will distort behavior from the efficient level less than if we try to achieve distributive goals in part through legal rules.

Chris Sanchirico and Richard Markovits have already pointed out a number of problems with this argument.  The objection that intrigues me most questions the political feasibility of the Kaplow and Shavell approach. 

For a variety of reasons, pursuing distributive goals through legal rules, including corporate law rules, may be more politically possible than just using tax law to redistribute.  That may be because widely held values or beliefs concerning fairness focus on particular legal rules.  Or, different rulemakers may have more power over some legal rules than over tax policy, and may be inclined to redistribute more than those with control over tax.

Moreover, some legal rules may importantly shape the future distribution of political power.  Setting those rules in a way that creates a more egalitarian system may be crucial to the future feasibility of more egalitarian tax policy.  Some corporate law rules may be important in shaping political power, so this consideration may well be worth pondering in the area of corporate law.

One area where we might care about the distributive consequences of corporate law rules is executive compensation.  I think that distributive concerns largely drive the politics of protests over high executive compensation.  Even corporate law scholars who criticize compensation practices typically distance themselves from that sort of plebeian politics.  I think the plebes are right.

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A few years ago, while I was still at the University of Wisconsin, I started investigating the business of cheesemaking. Wisconsin has long been the leading producer of cheese in the United States, but as California has increased production, Wisconsin cheesemakers have turned increasingly to the production of specialty cheeses. I noticed that some of these specialty cheesemakers were organized as corporations or limited liability companies, while others were organized as cooperatives.

At roughly the same time that I was looking into cheesemaking, I had a couple of students who were interested in the law governing cooperatives. I did a bit of reading and started asking around in the local legal community. We never discuss cooperatives in Business Organizations, and very few legal scholars write about cooperatives (Henry Hansmann being the notable exception). I became fascinated by this lost corner of our law, which obviously still has some traction in the U.S.

So last year I recruited Brayden King and Marc Schneiberg, two organizational sociologists, as co-authors. We applied for and received a grant from the University of Wisconsin Center for Cooperatives. And I took the occasion of the Wisconsin Contracts Conference to visit some cheesemakers in southwest Wisconsin. This is my first time using interviews as a research methodology, and it's a lot more fun than sitting in my office hatching theories of fiduciary duty. Not that there's anything wrong with that.

The only problem is the weather. A storm on Sunday -- rain followed by snow -- left the roads icy, and most of these cheesemakers reside in very small towns ... or in no town at all. They are accessible only by country roads, which are beautiful in the summer, but treacherous this week. Yesterday, I ended up in a snowbank on an unmarked curve. Fortunately, a cheesemaker named Ole (I am not making this up) had a truck and a chain and was able to pull me out.

My discussions with the cheesemakers are fascinating. I am constantly reminded of Stewart Macaulay's famous study of non-contractual relations because the smaller cheesemakers simply can't be bothered with formal contracts. If they come crosswise with a farmer who supplies them with milk or a distributor who sells their cheese, they just stop dealing with them. Simple.

UPDATE: If you want to get a feel for some disturbing local culture, this is one of the towns I visited yesterday.

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I know that blog posts on the behavioral economic aspects of Deal or No Deal are a bit trite at this point (here's an old Prawfs post and an old Freakonomics post), but the Chronicle of Higher Education today reports that the economic literature is also becoming littered with articles that use the contestants' decisionmaking as data for studying decisionmaking under uncertainty.  More particularly, some scholars are claiming that prospect theory predicting that wagerers will be more risk-seeking to avoid losses holds true for the contestants.  When the large dollar amounts are found early, defendants are apt to make riskier choices in an attempt to regain good odds.

I actually hate this game show.  There are too many commercials -- what is essentially a 20-minute show is stretched to an hour-long show, and an hour is a lot of time to waste on television that isn't Law and Order.  There is no skill whatsoever involved.  The contestants often say "No Deal" to in what my mind is an awful lot of money.  Their three-person pom pom squads use the worst arguments to get them to say "No Deal" also.  The fact that the contestant has six kids to send to college seems to me a good argument to take a six-figure amount, not to keep going.  That being said, I think studying this behavior is interesting.  Do contestants engage in pre-commitment strategies?  Do think encourage their support groups beforehand to urge them to keep going, reasoning that they began with nothing, so they have nothing to lose?  What affect to audience behavior have on the contestants?  Does financial net worth affect contestants' decisionmaking?  Does education?  I'm sure that with the writers' strike, we'll have much more data!

And of course, does this type of research require consent under IRB rules?

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Greg Mankiw gets a mash note from a medical student asking: why are economists so great? They’re better in seminars, the student gushes, they’re aggressive and probing, they’re all business and no cant. The student then asks an economist – not Mankiw – if he knows why economists are so great. The economist is happy to answer. It turns out:

• Economists have higher test scores than everybody else

• Economists go to better graduate programs than everybody else

• Economists get their jobs through a market that works better than everybody else’s

• Economists aren’t advocates, most everybody else is

It’s a charming, modest takeaway. But there’s no question that economists are well trained social scientists, with plenty of math and a confident professional ethos. Economists are also good in workshops – and I occasionally think that the old law professor credo of “have a theory about anything and speak in full paragraphs rich with prosody” is less popular in the interdisciplinary seminar rooms of our universities now that economists are coming too, and biting into the confounders and omitted variables.

So maybe economists are totally awesome. I bet Mankiw thinks so. But at least he’s cute about it.  Economists may crush all comers in seminars, Mankiw thinks, because "economics may attract people with a particular set of personality attributes, and perhaps these attributes are not the same set of attributes you might choose for your next dinner party.”

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Tyler Cowan at MR reports on an Economist report on an ultimatum game study associating rejection behavior with testosterone levels.  Is this why men never ask for directions?

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Today's New York Times had an interesting article discussing extremely nasty claims settlement practices by long term care insurers. The article discusses, for example, the curious variation in consumer complaint ratios, against the major players in this field. Conseco got one complaint per 383 policy holders. Genworth Financial received 1 complaint per 12,434 policy holders. Some of the allegations are pretty darned scary, the sort of misconduct I thought John Grisham had only fantasized about in his book The Rainmaker. It's hard to know how to assess the allegations, however, since the Times report finds few instances in which judges or jurors passed on the entire case. Instead, it appears that most of these matters, like an awful lot of civil litigation today, were resolved by confidential settlements in which records of the proceedings were sealed.

I think it's time we think longer and harder about the propriety of using public resources to fund litigation and then denying the public the results of that subsidized dispute resolution mechanism. There's an excellent and sophisticated article up on on SSRN about this subject by Professor Scott Moss from Marquette. If I might be permitted some speculation, it seems that basically what we've done is to create the equivalent of intellectual property rights in information about alleged wrongdoing. The parties generate information from use of the discovery process and generate further information by arriving on a settlement amount. While the parties pay much of the cost of this endeavor, taxpayers rather than litigants are amortizing the fixed costs of the civil justice apparatus or some of the marginal costs of dedicating the court system to their particular dispute. If the parties are able to bargain over the privacy of this information, they can extract from each other -- usually the plaintiff extracting from the defendant -- some portion of any expected increase in liability in other lawsuits that would result from publication of the information. Although perhaps this ability to bargain doesn't greatly alter the total amount paid by the defendant for the wrongdoing, at a minimum it would seem to reallocate compensation among plaintiffs in a way that may have little to do with the merits of the claims.

Anyway, I'd hate for this structural issue about modern litigation or my back-of-the-envelope musings on the subject to drown out what appears to be a compelling argument for nourishing that duty of good faith and fair dealing. But there that structural issue was, lurking not too far in the background in this and much other litigation about alleged corporate wrongdoing. So, I brought it up.

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When I was a third year law student, my roommates and I would periodically gather at dinner in a chilly triple-decker not to discuss the subtleties of federal jurisdiction but to huddle around a small black and white television set to watch William Conrad's Wild, Wild World of Animals. The show had a regularity well suited to relieving stress. At some point during each episode, Conrad would deeply intone "But the greatest threat to the [insert species here] isn't the [insert predator here] [add dramatic pause] but man. Which brings me to the Florida insurance situation.

Florida, as my dear readers know, is subject to destructive hurricanes. The earth and its oceans, as my reasonable readers will likewise concede, at least in the short run, for whatever reason, are heating up in a way that certainly does not decrease the likelihood of destructive hurricanes. And so, one might think that Florida would be taking steps to mitigate the damage potential and to sensibly spread its risk over time. Alas.

Florida's reaction to global warming has been to deny that the near future is more likely to resemble the near past rather than the brisker averages of the past century and to thus claim that for this and perhaps other reasons the evil insurance market is mis-pricing property policies. The solution: create a state subsidized property insurer that now has over $400 billion in exposure and can't afford to pay for even moderate hurricanes without a post-event assessment and a grotesquely underfunded state reinsurance fund that cheerfully concedes dependence on enormous post-catastrophe assessments. These assessments are what it will take in order to pay claims and keep primary insurers solvent.

But it's facile just to snicker at Florida's absurd response to the situation. The real issue is how does one insure against the 100-year risk of loss against $1.9 trillion in coastal exposure in Florida or an equal amount in New York (Long Island) or $740 billion in Texas or an I haven't-found-good-data-but-I-know-it-is-large amount of volcanic risk in Seattle? And this is where it gets tricky. The private market has a difficult time estimating the risk of a remote mega-catastrophe and it has a difficult time diversifying that large a risk among the world's reinsurers. The result is that one has to build up an enormous reserve (read asset stockpile). Until the mega-catastrophe occurs, however, what the public sees, in part because of the limitations of accounting, are large premiums and what appear to be large profits in the insurance industry. Moreover, absent detailed premium regulation, "irresponsible" insurers win business by undercutting "responsible" insurers that accumulate the proper levels of reserves. On the other hand, if all goes well, the insurance market sends useful pricing signals to developers so that they reduce risk by building sturdier structures or focusing development efforts on regions less prone to the most destructive winds (read, not the coast, and possibly not Florida at all).

The alternative is to allocate the risk of loss on people after the catastrophe. The economic virtue of this methodology is that the size of the loss is basically known. The problems, however, are multiple. First, there's the liquidity problem. From where does the money come to rebuild while the assessments trickle in? Sophisticated financial rating agencies know this, by the way, and are beginning to have questions about Florida insurers. Second, except possibly in the unlikely event that the assessment is proportional to the ex ante risk posed by each insured, retrospective assessments will not have been sending the correct pricing signals to the property development market before the loss. The consequences will be (a) a loss that will be way larger than it would have been had the proper pricing signals been sent and (b) slowed development in regions less subject to risk who fear having to pay enormous post-disaster assessments. Moreover, in the event the state ever wishes to change its mind and go to a conventional insurance system, it will be deterred by the prospects of coping with its brewed population of property owners now hopelessly addicted to subsidized insurance.

Of course, one way to dilute the effect of post-disaster assessments is to spread the loss not over just the affected state but over a larger group, say the nation. This is basically what we did in an ad hoc way following Katrina. And we thus see a flurry of legislative activity to establish national catastrophe funds. (Three guesses, by the way, as to which state's legislators introduced the most prominent bill.) Unfortunately, however, absent enormous political discipline, the creation of this fund may simply exacerbate the perverse incentive effects of the Florida fund.

Which brings me back to William Conrad and his Wild, Wild World. It appears his wisdom extends further than that group of young legal minds suspected at the time. The greatest threat to Florida isn't hurricanes, but man.

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The much anticipated day is here. Contracts as Organizations -- my paper with Brayden King -- is now available on SSRN. We have submitted the paper to law reviews, but we welcome further comments. Here is the abstract:

Empirical studies of contracts have become more common over the past decade, but the range of questions addressed by these studies is narrow, inspired primarily by economic theories that focus on the role of contracts in mitigating ex post opportunism. We contend that these economic theories do not adequately explain many commonly observed features of contracts, and we offer four organizational theories to supplement – and in some instances, perhaps, challenge – the dominant economic accounts. The purpose of this Article is threefold: first, to describe how theoretical perspectives on contracting have motivated empirical work on contracts; second, to highlight the dominant role of economic theories in framing empirical work on contracts; and third, to enrich the empirical study of contracts through application of four organizational theories: resource theory, learning theory, identity theory, and institutional theory.

Outside the economics literature, empirical studies of contracts are rare. Even management scholars and sociologists, who generated the four organizational theories just mentioned, largely ignore contracts, both in theoretical and empirical analysis. Nevertheless, we assert that these organizational theories provide new lenses through which to view contracts. While economic theories of contracting focus primarily on one purpose of contracts – mitigating ex post opportunism – the four organizational theories help us understand the multiple purposes of contracts.

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In addition to AALS this past weekend, the American Economics Association held its own annual meeting in Chicago.   Over at the Organizations and Markets blog, Peter Klein has posted links to noteworthy AEA papers on organizations.  These include a paper on Firm Boundaries in the New Economy:  Theory and Evidence, by Krishnamurthy Subramanian.  "Subbu," a co-author of mine on a couple of projects, is a new, up-and-coming finance professor at the B-school here at Emory (Goizueta).  Here's what his paper is about:

The theory in this paper highlights the trade-offs that knowledge intensive firms confront when deciding among mergers/acquisitions, joint ventures, alliances, and arm’s length contracts.  I define a knowledge intensive firm as a collection of the knowledge assets that it owns and the agents who have full access to such assets. Therefore, boundary decisions between two firms are modeled using access to knowledge and ownership of knowledge. Modeling boundary choices using ownership cannot provide optimal incentives since ownership affects incentives asymmetrically, and ownership can encourage over-investment. In contrast, modeling the boundary choices using access and ownership can provide first best incentives since access and ownership complement each other in providing incentives: access affects incentives symmetrically while ownership affects them asymmetrically. The theory explains why some mergers/ acquisitions in knowledge intensive industries are successful while others fail and in what situations an alliance or a joint venture dominates a merger/ acquisition and vice-versa. Using a sample of alliances and joint ventures in the high technology industries, I provide empirical evidence to support the theory.

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In addition to lots of corporate papers, the trend at ALEA seems to be--based on my casual empiricism after the first day--away from pure math papers and more toward empirical and experimental (surprise, surprise!).  I saw lots of regressions and a few experiments, a few theory papers with a little math, but no presentations with just equations, which seems a contrast from my past ALEAs.  At the end of the day, I had a conversation with Dean Lueck from Arizona.  He observed that more and more law and economics is being done in law schools, as opposed to economics departments, as JD/PhDs become more common and seem now more likely to wind up in law schools.  And economics departments seem to be ceding the territory--and the recruiting of law and econ scholars--to the law schools.  He suggested--and this must be right--that this changes the way law and economics is done.  The institutional pressures, constraints, and expectations must be different as between law schools and econ departments.  The work product is now generally more heavily influenced by law school norms, customs, and expectations than those of econ departments.  Perhaps this explains the change in emphasis--if I have correctly identified one--at ALEA.

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I'm about to make a run for the airport to fly to Berkeley and the annual ALEA meeting.  Looking over the program, it's amazing how corporate law has come to dominate the program.  Not only are there 4 panels devoted just to corporate and securities law (out of about 36 total), but corporate law papers are making their way onto all kinds of other panels as well--contracts, behavioral economics, comparative law, the political system and the law--where the cross-over possibilities abound.  And this year, there is a panel entitled Agency Conflicts in Financial Markets, which of course is all about corporate and securities law.  More from Berkeley . . .

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Charles Plott, the Edward S. Harkness professor of economics and political science at Caltech, and Kathy Zeiler, associate professor at Georgetown Law, published a paper in the American Economic Review about the endowment effect.  A copy of the paper is available here; another Plott-Zeiler paper on prospect theory, presented at last May's ALEA conference, is here.  The authors make a persuasive case that there was less to the endowment effect than earlier studies had indicated.  In brief, the endowment effect is an observed psychlogical phenomenon where folks value something that they have more than they would value the exact same thing if they didn't have it.  (You may have heard of the famous mugs experiments.)  In their paper, Plott and Zeiler argue than basic manipulation of the experimental procedures minimizes or even eliminates the endowment effect. 

Josh Wright and Todd Zywicki have recently blogged about the paper and its ramifications.  (Zywicki initially blogged about the paper here, with a good explanation of some of the terms used.)  Wright notes that in the past three years 189 law review articles have discussed the endowment effect, and he surmises that they have generally been making the same, anti-Coasean argument.  In his last graf, Wright argues:

Prior to reading Plott & Zeiler, I was fairly confident that the number of "endowment effect" regulatory proposals meeting [a rigorous proof] standard was small, and possibly zero.  Pending convincing contradictory evidence that the effect actually exists in markets, the set of qualifying proposals now appears to be null.  My only question is: What would the law reviews do with all that extra space?

Zywicki is a little more restrained -- he states, "Like Josh, I am curious to see what effect, if any, the Plott and Zeiler paper has on the production and publication of law review articles based on the endowment effect."

I guess I would like to just add a note of caution before we decide that the endowment effect no longer exists, or can no longer be written about in law reviews.  Law profs are often criticized for jumping to conclusions based on a thin reading of social science data.  As social scientists will often note, one study is not enough to scrap an old theory or create a brand new one.  Only testing and retesting, over time and by different researchers, get us closer to the truth.

So I fear that Wright may be doing what he criticizes -- namely, jumping to a conclusion based on preliminary social science findings.  Yes, I agree the Plott-Zeiler paper calls for further research into what, if anything, creates the endowment effect, and how robust the effect remains if subjected to various influences.  But should we say that years of research demonstrating a theory proposed by a Nobel prize winner are meaningless, thanks to one article?  If so, the Coase theorem itself wouldn't have lasted that long, either.

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Tomorrow I am teaching Akerlof's article on asymmetric information, and in preparation I stumbled across this essay: Writing the "The Market for ‘Lemons’": A Personal Interpretive Essay.  Among other things, Akerlof reports that the article (his first as an asst prof!) was rejected by AER and the Review of Economic Studies on the grounds that the journal in question "did not publish on topics of such triviality."  The Quarterly Journal of Economics ultimately picked it up, and twenty-something years later Akerlof shared the Nobel for it. 

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I heard a famous law professor/scholar say once that when you become an expert in a field, teaching basic courses is difficult because you don't believe in easy answers any more -- everything is gray.  Maybe that phenomenon was at work when 78% of economists answered this question wrong.  Perhaps because I am able to see economics in very simplistic terms, I was able to answer correctly!

Tip to Brian L.

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I'm late to the party, but the Prawfs debate on whether a PhD is necessary to do serious law-and-econ (and other law-and ) scholarship is really interesting.  See also Larry R.  Brett McDonnell pretty much nails it in his comment about halfway down the Prawfs thread.

More thoughts below the fold.

[*(By way of background:  I think of myself as a consumer, not a producer, of law and economics.  Economics informs my scholarship, as does philosophy, psychology and sociology.  If forced to choose a discipline or methodology, it would be intra-disciplinary (tax and business law), not inter-disciplinary.)]

I think it's worth adding one more element to the debate, at least as it pertains to business law: practice experience. This debate is not, or should not be, a debate about serious law-and-econ vs. armchair law-and-econ.  Most of us recognize that most schools still need more economists and fewer dabblers.  But at the same time, dabbling has its place.  Especially if the dabblers bring something else to the party.  What is that something?  Let's call it legal professionalism, both in the sense of practical experience and an understanding of the norms of how lawyers and clients make decisions.   

Litvak points out, quite accurately I think, that ALEA has become dominated by serious econ types.  The conference is no longer very hospitable to the likes of Conglomerate.  In part, the drive to muscle up corporate law is a needed correction.  I certainly think the empirical work is immensely valuable in testing an overtheorized field.  But I think the trend may have gone too far.  Shutting the lawyers out of ALEA will not ultimately advance our collective understanding of how things work on Wall Street or in Silicon Valley.

The Leiter/ALEA way-of-thinking suggests that it may be appropriate to require a PhD in economics (or similar skills) to get a law teaching job at a top school or to join in the debate.  I'm not so sure this is a good idea.  A PhD is often a substitute for practice experience.  And yet most economists recognize that institutions and norms affect the way things work in practice, and it can be helpful to have practiced yourself.   (N.B. This deficit can be overcome by interviewing lawyers, as we all have to do when our first-hand experience is inadequate.)

Moreover, doing "cutting-edge work" in economics is not the only game in town.  One important role for us non-PhDs is to translate the teachings of L&E into language that non-economists (esp. lawyers and policy-makers) can understand and appreciate.  Litvak herself provides a nice example in this piece.   

Lastly, many finance puzzles cannot be understood without a fairly sophisticated understanding of the regulatory backdrop.  I find many of the finance papers I read on SSRN lacking in this respect (although, increasingly, many are good).  I tend to focus on the interaction between tax and corporate governance, but of course other regulatory fields like securities, banking, and financial intermediation rules are important too.  (Litvak and I have had an exchange in print that illustrates my point.  Her piece is here; my short response is here.)

Now, having said all that, I don't want to lose sight of the original question on Leiter's blog, which was the value of a PhD.  It's my opinion that most schools need more PhDs, not fewer.  I just hope that hiring more PhDs adds richness to legal scholarship without dividing us into too many separate pods.

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Lior S has an interesting post on qualitative vs. quantitative empiricism over at PrawfsBlawg.  Lior says that qualitative empiricism is a good buy; I agree.  My branding paper uses a series of four mini case studies to get at the question of branding and deal structure.  It will be interesting to see what the quants think of it.

Also check out the comments to Lior's post.

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The D.C. Circuit recently handed down its decision, written by no less an antitrust luminary than Chief Judge Ginsburg, in the Three Tenors case.  For those not familiar with the facts, the basics are that the Three Tenors put on some concerts coinciding with the World Cup soccer finals in 1990, 94 and 98.  PolyGram distributed the 1990 album, Warner the 1994 album (both albums were very successful), and the two formed a joint venture to distribute the 1998 album.  The FTC did not challenge the formation of the joint venture.  Rather, the antitrust challenge involved an agreement discussed in negotiations of the joint venture and signed one month afterwards which restricted PolyGram and Warner from discounting and promoting the '90 and '94 albums for ten weeks while the '98 album was promoted and released.  The FTC struck down the agreement in an opinion written by my colleague at George Mason, Tim Muris (who defends the analysis here). 

Any parties to antitrust litigation can count themselves fortunate to have their arguments heard by sophisticated antitrust thinkers like Muris and Ginsburg.  Nonetheless, I am going to try to convince you, as I have explained elsewhere in response to Muris' analysis, that the Three Tenors' moratorium agreement was highly unlikely to produce consumer harm and where the Commission's analysis went wrong.

    The fundamental antitrust question was whether the 10 week moratorium agreement would fall under the per se rule (automatically illegal), or a more involved analysis that would require the FTC to define a relevant market and prove that the joint venture had monopoly power (whether under the full blown or truncated version of the rule of reason).  The Commission argued that rule of reason analysis was not appropriate because: (1) the moratorium agreement came after the venture was formed; (2) the agreement aimed to prevent competition by entities "outside" the venture.  Neither are persuasive.

    As a matter of antitrust law, the Supreme Court has found that the rule of reason applies to restraints formed after the initial contractual relationship (e.g. GTE Sylvania; Business Electronics).   The rule adopted by the Commission and the D.C. Circuit would force all parties to a joint venture accept the risk that subsequent attempts to modify the venture to adapt to changing business conditions would create antitrust exposure.  The Commission's analysis, adopted by the D.C. Circuit, also rejects the defendants' "prevention of free-riding defense," asserting that such agreements are not cognizable as a matter of antitrust law.  This also cannot be correct. 

    To borrow an example introduced by then Commissioner Muris and borrowed by Judge Ginsburg, consider General Motors and a rival introducing a new SUV model with heavy advertising causing "spillover effects" increasing the demand for rival brands.  The Commission argues that it would be illegal for GM (and a rival) to prevent these types of spillovers from benefitting rival brands in order to maximize the profits from the release of the new model.  But antitrust law most certainly does (and should) allow firms to prevent free-riding on promotional investments (for example, GM can use exclusive dealing arrangements to ensure that dealers do not use its promotional investments, which increased the demand for other brands as well, to increase sales of those brands).  If antitrust law allows a single firm to prevent this type of free-riding on promotional investments, why then, would not the parties to a joint venture?  The only answer is a misplaced preference for activity within the firm rather than by contract.

    Ultimately, this preference resulted in analysis which did not demand market definition.  I agree with Professor Muris that not all antitrust cases require the burdensome procedure of defining relevant markets.  However, per se analysis is reserved for cases where the court comes across a business practice with, as Judge Ginsburg wrote, "a close family resemblance" to "another practice that already stands convicted in the court of consumer welfare."  The economic learning justifying the use of the per se rule for naked price-fixing agreements and agreements by competitors to prohibit advertising simply does not teach us much about the joint venture formed by PolyGram and Warner. 

    The economics of joint ventures and promotional agreements can be complicated.  But one need not be a PhD economist or antitrust lawyer to figure out whether the Three Tenors agreement was likely to harm consumers.  Ask yourself: "with the 10 week restriction in place, would the Three Tenors have been able to raise the market price?"  Let's define the market not as "all music" but something with more reasonable substitutes such as "classical music."  I remain highly skeptical that the parties would have been able to raise the price of classical music as a result of the agreement, though I must admit do not know the answer because the analysis was never carried out.  I assert, however, the question of actual market impact, and not whether the agreement was "inside" or "outside" the venture, should have been the focus of the analysis.

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Thanks for the kind introduction Vic.  I figured I would start off with a more substantive post about payola before I try to sell folks on our Poker and the Law project.

I spend a lot of thinking about payments for product distribution like slotting arrangements in grocery stores or payola in the music industry.  NY AG Eliot Spitzer’s investigaion of Sony BMG Music Entertainment resulted in an agreement prohibiting Sony BMG (others may follow) from making payments in exchange for radio airplay.  Others in the blogosphere have responded to the investigation (see Ribstein and Picker commenting here and here emphasizing the potential for Satellite Radio to alleviate competitive problems in the industry).

Competition for product distribution is crucial to a variety of industries: slotting allowances for grocery store shelf space, payments for inclusion in mutual fund “supermarkets,” and for listing preference in search engine results. Despite the widespread use of payments for distribution in markets, payola can lay claim to the most colorful history of regulation and controversy.  The arguments against payola appear to come in two flavors:

(1) payola is bad because it disfavors small music publishers (the “competition objection”); and

 

(2) payola is bad because it deceives the listening audience,who believes that music is chosen based on merit rather than payola (the “deception objection”).

Each objection has taken center stage at various stages of the payola debate. Spitzer’s investigation explicitly adopts the deception theory, stating that “Sony BMG and other labels present the public with a skewed picture of the country’s ‘best’ and ‘most popular’ music.”

Ronald Coase responded to both objections in his seminal paper “Payola in Radio and Television Broadcasting.” With respect to the “competition objection,” Coase argued that small publishers had thrived under payola and protested attempts to ban it by the FTC. Further, it is not likely that the competition objection would amount to much in the presence of healthy capital markets where investors are willing to get behind artists likely to produce popular music.

As to the second objection, Coase employed economic analysis to show that radio stations’ would respond to incentives, which for the stations meant playing the mix of records that would maximize the popularity of the station and therefore maximize advertising revenues (as well as future payola payments). Attempts to select music that the audience did not ultimately approve of would result in losing radio station traffic, which would in turn, reduce advertising revenues and future payola. The point of Coase’s analysis is that payola introduced a price system that would efficiently allocate resources in the music industry, and that a ban on payola would therefore reduce efficiency and community wealth. An ancillary point of Coase’s analysis was that a payola ban “may result in worse record programs” because station song selection will depend solely on maximizing advertising revenues. I am not confident that I know what the mix of songs that attracts the best demographic audience for radio commercials looks like. Nor am I confident that I, or any regulator for that matter, could figure out whether such a mix of songs would be better or worse than what we have now.

But Coase’s pathbreaking analysis of payola is not complete. While pointing out the benefits of a price mechanism for radio spins, it does not address a fundamental economic question: why do music publishers have to pay radio stations for playing music at all? The answer “because radio station spins are scarce” is not enough. Radio stations also benefit from playing a mix of songs that attract a larger audience. If radio stations are interested in selecting the songs that will maximize advertising revenues (and future payola), why does the music publisher need to pay at all? Why doesn’t competition result in the efficient level of spins (that which maximizes joint profits) without payments? This is an important and unanswered question that sheds light on the pro-competitive role of payola in the music industry.

The answer is that music publishers must pay radio stations to promote singles (give more airtime) than they would otherwise because radio stations do not take into account the marginal profits earned by the publisher as a result of record sales produced by the additional airtime. The publisher earns substantial profits from record sales with each incremental spin granted by the radio station. The radio station does not take into account these profits when determining the number of spins to give a particular record and will therefore undersupply spins of a particular song without further compensation. Therefore, the music publisher must pay for the additional spins in order to achieve the efficient (jointly profit-maximizing) solution.

The radio station cannot just take payments to play horrible music and ultimately survive. This is implicit in the popular claim that payola is the cause of the rise of “bad” music, or is only necessary for such music. This was the claim with respect to rock n roll in the 1950s, and more recently, rap music (where payola is quite popular) and the musical stylings of J-Lo. But payola has always been a part of the music industry, even when the songs performed did not raise the same type of criticism. This suggests that economic forces other than bribery must be at work. The radio station is constrained by selecting those singles that will not cause a substantial reduction in its audience, while it does retain some discretion over its overall song mix because it faces a downward sloping demand curve (i.e. the station is able to allocate spins such that playing song X rather than song Y will typically not result in a substantial loss of radio traffic).

The key economic point is that supply of these incremental spins (promoting sale of one record over another) are not likely to have a large impact on inter-radio station competition, but they are significant forces in competition between music publishers. Of course, radio stations do not have unlimited discretion to play any record they want for an unlimited number of spins --- at some point, the radio station’s disregard for its listening audience will induce closely monitored station switching. In general, however, radio stations have an insufficient incentive to promote a particular single without compensation from the publisher. One can think of payola as the record company sharing the profits created by the incremental record spins with the radio station.

Benjamin Klein and I lay out the details of this theory in our forthcoming analysis of slotting allowances (payments for shelf space) in the grocery industry (an older draft is available here).

The analogy to grocery store shelf space is instructive. Like radio stations, grocery stores face downward sloping demand curves (and therefore can change the allocation of products without losing all customers) and seek to maximize store traffic. The manufacturers of brand name products sold in grocery stores where we observe slotting allowances earn large incremental profits on additional sales created as a result of the supermarket allocating the product preferential shelf space (because the wholesale price is significantly greater than the manufacturer’s marginal cost) as the music publishers earn additional incremental profit from the record sales created by incremental spins. In each case, it is the distributor that does not take into account these additional profits in choosing the promotional resources to dedicate to a particular album or product. Therefore, the manufacturer must compensate the distributor for this additional promotion in order to achieve the efficient solution.

Once one understands why record company and radio station incentives do not coincide with respect to airtime, the logic of payola payments and their important role in the competitive process for music distribution is easier to digest. But other questions remain. Would a ban or mandatory disclosure of payola improve the outcome?

Most economists would be suspicious of an argument that more disclosure is a bad thing, although the Spitzer settlement goes beyond mandating disclosure and bans payola. What is interesting is that many feel more “deceived” by payments in the music industry then by slotting allowances or other payments for product placement. Why is this? Perhaps there is something different about radio. It could just be that consumers feel differently about music than about their groceries. From an economic standpoint, one could argue that consumers perceive the radio station has having something closer to a fiduciary duty to select the best products than does the supermarket. But at first glance it appears that radio stations ought to be more concerned with offering poor products since a consumer listening to that station can switch stations with the push of a finger rather than driving to a new supermarket. Perhaps paradoxically, both consumers and regulators seem to believe that competition is more likely to deceive consumers in the music industry. Let me be clear that I am not against a regulation demanding disclosure of these payments, but am merely suggesting that there are some very interesting questions surrounding this issue that have not been resolved.

The fact that payola is an important part of the competitive process did not escape Coase. Coase’s account includes a detailed history of payola tracing back to 1867 when public performers were paid to perform songs from a publisher’s catalog. The most striking feature of the history of payola is the series of unsuccessful attempts, each initiated by the music industry, to stop payola on their own (at least one attempt in 1890, 1916-17, 1933, the more well-known attempts to amend the Communications Act in 1960, and the shortlived suspension of independent promoters in 1986 following a 1984 Senate investigation).

Because radio airtime is a substitute for advertising, it is completely unsurprising that music publishers desired to collude to stop advertising --- an important dimension of competition for record sales. Collusion is notoriously difficult to accomplish in the first instance, and even harder to sustain because members of the cartel increase profits by deviating from the collusive agreement. Successful collusion often takes a third party to regulate the agreement and punish defectors. Occasionally, would-be cartel members are able to persuade the government to take the job. It appears that Spitzer may succeed where the recording industry has failed for over a century by stepping up to police the industry restriction on competitive payments for spins.

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Todd Zywicki has an interesting post today on Steve Levitt's argument that car seats do not save as many lives of children over the age of 2 as has been previously claimed.  (This argument is made briefly on page 152 of Freakonomics, but longer paper is available here.)  In fact, Levitt argues that the small benefits of toddler/child car seats do not justify the state-mandated price tag in order for parents to comply with the law.  (For example, in Illinois, children under 8 must be in some type of car seat or booster).  Levitt argues that the largest safety measure was moving children from the front seat to the back seat and requiring seat belts.

I love studies like this.  Studies where facts challenge your preconceived notions and your innate biases.  However, as Todd and the Freakonomics blog point out, not everyone does. 

So, activist groups want to keep this information off of the Today show and out of major newspapers because one child might die if parents of toddlers abandon car seats.  I am troubled with many stories of politicization of science.  Facts are facts.  As Todd points out, there are many laws we could pass to save one more child a year, but many of these are unfeasible or unpalatable.  We could just prohibit cars, for instance.  (Just a note:  I had a distant relative who tragically lost a baby after forgetting to strap the baby into the car seat before an accident ensued.  I'm sure others have tragic stories.  However, as much as I would love to reverse time to save that baby, I don't think putting a six year-old in a booster is going to do that.) 

In the mommy milieu, car seats seem to be a matter of social norms, which change from region to region.  Here, most kids five and up ride around in $19.99 booster seats without backs.  Some four and five year olds ride around in full boosters.  They probably affect comfort more than safety, but they conform to the most draconian booster laws.  However, my friend in west Austin tells me that the moms out there still strap their five year-olds into 5-point car seats, so she goes along with the norm.  If we deregulate toddler/child car seats, then these social norms would probably lead to differing seat belt norms between socioeconomic classes.  Is an $80 5-point booster worth it to you to increase the safety of your child, if at all?  But of course, marginal safety measures are luxuries already -- baby gates, outlet plugs, straps to attach your bookcases and stoves to the wall, coffee table bumpers, the list goes on and on.   

Of course, Levitt study doesn't take into account what I see as a positive externality of seat belts -- no hands slammed in the car door.  When I was growing up, I think some kid got his hand slammed in the car door every day.  So far (knock on wood), we're slam-free!  (Again, not worth making car seats legally required -- or criminalizing not having car seats.)

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The recent thread on gambling and financial markets reminded me of a conversation I had last week with Josh Wright, a George Mason lawprof who is also a bit of a poker shark. 

I think it would be possible to teach a great seminar on Poker & the Law.  Not having anything to do with the laws that regulate gambling.  Rather, I'd use poker concepts to explore issues in law and economics.  Having trouble laying down pocket kings with an ace on the board?  Welcome to the endowment effect.  Has the gal on your left check-raised you one too many times?  Let's talk about the importance of reputation and repeat play.  I could imagine a whole syllabus:

Week 1:  Efficient Markets.  Is poker gambling?  Is it a game of chance, or skill?  How does this compare to investing?  Does your answer depend on the skill of the investor, the efficiency of markets, or both?

Week 2:  Paternalism.  Should we let bad poker players keep playing?  How do table limits screen out bad players?  How do these limits compare to "accredited investor" rules?

Week 3:  Staged Financing.  Why is position so important in poker?  How much is the button worth?  How can you extract information from your opponents, and how do you maximize the opportunity of being the last to act?  How does this compare to staged financing in VC deals? 

Week 4:  Signaling.  Why is it important to defend your blinds?  How does this compare to the early stages of a negotiation?

Week 5:  Endowment Effect.  What makes people hold on to hand that they should lay down?  Do people tend to underreact to new information?  Why are pocket pairs so hard to fold?  How do markets take advantage of behavioral mistakes? 

Week 6:  Impact Bias / Salience.  Why does everyone have a slew of bad beat stories at their fingertips? 

Week 7:  Norms.  Why, at low-limit tables, is raising before the flop frowned upon? 

Week 8:  Taxation.  How does the table rake compare to taxation?  Is the rake noticeable or hidden?   

Week 9:  Taxation, continued.  When you tip the dealer, is it taxable to the dealer?  Is it deductible, if you are a professional poker player?  How does this question shed light on whether other "gifts," like blog tipjars, are taxable to the recipient?

Week 10:  Taxation, continued.  When you win a big pot, is that income?  What if you don't cash in your chips, but keep playing?  What if you leave them in a lockbox overnight?  What are poker chips really worth, and what does this tell us about the realization doctrine?  Cf. Zarin. 

Week 11: Marginal Utility of Wealth.  In tournament play, why do big stacks have such an advantage? 

... you get the idea.  I am semi-serious about this.  Many lawyers have good instincts as poker players, and a course like this could leverage that knowledge into a base of law and economics knowledge.  But I'm not sure my senior non-poker playing colleagues would embrace it so quickly.  (I could probably count on Bainbridge for support.)  Of course, significant poker experience would be a pre-requisite.  These days I think it's safe to say that more law students have significant poker experience than, say, take a course in corporate tax or regulation of financial intermediaries. 

The course also might have limited appeal for women.  Although there are some strong high-profile women players, the game remains overwhelmingly male. 

The best part of the course:  we could do a field trip to Vegas.  (Good luck squeezing that one by the Dean.)

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Law and Entrepreneurship News notes that Congress is nearing action on a bill to limit class action suits. I can't tell from the post or the underlying Forbes article whether or how the bill applies to securities and corporate law class actions, so the following thoughts may or may not be relevant to this specific bill. Still, I've been thinking recently about procedural rules for class actions, and how we should evaluate them. What are we trying to accomplish with these rules?

The traditional approach is that we are balancing costs and benefits. Class action suits may be the only effective way to enforce fiduciary duties and disclosure requirements in many circumstances. However, many class actions seem to be strike suits pursued purely for the profit of plaintiffs' counsel. How to encourage good suits while discouraging bad ones becomes the key question.

That's all true and important, but is cost/benefit analysis all there is to it? Larry Solum's recent paper Procedural Justice has spurred me into thinking about whether there is more. Larry stresses the independent importance of participation as a way of legitimating a system that will inevitably produce wrong results sometimes. If we go too far in discouraging class actions, have we effectively removed shareholders from participating in the development of corporate and securities law via case law?

And what about the distributive impact of different rules? Restrictive procedure helps directors and officers, hurts plaintiff attorneys, and has disputed effects on shareholders. Shouldn't we care about who's helped and who's hurt? Even if you don't care as a normative matter, does the differential impact of different rules help explain the politics in this highly controversial area? Thus, isn't the distributive impact of different rules important in understanding the political process that creates procedural rules?

Finally, the current bill seems to focus on limiting how many cases wind up in state court rather than federal court. So, it appears that most conservatives like federalism, except when they don't. Of course, precisely the same applies for most liberals. Is there anyone out there advocating a more consistent approach on federalism? Should we want more consistency, or are the differing implications of federalism for differing substantive matters just far more important than any general principles for or against federalism?

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After leaving the sunny beaches of Santa Monica, I didn't fly directly home to Wisconsin. I made a side trip to Berkeley, where I will present a paper tomorrow at the Law & Economics Workshop. The paper is tentatively entitled Control and Exit in Venture Capital Relationships, and it is one byproduct of an extensive empirical study of venture capital contracts. Coding contracts is hard work, and fortunately I had research assistance. The goal of this paper is to describe the structure of control rights and exit rights that characterize venture capital investing. It will challenge some prevailing views.

If you are interested in more detail, here is an excerpt from the introduction to the paper:

[T]his paper describes a relationship in which a combination of staged financing, board control, and contractual protections ensures that venture capitalists are able to pursue the most desirable exit options. The analysis describes a relationship in which venture capitalists initially receive a minority of the votes in the portfolio company and a minority position on the board of directors. As noted above, venture capital contracts often allocate board control roughly evenly among the venture capitalists and entrepreneurs, with outside ("swing") positions being determined by their collective voice. In these early stages of the relationship, the outside directors would usually be selected by consensus, as conflicts between the venture capitalists and entrepreneurs have not yet (fully) surfaced.

During this initial period, venture capitalists appear vulnerable in the sense that they do not formally control the board of directors. Nevertheless, they formally limit their exposure to harm in two important ways. First, they use negative contractual covenants (often called "protective provisions") to limit the ability of the entrepreneur to act opportunistically. These covenants typically prohibit the portfolio company from engaging in fundamental transactions (e.g., mergers) without prior approval of the venture investors, thus cutting off the means by which common stockholders have traditionally taken advantage of preferred stock. Second, even if the contractual provisions leave a gap for opportunism by the entrepreneur, venture capitalists typically have limited exposure to harm because they stage their financing of the venture, providing only limited funding during the initial stage, with increased funding at subsequent stages.

Venture capitalists are also protected in this initial phase of the relationship in less formal ways. For example, if outside directors are elected by consensus, one suspects that venture capitalists play a significant role in identifying and recruiting them. In the event of conflict between the venture capitalists and entrepreneur, such outside directors would have a natural inclination to side with the venture capitalists. In the context of large corporations, this inclination to favor those who are part of the "in" group would be called a "structural bias."

In the early stages of the investment, therefore, venture capitalists are less concerned about initiating exit than they are about protecting against forced exit. As the business matures, new conflicts begin to play a more prominent role. The entrepreneur acquires a taste for the private benefits associated with running a firm, and may not be willing to sacrifice those benefits on the altar of monetary return. For many venture-backed firms, the most important mid-stream decision is the choice between continuing and liquidating, and this decision provides the starkest potential conflict between the venture capitalist and the entrepreneur. Whether the interests of the firm as a whole would best be served by continuing as an independent business or Aliquidating@ through acquisition depends on myriad factors that are not susceptible to ex ante specification in the investment contract. The parties have implicitly agreed to revisit the issue at each stage of financing.

If the venture capitalists want to wrest control from the entrepreneur, they may demand majority board control in exchange for additional financing. In many instances, they will not need to make an explicit demand because board control shifts naturally when the venture capitalists acquire a majority of the voting rights. As implied by Cumming and MacIntosh, venture capitalists increase their control over exit decisions as time passes.

When combined, board control and voting control provide venture capitalists with nearly ironclad protection against entrepreneurial opportunism. Specific contractual protections are largely a forgotten formality. In some instances, however, venture capitalists never obtain board control or voting control. This pattern is most likely to emerge in the so-called "living dead" companies, where revenues are large enough to sustain the firm, but insufficient to justify an initial public offering. These companies are impervious to the constraints imposed by staged financing because they do not need additional financing to survive. In these circumstances, specific contract provisions allow venture capitalists to exert pressure on the entrepreneur to obtain a favorable exit.

If you want even more, feel free to download the paper, recognizing, of course, that the paper is still in draft form.

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Now that my grades are turned in, I have time to read some blogs. . . .

Yesterday, Todd Zywicki at VC noted that buying one's way into an HOV lane by buying a hybrid car is no different than buying one's way into a toll lane. True, although the hybrid car may also have other, positive affects on the externalities of increased traffic by causing less pollution. That being said, on a recent trip home to Milwaukee from Chicago's O'Hare airport, I noticed signs announcing that on a future date, the price of the toll for cash-basis drivers (and coin-basis) would be double the regular toll. Only drivers with toll tags will continue to pay the same toll without an increase. My husband immediately extolled the economic virtues of such a system.

I think one result of a system where cash tolls were more expensive would be to deter occasional users of the toll road who are only going to be on the road a short while. I have heard engineer-types explain that the worst roads for clogged traffic are highways with frequent exits and with drivers that are constantly entering and exiting. If the number of those drivers decreased, leaving the road populated with mostly long-distance commuters, than traffic problems may decrease.

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Any who have benefited from economic insights on law should know Aaron Director. This is from his obituary:

Mr. Director, who published sparingly, was perhaps best known for his influence on his students and colleagues at the University of Chicago Law School, including the jurists Robert H. Bork and Richard A. Posner. He also founded in 1958 the Journal of Law & Economics, which he co-edited with Nobel laureate Ronald H. Coase.

As a student at the University of Chicago Law School, I heard about Director's influence on the Chicago School, but we were more fascinated with Ronald Coase, who occasionally could be spotted in the library. I was surprised to learn that Larry Ribstein had antitrust from Posner and Director. I had never before thought of Larry as my link to the past ...

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This past week, our Law & Economics Reading Group discussed Ronald Coase's classic article, The Nature of the Firm. Here are a few thoughts ...

Coase was striving to craft a "clear definition of the word 'firm.'" This is what he proposed: "A firm consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur," as opposed to the price mechanism. And why would the direction of resources depend on an entrepreneur rather than the price mechanism? Because the entrepreneur, in some instances, can accomplish that direction more cheaply than the price mechanism. This is the fundamental insight from The Theory of the Firm, and while it seems obvious now, it was not at all obvious in 1937.

Mark Suchman ventured across Bascom Mall to participate and commented that rereading Coase reminded him how much Oliver Williamson had added. Ditto that sentiment. One thing that really stood out on this reading was the absence of any discussion of opportunism. Coase didn't use the word and didn't seem to consider this as a major motivation for the formation of firms. The transactions costs that most concerned Coase were information costs:

The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism. The most obvious cost of "organising" production through the price mechanism is that of discovering what the relevant prices are.

Coase is focused on the cost of labor throughout the article. His "firm" is really just an employment (principal-agent) relationship. (Interestingly, this relationship is not a legal firm, that is, a business entity.) Rather than bargaining over the price of specific tasks, therefore, a principal can hire an agent to be subject to the principal's control.

A factor of production (or the owner thereof) does not have to make a series of contracts with the factors with whom he is co-operating within the firm, as would be necessary, of course, if this co-operation were as a direct result of the working of the price mechanism. For this series of contracts is substituted one.... The contract is one whereby the factor, for certain remuneration ... agrees to obey the directions of the entrepreneur within certain limits. The essence of the contract is that it should only state the limits to the powers of the entrepreneur. Within these limits, he can therefore direct the other factors of production.

These sorts of relationships become more desirable as the desirable time for the relationship lengthens. On the other hand, as the firm grows, the costs of control rise. Spatial distance between transactions and substantive dissimilarity among transactions increase the costs of being a firm.

This last point raises the issue of institutional choice. (You cannot walk away from a conversation with Neil Komesar without having this conversation.) Spatial distance between transactions and substantive dissimilarity among transactions may increase the costs of being a firm, but they also increase the costs of market transactions. Coase observes the effect of technological innovation on transaction costs:

Changes like the telephone and the telegraph which tend to reduce the cost of organising spatially will tend to increase the size of the firm. All changes which improve managerial technique will tend to increase the size of the firm.

This looks suspiciously like single institutional analysis, but Coase recovers in the footnote (thanks to John Ohnesorge for pointing this out):

It should be noted that most inventions will change both the costs of organising and the costs of using the price mechanism. In such cases, whether the invention tends to make firms larger or smaller will depend on the relative effect on these two sets of costs. For instance, if the telephone reduces the costs of using the price mechanism more than it reduces the costs of organising, then it will have the effect of reducing the size of the firm.

That's enough to warm Neil's heart.

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If you are interested in law and economics, you will want to read about Hugo Mialon's research agenda. Mialon uses data from the 2000 Orgasm Survey to talk about the Fourth and Fifth Amendments. No, I'm not kidding.

Thanks to Slate for the pointer.

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Last week we inaugurated the Law & Economics Reading Group at the University of Wisconsin Law School. As you can imagine, the constituency for this group is smaller than for the Law & Society Reading Group (if that existed). Nevertheless, several members of our faculty enjoy talking about economics, so we settled on last Wednesday afternoon as an appropriate time to discuss our first work: Neil K. Komesar, Law�s Limits: The Rule of Law and the Supply and Demand of Rights (2001). Of course, Neil is on the faculty, and he is a great colleague, so we decided to take advantage of him.

Neil's big idea is comparative institutional analysis. It's very simple in concept, though often neglected in practice. In his most recent book, Neil concentrates on four institutions: courts, political processes, markets, and norms. These institutions are society�s mediators. Simply stated, their task is to make decisions about resource allocation (or, in my words, they resolve conflicts).

The goal of comparative institutional analysis is to define a role for law, by which Neil means �the adjudicative process.� In comparing markets and courts, many policymakers and commentators employ a single institutional framework that skews the analysis. For example, by focusing on the characteristics of courts, commentators have proposed judicial intervention where market solutions are superior or judicial abstention where the market is dysfunctional. Alternatively, by focusing on the shortcomings of the market, commentators often argue for judicial intervention in areas where the courts have little to offer.

Comparative institutional analysis is complicated by the fact that institutional competencies are not static. Neil identifies two attributes of transactions that seem to influence the quality of institutional performance most: the number of parties connected to the transaction and the complexity of the transaction. Importantly, �[i]nstitutions tend to move together,� and as numbers and complexity increase, institutional competence declines across the board. As a result, �analysis of law and rights will usually involve a series of close institutional choices.�

I am currently attempting to employ comparative institutional analysis in a paper on two important doctrines for the "law of venture capital contracting" (whatever that is!): the doctrine of independent legal significance and the doctrine of good faith. I will present the paper at a conference called "Venture Capital After the Bubble" in Portland, Oregon, on March 5. The conference is sponsored by Willamette Law Review, and it looks like a good lineup.

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I made a proposed Top 10 list of law and economics articles below. Some readers commented on the list, and Kaimi Wenger found a nice syllabus from Professor Avery Wiener Katz at Columbia. From the comments below and the Katz list, there are a few articles that I would like to add to the Top 10, if I can find the room.

Here they are (again in chronological order):

* George Stigler, The Economics of Information, 64 J. Pol. Econ. 213 (1961)

* George Akerlof, The Market for Lemons: Qualitative Uncertainty and the Market Mechanism, 84 Q. J. Econ. 488 (1970)

* Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under Risk, 47 Econometrica 263 (1979)

* Robert Mnookin & Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 Yale L.J. 950 (1979)

* Robert Cooter, Unity in Tort, Contract and Property: The Model of Precaution, 73 Cal. L. Rev. 1 (1985)

Here is my original Top 10:

* Ronald Coase, The Nature of the Firm, 4 Economica (n.s.) 386 (1937)

* Ronald Coase, The Problem of Social Cost, 3 Journal of Law and Economics 1 (1960)

* Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965)

* Guido Calabresi and Douglas Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harvard Law Review 1089 (1972)

* Richard A. Posner, A Theory of Negligence, 1 J. Legal Stud. 29 (1972)

* Richard A. Posner, An Economic Approach to Legal Procedure and Judicial Administration, 2 J. Leg. Stud. 399 (1973)

* Richard A. Epstein, A Theory of Strict Liability, 2 J. Legal Stud. 151 (1973)

* Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. Fin. Econ. 305 (1976).

* Jules Coleman, Efficiency, Auction and Exchange: Philosophic Aspects of the Economic Approach to Law, 68 California Law Review 221 (1980)

* George L. Priest & Benj