Showing papers in "The Journal of Law and Economics in 1983"
TL;DR: The authors argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. But they do not consider the role of decision agents in these organizations.
Abstract: ABSENT fiat, the form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs.1 Our goal is to explain the survival of organizations characterized by separation of "ownership" and "control"-a problem that has bothered students of corporations from Adam Smith to Berle and Means and Jensen and Meckling.2 In more precise language, we are concerned with the survival of organizations in which important decision agents do not bear a substantial share of the wealth effects of their decisions. We argue that the separation of decision and risk-bearing functions observed in large corporations is common to other organizations such as large professional partnerships, financial mutuals, and nonprofits. We contend that separation of decision and risk-bearing functions survives in these organizations in part because of the benefits of specialization of
14,045Â citations
TL;DR: Jensen and Fama as mentioned in this paper developed a set of propositions that explaim the special features of the residual claims of different organizational forms as efficient approaches to controlling agency problems and explained the survival of organizational forms in specific activities.
Abstract: Social and economic activities, like religion, entertainment, education, research, and the production of other goods and services, are carried on by different types of organizations, for example, corporations, proprietorships, partnerships, mutuals and nonprofits. There is competition among organizational forms for survival. The form of organization that survives in an activity is the one that delivers the product demanded by customers at the lowest price while covering costs. The characteristics of residual claims are important both in distinguishing organizations from one another and in explaining the survival of organizational forms in specific activities. This paper develops a set of propositions that explaim the special features of the residual claims of different organizational forms as efficient approaches to controlling agency problems. © M. C. Jensen and E. F. Fama, 1983 Michael C. Jensen, Foundations of Organizational Strategy Chapter 6, Harvard University Press, 1998. Journal of Law & Economics, Vol XXVI (June 1983) This document is available on the Social Science Research Network (SSRN) Electronic Library at: http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=94032 AGENCY PROBLEMS AND RESIDUAL CLAIMS
3,594Â citations
TL;DR: The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear.
Abstract: The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear.... In creating these new relationships, the quasi-public corporation may fairly be said to work a revolution. It ... has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.1
2,407Â citations
TL;DR: Agency problems, auditing, and the theory of the firm: Some Evidence as discussed by the authors, by Ross L. Watts and Jerold L. Zimmerman, was a seminal work in the field of law and economics.
Abstract: Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14
1,198Â citations
TL;DR: The analysis of residual claimants usefully extends the economics of internal organization to include partnerships, mutuals, nonprofits, and the like as mentioned in this paper, which is an important argument and one with which I broadly concur.
Abstract: EUGENE FAMA and Michael Jensen's treatment of the "Separation of Ownership and Control" is both insightful and informative. It deepens our understanding of corporate control, and the analysis of residual claimants usefully extends the economics of internal organization to include partnerships, mutuals, nonprofits, and the like. The basic argument is this: specialized governance structures arise in response to the efficiency needs of each type of organization. This is an important argument and one with which I broadly concur. They couple this, however, with a strong suggestion that these structures have reached a high degree of refinement-on which account there is not now, if indeed there ever has been, an organization control problem with which scholars and others are legitimately concerned. On this point I have grave doubts. My discussion of the paper addresses three issues: What is the relation, if any, of the hierarchical organization of the firm to economic performance? What relation, if any, does residual claimant status have to the composition and character of the board of directors? And is there now or has there ever been a corporate control problem? I deal with each of these issues in order.
318Â citations
TL;DR: In this article, the authors argue that shareholders are apathetic in the best of times because it is so unlikely that their votes would make a difference, but managers' domination of the proxy machinery is the coup de grace.
Abstract: ONE of the themes of The Modern Corporation and Private Property is that managers use the machinery of voting to seize control of corporations. Managers name the slates of candidates and control the agents who cast proxy ballots. Shareholders are apathetic in the best of times because it is so unlikely that their votes would make a difference, but managers' domination of the proxy machinery is the coup de grace. "The proxy machinery has thus become one of the principal instruments not by which a stockholder exercises power over management of the enterprise, but by which his power is separated from him."' Hundreds of people, writing in what they take to be the Berle and Means tradition, have argued that the machinery of voting must be reformed so that the firm's "owners" may reclaim "power over management." They call for managers to disclose fully their own interests and the status of the firm at the time of solicitation; for corporations to give shareholders free access to the proxy machinery so that shareholders may make their own proposals; for corporate boards to establish nominating committees of directors unaffiliated with management, and for these committees to control access by both managers and shareholders at large to the election machinery. Other proposals call for shareholders to make more decisions themselves, including selection of the firm's accountants, and for legal restrictions on the ability of directors to spend firms' funds campaigning for reelection. Implementation of these proposals, it is said,
313Â citations
TL;DR: The economics of financial institutions in generating and exchanging accounting information essential to the operation of four-party cashless payment systems is discussed in this article. But the authors focus primarily on the economics of banks in generating, exchanging, and storing accounting information.
Abstract: CONSUMER purchases by means other than currency-for example, by check, credit card, or debit card-generate a paper record that must be handled by the merchant, the merchant's bank, the purchaser's bank, and the purchaser. Before coming to Washington, I was involved in several controversies over the terms on which these types of records would be created and exchanged between banks. That involvement led me to think that economics provides novel and useful insights into the process of interchange and the payment systems of which they are a part. In this article I examine some of those lessons. I focus primarily on the economics of financial institutions in generating and exchanging accounting information essential to the operation of four-party cashless payment systems. Section I develops the economic theory of these systems, and Section II examines the evolution of four-party cashless payment systems in the light of this theory.
296Â citations
TL;DR: Block booking is the practice of licensing, or offering for license, one feature or group of features on the condition that the exhibitor will also license another feature or groups of features released by distributors during a given period as mentioned in this paper.
Abstract: BLOCK booking involves \"the practice of licensing, or offering for license, one feature or group of features on the condition that the exhibitor will also license another feature or group of features released by distributors during a given period.\"' This contractual arrangement, common in the American motion picture industry from as early as 1916,2 was declared illegal in two Supreme Court decisions, Paramount Pictures,3 where blocks of films were rented for theatrical exhibition, and Loew's,4 where blocks of films were rented for television exhibition. The primary legal objection to block booking is that the practice \"extends monopoly power.\" In Paramount the Supreme Court stated that block booking \"adds to the monopoly of a single copyrighted picture that of another copyrighted picture.\"5 Similarly, in Loew's, the Court asserted that a distributor cannot use the market power granted by the copyright in a \"desirable\" film to force exhibitors to license a second \"undesirable\" film, stating that \"the antitrust laws do not permit a compounding of
218Â citations
203Â citations
TL;DR: The reception of Berle and Means's The Modern Corporation and Private Property by the economics profession in the first decade of the twenty-first century is examined in this article, where the authors examine the reception of this book by the profession, particularly by economics profession, in its first decade.
Abstract: THERE are not many books fifty years old whose central argument is identified for modern economists simply by naming the work, but Berle and Means's The Modern Corporation and Private Property is surely one. Every schoolboy, as Macaulay would say, knows that they discovered or asserted or proved or were otherwise joined to the proposition that ownership and control have been separated in the large corporation. Moreover this separation had large, but not easily recalled, effects on the conduct of corporate enterprise. This essay will examine the reception of this book, particularly by the economics profession, in its first decade. Our interest will be not so much in the novelty or validity of the book's message as in how it was understood and received. The process by which a proposition of great potential scientific and political significance gets established in a discipline is fascinatingly mysterious. Our investigation will support the view that doctrines and theories congenial to an intellectual milieu are accepted quickly and widely, although not necessarily as uncritically as the work of Berle and Means was accepted.
132Â citations
TL;DR: In the real world, complete, fully contingent, costlessly enforceable contracts do not exist as mentioned in this paper, and contracts are incomplete for two main reasons: uncertainty implies the existence of a large number of possible contingencies, and it may be extremely costly to know and specify in advance responses by the transacting parties to all of these possibilities.
Abstract: IN the real world, as opposed to the standard economic model, complete, fully contingent, costlessly enforceable contracts do not exist.' Contracts are incomplete for two main reasons. First, uncertainty implies the existence of a large number of possible contingencies, and it may be extremely costly to know and specify in advance responses by the transacting parties to all of these possibilities. Second, contracts are incomplete because particular contractual performance, such as the level and form of energy an employee is to devote to a complex task, may be prohibitively costly to measure and hence to specify contractually. Therefore, contractual breach may often be difficult to prove to the satisfaction of a thirdparty enforcer such as a court. Given incomplete contracts, a general "agency problem" is likely to exist. While the standard statement of the problem assumes prohibitive costs of measuring agent inputs and therefore the necessity of contracting on the basis of assumed measurable output, it is merely one case of the broader class of phenomenon implied by incomplete contracts. A shirking problem exists even if performance is contractually related not to output measures but rather to imperfectly measured input supply. If one individual is hired by another to supply particular services and make particular decisions, it is unlikely that this service flow can be either specified ex ante or precisely measured ex post so that an incentive problem is not created. For example, the number of contingencies is so large and the
TL;DR: In this paper, the authors analyze inefficiencies that may emerge from the noncompensated transfer of valued rights among persons, based on the fact that all non-commissioned transfers are rents to the recipients.
Abstract: My purpose in this paper is to analyze inefficiencies that may emerge from the noncompensated transfer of valued rights among persons. This source of inefficiency has not, to my knowledge, been fully incorporated either in the economic theory of property rights or in orthodox tax analysis. My discussion is based on the elementary fact that all noncompensated transfers are rents to the recipients. Implications for the emergence of rent-seeking behavior follow straightforwardly. The now-familiar propositions to the effect that rent seeking may dissipate economic value can be applied to a variety of transfer settings, only a few of which are explored in this paper.1 To the extent that the efficiency criterion is the relevant norm, direct implications may be drawn for policy with respect to the laws or rules for succession.
TL;DR: There is an uneasy coexistence between federal antitrust laws and state regulatory regimes as mentioned in this paper, and many scholars believe that regulatory laws owe more to interest group politics than to legislators' concern for the welfare of society at large.
Abstract: THERE is an uneasy coexistence between federal antitrust laws and state regulatory regimes. Regulation displaces competition. Displacement is the purpose, indeed the definition, of regulation. Limitations on the number of taxicabs, licensing of barbers and dentists, health and safety codes, zoning laws, and price supports for milk depend on a belief that competitive markets should be replaced with something else. Sometimes legislation may be justified as necessary to correct "imperfections" in markets, but in most cases legislation is designed to defeat the market altogether. Although state and local legislatures may say that their schemes are better than the markets they replace, many scholars believe, and much evidence shows, that regulatory laws owe more to interest group politics than to legislators' concern for the welfare of society at large.' The state and local laws reduce allocative efficiency and
TL;DR: In this article, the authors investigate the variation in daily newspaper advertising rates due to demand and cost function changes associated with local daily newspaper-broadcasting cross-ownership, daily newspaper chain ownership, and local daily newspapers and broadcast competition, using the results of cross-section reduced-form log-linear multiple regressions with a sample of 815 daily newspapers.
Abstract: THE continuing decline in the number of cities with competing daily newspapers, the significant increase in the number and size of newspaper chains owning two or more daily newspapers published in different cities, and the increase in local newspaper cross-ownership of radio and television stations in the same city are frequently cited as evidence of a deteriorating competitive situation and of the need for corrective government action, especially by the FCC.' I investigate the variation in daily newspaper advertising rates due to demand and cost function changes associated with local daily newspaper-broadcasting cross-ownership, daily newspaper chain ownership, and local daily newspaper and broadcast competition. I answer the following four questions using the results of cross-section reduced-form log-linear multiple regressions with a sample of 815 daily newspapers. Does joint profit maximization of the cross-owned daily newspaper and
Journal Article•
TL;DR: The Modern Corporation and Private Property (MCP) as discussed by the authors is one of the most popular books of the 1930s and has an enduring influence on public opinion and public policy in the United States.
Abstract: FEW American books have been as highly acclaimed as The Modern Corporation and Private Property, and fewer still enjoy as illustrious a reputation fifty years after they were published. This book is a living classic, with an enduring influence on public opinion and public policy. John Kenneth Galbraith did not exaggerate when he wrote that The Modern Corporation and Private Property was, with Keynes's The General Theory of Employment, Interest and Money, one of the two most important books of the 1930s.' In the popular press, reviews ranged from enthusiastic to euphoric. Writing in the Nation, Ernest Gruening declared that it was an "epochmaking volume," while in the New Republic, Stuart Chase said, "There may have been a better book than this published in 1932, but I did not see it. By 'better' I mean more significant, clearly organized, lucid, scrupulously documented. It is seldom that one finds such epoch-shattering material in such scholarship."2 On the front page of the highly influential book section of the New York Herald-Tribune, Professor Charles A. Beard wrote: "In the time to come this volume may be proclaimed as the most important work bearing on American statecraft between the publication of the immortal 'Federalist' by Hamilton, Madison and Jay and the opening of the year 1933." He added that its publication "will mark a sharp turning point in fundamental, deep-thrusting thinking about the American State and American civilization."3
TL;DR: In this article, Shavell has argued that damages rules substitute for complete contingent claims contracts in which the parties specify the required performance in every state of the world, and that expectation damages lead to the appropriate amount of breach although, in the presence of a reliance decision, promisees tend to overrely.
Abstract: WHAT social function does the law of contract damages play? The literature, legal and economic, offers several answers, two of which are of particular interest here. In a famous article published in 1963, Stewart Macaulay suggested that contract law might play two roles in exchange transactions.' (1) It might promote rational planning of transactions and (2) the existence or use of actual or potential legal sanctions might induce parties to perform. Macaulay then reports results of a study of the role of contract in business exchange; apparently business attended little to contract in the second sense and only attended in the first sense when the value of the exchange was great. More recently Steven Shavell has argued that damages rules substitute for complete contingent claims contracts in which the parties specify the required performance in every state of the world. Since the cost of drafting complete contracts is exorbitant, the law of damages usefully provides the appropriate incentives for promisors when something untoward happens. In a formal model, Shavell shows that expectation damages lead to the appropriate amount of breach although, in the presence of a reliance decision, promisees tend to overrely.2
TL;DR: A delivered price system is one where the price to the buyer is inclusive of transport charges and is stipulated as a function of the buyer's location as discussed by the authors, where two firms would quote the identical price to a buyer even if the two firms are located at different distances from the buyer.
Abstract: A delivered price system is one where the price to the buyer is inclusive of transport charges and is stipulated as a function of the buyer's location. In a delivered price system, two firms would quote the identical price to a buyer even if the two firms are located at different distances from the buyer. The subject of delivered pricing used to attract the attention of some of the best economists.' The key issue was whether and how delivered pricing could aid collusion. Interest in that issue declined in the late 1940s when the Supreme Court decided that basing point systems violated the antitrust laws.2 Recently, in Boise Cascade v. FTC the FTC unsuccessfully challenged a method of quoting price in which freight charges were always West Coast freight regardless of the product's origin.3 In a private
TL;DR: In this article, the authors analyzed the differential effects of regulation and deregulation across individual firms and markets in the airline industry and found that the regulation of the industry was a way to enforce their cartel, and when long run gains from regulation were analyzed, it was found that-on the average-
Abstract: ALTHOUGH the deregulation of the airline industry was accompanied by much academic research concerning its potential impact on areas such as fares, quality of service, welfare and industry structure, and performance, few have analyzed the differential effects of regulation and deregulation across individual firms and markets.' Previous analyses of airline industry regulation have been based on the assumption that airlines have homogeneous interests in the regulatory decision. Hence, the regulation of the industry was a way to enforce their cartel.2 However, when long-run gains from regulation were analyzed, it was found that-on the average-
TL;DR: In this article, the effect of liability rules on accident avoidance is studied in two types of situations in which potential victims and potential injurers act sequentially: those where victims act first and injurers second; and those where the reverse is true.
Abstract: The effect of liability rules on accident avoidance is studied in two types of situations in which potential victims and potential injurers act sequentially: those where victims act first and injurers second; and those where the reverse is true. What is of special interest about the working of liability rules in such sequential situations is that the party who acts second behaves in response to the party who acts first, and that the party who acts first takes this into account. The major result shown is that liability rules induce optimal behavior provided that they lead the party who acts second to act optimally if and only if the first party did so. In an important extension of the basic model considered, however, this result may not hold.
TL;DR: In this article, the rate of wages paid in the area in which the work is to be performed, to the majority of those employed in that classification in construction in an area similar to the proposed undertaking, was defined.
Abstract: (a) The rate of wages paid in the area in which the work is to be performed, to the majority of those employed in that classification in construction in the area similar to the proposed undertaking; (b) In the event that there is not a majority paid at the same rate, then the rate paid to the greater number: Provided, Such greater number constitutes 30 percent of those employed; or (c) In the event that less than 30 percent of those so employed receive the same rate, then the average rate.
TL;DR: Demsetz's analysis of the percentage of ownership interest held by management varying from 2 percent in very large firms to 32 percent in small firms as discussed by the authors, showing that the size of a firm and percentage of shares owned by managers are not always inversely related.
Abstract: I agree with the basic points made by Harold Demsetz. Of considerable interest is Demsetz's tabulation of the percentage of ownership interest held by management varying from 2 percent in very large firms to 32 percent in small firms. Demsetz classifies corporate directors as managers in obtaining these percentages. To me this muddies the waters. Outside members of boards of directors do not practice "hands-on" management of a corporation. Directors have functions that are distinct from managers even though they become involved in long-range planning. Directors monitor the performance of top management and have ultimate control in that they can fire the chief executive officer (CEO) and hire a new one. Even with management defined to exclude directors, it probably is still true that the smaller the firm, the higher the percentage of shares owned by management. It would be useful to have two classifications, especially of small firms: one, where the innovator/founder is still a very active hands-on manager of what he still considers to be his firm, and a second where the innovator/founder is no longer involved. An example of the first category are William Hewlett and David Packard, founders of HewlettPackard, who have remained active in that firm. The size of firm and the percentage of shares owned by managers are not always inversely related. The percentage of shares owned by managers would be probably much greater in the first group than in the second, without regard to the firms' size. Where the innovator/founder is chairman of the board, rather than CEO, one would still expect that management not only has a high percentage of shares but also is firmly in control. Unlike Eugene Fama of the University of Chicago, to whose 1980 arti-
TL;DR: The Modern Corporation as discussed by the authors is a survey of the issues raised in the book The Modern Corporation, focusing on the second theme of this issue, the power of corporations, and the extent to which the separation of ownership and control increases that power.
Abstract: I have been asked to give you my perception at present of the issues raised in our book The Modern Corporation. As a macroeconomist concerned with a stable and productive economy, I will focus on the second theme of this issue, the power of corporations. At the same time I will keep in mind the extent to which the separation of ownership and control increases that power. Also I want to make it clear that in speaking of corporate power in the marketplace I am not concerned with monopoly power. Our book does not even list "monopoly" in the index. Rather, I am concerned with the market power that arises naturally from active competition among a few large independent corporations and is reflected in the pricing discretion in the hands of individual competing enterprises.
TL;DR: One of the most striking points made by Berle and Means was that the 200 largest non-financed corporations had 49.2 percent of all non-financial corporate assets as of January 1, 1930, and that their share was growing rapidly.
Abstract: ONE of the most striking points made by Berle and Means was that the 200 largest nonfinanced corporations had 49.2 percent of all nonfinancial corporate assets as of January 1, 1930, and that their share was growing rapidly.' Americans had been uneasy about the role of the very large corporations for a long time, and the Berle and Means figures on aggregate concentration had a major effect. Their story raises a variety of questions: How realistic were their numbers? Has the trend in aggregate concentration continued? What difference does it make? What can be done about it? Since almost the only conceivable systematic policy to limit aggregate concentration in the United States short of a social and economic revolution is to limit large conglomerate mergers, I will put considerable emphasis on such mergers.
TL;DR: In this article, the authors focus on the type of agency supplying education regulation in each state and its effects on the ability of producers, or educators, to capture benefits for themselves via regulatory.
Abstract: IN recent years economists have made substantial progress toward understanding the regulatory process, as is exemplified by numerous articles appearing in this Journal. Much of the theoretical progress can be attributed to the works of George Stigler and Sam Peltzman, for together these studies clarified the conditions under which producer-protecting regulation would likely be forthcoming.' This paper suggests that one condition, however, has been largely overlooked in the regulatory literature. That condition is the institutional structure of the agency providing the regulation.2 The conclusion that agency structures are an important determinant of the regulatory outcome emerges from an examination of an industrypublic education-which itself has received little attention as a regulated industry.3 Specifically, I shall focus on the type of agency supplying education regulation in each state and its effects on the ability of producers, or educators, to \"capture\" benefits for themselves via regulatory
TL;DR: The authors argue that substantial imports show that foreign producers are "in the market" and could therefore divert supplies to the American market in response to noncompetitive prices, and suggest that the impact of this potential diversion may be gauged better by the total sales of foreign firms than by the amount they happen to sell in the US market.
Abstract: IN applying antitrust laws, courts often must define geographic "markets"; the verdict frequently depends upon the definition selected. Legal market definitions have rarely extended beyond the boundaries of the United States. When the principal laws were enacted and first interpreted, protective laws may have made this limitation appropriate. In 1890 (the year that the Sherman Act was passed), for example, tariff collections equaled approximately 30 percent of the value of imported goods. This suggests that most product markets were effectively closed to foreign producers. Treating the United States economy as "closed" may be less appropriate today. In the year we use for empirical testing below (1972), the comparable tariff figure was 6 percent. Declining transportation costs have further opened American markets. Most experts expect this trend toward interdependence to continue. When considering foreign markets, both legal and economics professions typically use trade volume to measure foreign competition. This orthodoxy has been challenged by Areeda and Turner' and by Landes and Posner,2 who advocate expanding the legal "market" to include not only imports but some or all nonimported foreign production. They argue that substantial imports show that foreign producers are "in the market" and could therefore divert supplies to the American market in response to noncompetitive prices. They suggest that the impact of this potential diversion may be gauged better by the total sales of foreign firms than by the amount they happen to sell in the American market. Ultimately the appropriate measure of foreign competition is a case-bycase question; the answer need not be the same for all industries. Never-
TL;DR: The Stigler-Friedland paper as mentioned in this paper addresses the importance of the Berle and Means study as either (a) demonstrating to economists that the separation of ownership and control had important implications for the performance of the economy or (b) being a major contribution to the ideological perspective which has influenced changes in the property rights structure in the economy in the past fifty years.
Abstract: WE may conceive of the importance of the Berle and Means study as either (a) demonstrating to economists that the separation of ownership and control had important implications for the performance of the economy or (b) being a major contribution to the ideological perspective which has influenced changes in the property rights structure of the economy in the past fifty years. The Stigler-Friedland paper addresses itself primarily to the first issue but offers a few comments about the second. I shall explore briefly each in turn. The corporation as a legal entity has evolved since the early nineteenth century in the context of a set of political rules and court decisions that specify the rights and obligations of contracting parties. Both this specification and the effectiveness of enforcement have, in turn, provided the framework for the contracting parties to develop a specific structure of organization in the context of the attendant transaction costs. We have very little in the way of theory with which to explore the evolution of the political legal rules or to measure their efficiency implications. Obtaining an efficiency measure would require studying the resource costs devoted to government specification and enforcement of rules against some abstract standard of political efficiency-that is, some least-cost government framework for any given output. While it is possible to test the efficiency implications of various property rights structures against some abstract standard, as the authors of this paper have done at other times and places, it is something else again to specify how we can compare the political system with the implied counterfactual alternative. However, within the context of a given set of rules, we can explore the attendant transactions costs and analyze the consequent organizational structure. Agency theory suggests that, given the costs of measurement of
TL;DR: In this paper, the authors argue that these justifications for the regulation of security interests in consumer goods are untenable or unpersuasive, and that contracts to give security pose problems similar in kind to those posed by any other consumer contract, and should be regulated, if at all, under the same rationales.
Abstract: Security interests in consumer goods have been extensively regulated, this regulation taking the principal forms either of prohibiting creditors from taking such interests at all or of deliberately reducing their attractiveness as risk reduction devices. The unique feature of this consumer protection regulation is that it is not justified by the usual unconscionability reasons, such as the existence of imperfect information, but rather by the view that security disadvantages consumers even though the contracts that create it may not be unconscionable. In particular, the institutional structure is considered to create incentives for secured creditors not to maximize the proceeds that repossessed collateral could yield, with the result that consumers remain liable for excessive debts even after foreclosure. Also, creditors are said to threaten repossession unfairly to coerce payment; repossession allegedly destroys consumer surplus; and it supposedly violates debtors' rights. This paper argues that these justifications for the regulation of security interests in consumer goods are untenable or unpersuasive. Contracts to give security actually pose problems similar in kind to those posed by any other consumer contract, and should be regulated, if at all, under the same rationales.
TL;DR: Hessen correctly states that Berle and Means argue, "The existence of these giant enterprises cannot be integrated into the classical theory of capitalism." Beyond this point his appraisal breaks down.
Abstract: I find great difficulty in recognizing the book described by Dr. Hessen as the book we wrote fifty years ago. The first few pages of his reappraisal start off well. They describe the acclaim with which the book was received. They describe and accept the two basic developments that provide the focus of our analysis, the high economic concentration and the widespread separation of ownership and control. And, most important of all, Hessen correctly states that Berle and Means argue, "The existence of these giant enterprises cannot be integrated into the classical theory of capitalism." Beyond this point his appraisal breaks down. The main break occurs in Hessen's third section, entitled "Corporations: Old Style and New," in which he summarizes his perception of what we say. This breakdown takes the form of two major omissions and several distortions of what we actually say. The first major omission is the absence of any discussion of the main thrust of our book, which concerns the effect of the modern corporation on the working of the economy as a whole. The subject is not mentioned by Hessen, yet it is clearly stated in our book. In our next to last chapter we summarize our conclusions in a chapter entitled "The Inadequacy of Traditional Theory." There we discuss the basic classical conceptsprivate property, wealth, private enterprise, individual initiative, the profit motive and competition-which underlie the classical theory of capitalism. In the final paragraph of this chapter we say, "In each of the situations to which these fundamental concepts refer, the Modern Corporation has wrought such a change as to make the concept inapplicable. New concepts must be forged and a new picture of economic relationships created" (p. 351). The importance of this omission is underscored by the conclusions we listed in a chapter preceding our chapter on ownership and that on control. The topic sentence of each of the five conclusions we had reached are listed below (pp. 45 and 46): (1) "Most fundamental of all, it is now
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