March 12, 2009
Theoretical Implications of a Supreme Court Ruling in Jones v. Harris.
Posted by William Birdthistle

And now, to conclude, a few thoughts on the theoretical implications of a Supreme Court ruling in Jones v. Harris.

While this case is sure to become a seminal mutual fund case, it’s also likely to shed a great deal of light on the Court’s disposition towards classical versus behavioral economic theory, the broader question of excessive compensation, and the ability of courts to evaluate dueling econometric analyses of market competition.

The first -- and perhaps the broadest and most interesting -- ramification of Jones v. Harris is the prominence of Posner’s reevaluation of his earlier views on law and economics.  As Brian Tamanaha has noted, the current financial situation appears to have prompted Posner, Gary Becker, and others (though perhaps not Easterbrook) to reconsider the efficacy of a law-and-economics orthodoxy.  In its ruling, the Court may reveal to what extent it, too, will adopt a more behavioral strain of economic theory in this and other contexts.

Second, although claims of excessive executive compensation are the typical province of Delaware courts, this case presents an opportunity for the Supreme Court to expound upon the issue, since the fees to advisers here are similar to executive remuneration in typical operating companies.  Indeed, Posner emphasized this point in his dissent, declaring that the panel’s economic analysis “is ripe for reexamination on the basis of growing indications that executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation.”

Third, this case should demonstrate the comfort and skill with which the Supreme Court can evaluate dueling econometric analyses of market competitiveness, since the Coates & Hubbard paper and contradictory studies are central to the issues here.  If even the Supreme Court has difficulty with these methodologies, lower courts may be seriously challenged.

Congress first revisited the Company Act in 1970, thirty years after its original enactment.  Now that another forty years have passed, perhaps the current economic situation will prompt another set of legislative revisions, especially if the Court struggles with Jones v. Harris.

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