The 2008 crash has left all the established economic doctrines - equilibrium models, real business cycles, disequilibria models - in disarray. Part of the problem is due to Smith’s "veil of ignorance": individuals unknowingly pursue society’s interest and, as a result, have no clue as to the macroeconomic effects of their actions: witness the Keynes and Leontief multipliers, the concept of value added, fiat money, Engel’s law and technical progress, to name but a few of the macrofoundations of microeconomics. A good viewpoint to take bearings anew lies in comparing the post-Great Depression institutions with those emerging from Thatcher and Reagan’s economic policies: deregulation, exogenous vs. endoge- nous money, shadow banking vs. Volcker’s Rule. Very simply, the banks, whose lending determined deposits after Roosevelt, and were a public service became private enterprises whose deposits determine lending. These underlay the great moderation preceding 2006, and the subsequent crash.

The Economic Institutions of Capitalism

Foundations of Economic Analysis of Law, by Steven Shavell, 2004, The Belknap Press of Harvard University Press, 737 pages Steven Shavell has contributed to the foundations of economic analysis of law in different manners According to Posner (2006), he is a member of the third generation of economic analysts of law-Coase, Becker, and Calabresi being the first group, with Posner himself, Landes, and Ehrlich forming the second Shavell has published several books and more than 100 articles on economics and on the economics of law He has contributed to the principal-agent theory (Shavell, 1979b) and, more particularly, to the moral hazard literature (Shavell, 1979a) This book proposes an overview of the fields in the economics of law to which the author has contributed It also covers in detail other fields and many contributions to the literature The emphasis is on theory, but some empirical facts are mentioned The book has twenty-nine chapters in seven parts or sections, a comprehensive list of references (786 references in the References section of the book), and two indexes (authors and subjects) It covers many subjects related to the economic analysis of basic law Particular attention is devoted to the positive analysis of law, although the normative aspect is also well covered The book is addressed to two broad audiences: economists and individuals interested in law with no formal background in economics There is no formal economic analysis in the text (but formal models are sometimes sketched in footnotes) and no detailed discussion of legal doctrine The subjects covered are important for any legal system: laws related to property, accidents, contracts, crimes, and their litigation process Specialized subjects such as labor, bankruptcy, or environmental law are not covered However, for the readers of the Journal of Risk and Insurance, accident law is discussed in detail (one section including five chapters that will be analyzed below) Chapter 1, the introduction to the book, presents the author's basic philosophy with regard to the economics of law He first distinguishes the positive analysis of the economics of law from its normative analysis Using his example for automobile accidents, the positive analysis is concerned with how a liability system affects accidents and litigation expenses, whereas the normative analysis looks at the social desirability of a liability system Two standard and important assumptions are made for the normative analysis First, the normative analysis does not take any of the distributive aspects into account; this is left to the income tax system and other transfer mechanisms Second, the notions of fairness and morality are not integrated in the analysis, although a significant effort is made to do so in part seven of the book The first four parts of the book treat areas related to private law: property law, liability for accidents, contract law, and civil litigation They are called private because they are enforced by the activities or suits of private parties The first of the four parts is devoted to property law Chapter 2 covers the rationale of ownership and the emergence of property rights The chapter defines concepts that are not often discussed in the standard economic literature For example, the author treats property rights, their justification, and their emergence Property rights are themselves divided into two types of rights: possessory rights and transfer rights The justification of property rights is mainly related to incentives: incentives to work, incentives to maintain and improve things, and incentives to transfer things Their emergence occurs when the advantages are greater than the costs of instituting and maintaining them Chapter 3 is devoted to the division of property rights while chapter 4 discusses, in detail, the acquisition and transfer of property rights, including transfer after death Chapter 5 concerns the issues of conflict and cooperation associated with the use of property rights …

Foundations of Economic Analysis of Law

The concept of market failure was originally presented by economists as a normative explanation of why the need for government expenditures might arise. Gradually, the concept has taken on the form of a full-scale diagnostic tool frequently employed by policy analysts to determine the exact scope and nature of government intervention. For some time, economists have known that the market failure idea is conceptually flawed. The authors of this article demonstrate why this is so, employing concepts drawn from the perspective of transaction costs. In a review of empirical studies, they further show how the market failure diagnostic leads analysts to make generalizations that are not supported by facts. Transaction cost analysis helps to explain the underlying processes involved. © 1999 by the Association for Public Policy Analysis and Management.

/pdf/the-failure-of-market-failure-49wei02mn2.pdf

The failure of market failure

An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach

1. Making non-legalities in international law 2. Illegality and the torture memos 3. Black holes and the outside within: extra-legality at Guantanamo 4. Doing deals: pre- and post-legal choice in transnational financing 5. Receiving climate change: law, science and supra-legality 6. Death, disaster and infra-legality in international law Conclusion.

Non-Legality in International Law: Unruly Law

This article starts from the premise that contract parties care about fairness and argues that reciprocal fairness concerns can lead parties to engage in wasteful retaliation. In particular it analyzes reciprocal fairness issues in the context of venture capital contracts. The bargaining power of venture capitalists and the (well-documented) over-optimism of entrepreneurs can lead entrepreneurs to enter into one-sided contracts. In fact, standard venture capital contracts transfer effective control over the venture to the venture capitalist. As high-powered incentive mechanisms and one-sided contract provisions are triggered, entrepreneurs will begin to revise their initial (over-optimistic) beliefs. This belief-revision will increase the likelihood that an entrepreneur will retaliate. Entrepreneurs control an important firm asset - their human-capital. This control over the production and dissemination of innovation-specific knowledge will given an entrepreneur the power: (1) to protect her contractual interests; and (2) to retaliate against venture capitalist actions deemed unfair. The article develops various theoretical and doctrinal implications.

/pdf/reciprocal-fairness-strategic-behavior-venture-survival-a-4ytkxbc8bn.pdf

Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms

This Article examines the effect of time-inconsistent preferences on the decision-making process of criminal offenders. It shows that even a relatively small preference for immediate gratification and over-optimism about their future self-control can lead hyperbolic criminals to repeatedly commit welfare-reducing crimes - i.e., those that (from a detached, long-term perspective) have negative expected returns. The Article makes four principal contributions. First, it develops a theory of repeated criminal misconduct that incorporates the findings of the growing behavioral economics literature on hyperbolic discounting and self-control problems. Second, it identifies various deterrence implications of the theory, showing, among other things, that the optimal sanctions of standard (or neoclassical) law & economics models will under-deter hyperbolic offenders. Third, it explains a number of well-known empirical puzzles of neoclassical theory, including why policymakers punish repeat offenders more harshly and spend more on enforcement than the theory predicts, as well as why, in some areas, such as tax compliance, people routinely forego committing crimes with positive expected returns. Fourth, the Article describes various implications of the time-inconsistent misconduct theory for the law of conspiracies, entrapment, and domestic violence.

Hyperbolic Criminals and Repeated Time-Inconsistent Misconduct

This article models the long-term relationship between managers and shareholders as a multi-stage (repeated) bargaining game. In each stage of the game, the parties reach explicit and tacit bargains to divide two types of stakes: “substantive” or monetary stakes, such as dividends, retained earnings, and management compensation; and “procedural” stakes, which are bargains over the rules of the game applicable in future stages. The article shows that even a relatively small bargaining advantage by either managers or shareholders can greatly impact the governance institutions that emerge and survive within a particular corporation. It then argues that a variety of institutional features of modern public corporations give managers a great deal of bargaining power over both substantive and procedural stakes. This allows managers great leeway over their compensation packages in any one period and the ability to ratchet-up the bargaining power that they will enjoy in future periods – e.g., making it more difficult for shareholders to monitor and replace them. By focusing on the dynamic nature of corporate governance relationships, the bargaining model provides a novel explanation of the Van Gorkom decision, managerial entrenchment, and the general path-dependence of compensation practices within corporations.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1657717_code56995.pdf?abstractid=1657717&mirid=5

Towards a Bargaining Theory of the Firm

This Article has two principal objectives. The first is to develop a theory that isolates four factors that will affect whether offenders engage in repeated time-inconsistent misconduct: (1) an offenderis level of present-bias; (2) her awareness of the true magnitude of her future resoluteness or willpower to keep to her long-term preferences; (3) the availability of cost-effective "commitment devices" to help offenders overcome the pull of immediate gratification; and (4) the extent to which criminal sanctions and enforcement efforts directly target the short-term, time-inconsistent preferences of offenders. In the end, any theory has to be open to empirical testing; identifying these four factors will help in this endeavor.

This Article's second objective is to identify various mechanisms available to policymakers to efficiently deter repeated time-inconsistent misconduct. The key insight is that a hyperbolic offender will be underdeterredowill make short-term decisions to commit nonworthwhile crimesowhenever the immediate benefits from misconduct (with the added weight due to the offenderis present-bias) are less than the delayed criminal sanctions. It thus follows that one way to deter time-inconsistent misconduct is through enforcement policies that directly reduce the immediate benefits (or increase the immediate costs) of criminal activity. Alternatively, criminal sanctions have to be set high enough to overcome the added weight that a hyperbolic offender gives to immediate benefits. One of the contributions of this Article is showing that, all other things being equal, the optimal sanctions of the neoclassical approach will underdeter hyperbolic offenders. The Article also suggests a series of less obvious policy approaches to time-inconsistent misconduct, such as providing offenders with "off-the-rack" commitment devices. Finally, the theory also helps explain various puzzles of neoclassical deterrence theoryofor example, why policymakers punish repeat offenders more harshly and increase enforcement expenditures before resorting to increasing sanctions to the maximum extent feasible, as well as why, in some areas, people violate the law much less frequently than predicted by neoclassical models.

/pdf/hyperbolic-criminals-and-repeated-time-inconsistent-118e7w4vki.pdf

/pdf/reciprocal-fairness-strategic-behavior-venture-survival-a-4892a3kbtz.pdf

Manuel A. Utset

Papers

Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms

Hyperbolic Criminals and Repeated Time-Inconsistent Misconduct

Towards a Bargaining Theory of the Firm

Hyperbolic Criminals and Repeated Time-Inconsistent Misconduct

Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms