Law JournalFeeds

The Journal of Legal Studies, Volume 39, Issue 1, Page 1-31, January 2010.

Abstract Laws are known to be replete with loopholes. The reason is generally thought to lie in the divergence between the text and the purpose of a law. Practical constraints supposedly make laws unavoidably over‐ or underinclusive. Lawyers who exploit loopholes are thought to be taking advantage of that over‐ and underinclusiveness. This essay offers a different perspective. Most loopholes have nothing to do with the over‐ or underinclusiveness of rules. This is best seen by exploring a particular subset of rules that reveal most clearly what is going on: the rules of voting. Arrow’s famous theorem teaches us that all halfway decent voting rules are vulnerable to agenda manipulation. Fundamentally, it will turn out, all legal rules are analogous to voting rules and all loophole exploitation analogous to agenda manipulation. The loophole‐exploiting lawyer no more deserves to be criticized, sanctioned, or otherwise frustrated in his efforts than does the shrewd parliamentarian. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 159-200, January 2010.

Abstract The fashion market is an anomaly: innovation is vigorous, but original producers are substantially unprotected against imitation. We account for this anomaly through a cooperative innovation model in which producers prefer an incomplete property regime that permits some imitation to alternative regimes that permit no imitation or all imitation, independent of budget constraints. A property regime that permits positive but limited levels of imitation operates as a collective insurance mechanism that alleviates the risk of recoupment failure in a market characterized by demand uncertainty, long lead times, skewed returns, and rapid product obsolescence. This model is compatible with producers’ selective enforcement of intellectual property protections, privately administered quasi‐copyright schemes, and institutional mechanisms that facilitate seasonal coordination of design outcomes. This model potentially generalizes to certain other markets in which innovation persists despite substantial imitation. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 289-324, January 2010.

Abstract In September 2000, a Brussels court ruled in favor of a hedge fund that held an unpaid debt claim against the Republic of Peru. The decision was based on a novel interpretation of the common pari passu clause. Policy makers and practitioners suggested that this decision signaled a paradigm shift that caused a significant increase in the risk of holdout litigation faced by sovereign debtors. Over the ensuing years, multiple reform solutions were implemented including the revision of certain contractual terms, the filing of amicus briefs in a key New York case, and the passage of legislation in Belgium. This article investigates whether the markets perceived an increase in risk in sovereign debt in the wake of the Brussels court decision. And, to the extent the markets reacted to the increase in legal risk, did any of the antidotes that were implemented to reduce the supposed increased holdout risk work? [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 245-288, January 2010.

Abstract Building on Kahneman and Tversky’s prospect theory, this paper presents a series of experiments designed to reveal people’s preferences regarding attorneys’ fees. Contrary to common economic wisdom, it demonstrates that loss aversion (rather than risk aversion or incentivizing the lawyer to win the case) plays a major role in clients’ preferences for contingent‐fee arrangements. Facing a choice between a mixed gamble and a pure positive one, plaintiffs prefer a contingent fee (framed as a pure positive gamble), even if it yields an expected fee that is 2 or 3 times higher than a noncontingent one (framed as a mixed gamble). At the same time, defendants, who face a choice between two pure negative gambles, are typically risk seeking and prefer fixed fees. Our findings indicate that information problems and lack of alternative fee arrangements probably do not loom large in clients’ choice of fee arrangement. We discuss the policy implications of our findings. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 109-157, January 2010.

Abstract We study the role of attorneys as arbitrators in securities arbitration. We find that arbitrators who also represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor‐claimants than do other arbitrators. We find no significant effect for attorney‐arbitrators who represent investors or both investors and brokerage firms. The relation between representing brokerage firms and arbitration awards remains significant even when we control for political outlook. Arbitrators who donate money to Democratic political candidates award greater compensation than do arbitrators who donate to Republican candidates. We also study the dynamics of panel interaction. We find that the position of chair is an important factor in assessing an arbitrator’s influence, although the financial relationships of other arbitrators may also affect arbitration awards. Coalitions with the other arbitrators are also important. If the chair and another panelist possess a common attribute, the effect on the arbitration award increases. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 63-108, January 2010.

Abstract The socially desirable design of the appeals process is analyzed assuming that it may involve either an initial discretionary review proceeding—under which the appeals court would decide whether to hear an appeal—or else a direct appeal. Using a stylized model, I explain that the appeals process should not be employed when the appellant’s initial likelihood of success falls below a threshold, that discretionary review should be used when the likelihood of success lies in a midrange, and that direct appeal should be sought when this likelihood is higher. Further, I emphasize that appellants should often be able to choose between discretionary review and direct appeal, notably because appellants may elect discretionary review to save themselves (and thus the judicial system) expense. This suggests the desirability of a major reform of our appeals process: appellants should be granted the right of discretionary review along with the right that they now possess of direct appeal at the first level of appeals. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 201-244, January 2010.

Abstract No large‐scale empirical study on condemnation compensation has been done in the past 30 years. Several state legislatures, in response to Kelo v. City of New London, have changed laws to increase condemnation compensation, despite the lack of empirical grounds. To fill in the empirical gap, I use hedonic regression models and about 80,000 sales to estimate the fair market value (FMV) of 430 condemned properties whose owners reached compensation settlements with the condemnor, New York City, between 1990 and 2002. More than 50 percent of these condemnees were compensated with less than FMV, about 40 percent received more than FMV, and less than 10 percent received FMV. Owners of residential properties and nonresidential properties alike often received extreme compensations that are less than 50 percent or more than 150 percent of FMV. Extreme compensation results from bias‐prone and inaccurate appraisal methods. Using the available data, I find that compensation level does not correlate with any factor. [...]

The Journal of Legal Studies, Volume 39, Issue 1, Page 33-61, January 2010.

Abstract This paper examines how filing for bankruptcy under Chapter 13 helps financially distressed homeowners. We develop a model of debtors’ decisions to default on their mortgages and file for bankruptcy and evaluate it using a new data set of debtors who filed for bankruptcy under Chapter 13 in 2006. We also examine the effect of introducing cram down of residential mortgages in Chapter 13, which would reduce the total amount that debtors owe. We find that 96 percent of Chapter 13 filers are homeowners and 79 percent of filers repay mortgage debt in their repayment plans, while just 9 percent of filers replay only unsecured debt in their plans. Thus, filers use Chapter 13 almost exclusively as a save‐your‐home procedure. Under current law, only about 1 percent of Chapter 13 filers who would otherwise have defaulted save their homes, but this fraction would increase to 10 percent if cram down were introduced. We estimate that the cost to lenders of cram down would be $264,000 per home saved and $30 billion in total. [...]