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Article

Francine J. Lipman

Since 2010, Congress has significantly cut the annual budget of the Internal Revenue Service (IRS) while requiring the IRS to manage more responsibilities, including last-minute comprehensive tax reform, health care, broad-based antipoverty relief, and a variety of economic stimulus provisions. As a result, the IRS has sustained across-the-board decreases in staffing, with the most significant decreases in tax enforcement personnel. The IRS has fewer auditors than at any time since World War II, despite an explosion of concentrated income and wealth. Predictably, the tax gap, the difference between what taxpayers owe and what taxpayers pay, has skyrocketed to almost $1 trillion a year. Economists have estimated that funding the IRS will pay for itself severalfold, raising more than a trillion dollars of uncollected tax revenues over a decade. Despite evidence that funding will remedy budget shortfalls severalfold, Congress continues to defund the IRS. While the bulk of the tax gap is due to unreported income by high-income individuals, the audit rate of these households has dropped precipitously. By comparison, the lowest income wage earners are being audited five times more often than all other taxpayers. Given centuries of racist policies in the United States, households of color are disproportionately impoverished and white households are disproportionately wealthy. Accordingly, lower income working families of color, especially in the South, are audited at rates higher than their white northern counterparts. Moreover, because these households and the IRS have limited resources, many of these audits result in taxpayers losing antipoverty benefits that they have properly claimed. This discriminatory treatment is counter to Congressional intent to support these families and exacerbates existing racial income and wealth gaps. With President Biden’s 2021 executive order on advancing racial equity and support for underserved communities through the federal government, the U.S. Treasury, IRS, and Congress have been charged to “recognize and work to redress inequities in their policies and programs that serve as barriers to equal opportunity.” Properly funding the IRS is a necessary step to advancing racial equity.

Article

Administrative law refers to the body of legal doctrines, procedures, and practices that govern the operation of the myriad regulatory bodies and other administrative agencies that interact directly with individuals and businesses to shape economic and social outcomes. This law takes many forms in different legal systems around the world, but even different systems of administrative law share a focus on three major issues: the formal structures of administrative agencies; the procedures that these agencies must follow to make regulations, grant licenses, or pursue other actions; and the doctrines governing judicial review of administrative decisions. In addressing these issues, administrative law is intended to combat conditions of interest group capture and help ensure agencies make decisions that promote the public welfare by making government fair, accurate, and rational.

Article

Johanna Catherine Maclean, Justine Mallatt, Christopher J. Ruhm, and Kosali Simon

The United States has experienced an unprecedented crisis related to the misuse of and addiction to opioids. As of 2018, 128 Americans die each day of an opioid overdose, and total economic costs associated with opioid misuse are estimated to be more than $500 billion annually. The crisis evolved in three phases, starting in the 1990s and continuing through 2010 with a massive increase in use of prescribed opioids associated with lax prescribing regulations and aggressive marketing efforts by the pharmaceutical industry. A second phase included tightening restrictions on prescribed opioids, reformulation of some commonly misused prescription medications, and a shift to heroin consumption over the period 2010 to 2013. Since 2013, the third phase of the crisis has included a movement toward synthetic opioids, especially fentanyl, and a continued tightening of opioid prescribing regulations, along with the growth of both harm reduction and addiction treatment access policies, including a possible 2021 relaxation of buprenorphine prescribing regulations. Economic research, using innovative frameworks, causal methods, and rich data, has added to our understanding of the causes and consequences of the crisis. This body of research identifies intended and unintended impacts of policies designed to address the crisis. Although there is general agreement that the causes of the crisis include a combination of supply- and demand-side factors, and interactions between them, there is less consensus regarding the relative importance of each. Studies show that regulations can reduce opioid prescribing but may have less impact on root causes of the crisis and, in some cases, have spillover effects resulting in greater use of more harmful substances obtained in illicit markets, where regulation is less possible. There are effective opioid use disorder treatments available, but access, stigma, and cost hurdles have stifled utilization, resulting in a large degree of under-treatment in the United States. How challenges brought about by the COVID-19 pandemic may intersect with the opioid crisis is unclear. Emerging areas for future research include understanding how societal and health care systems disruptions affect opioid use, as well as which regulations and policies most effectively reduce potentially inappropriate prescription opioid use and illicit opioid sources without unintended negative consequences.

Article

Daniel Greene, Omesh Kini, Mo Shen, and Jaideep Shenoy

A large body of work has examined the impact of corporate takeovers on the financial stakeholders (shareholders and bondholders) of the merging firms. Since the late 2000s, empirical research has increasingly highlighted the crucial role played by the non-financial stakeholders (labor, suppliers, customers, government, and communities) in these transactions. It is, therefore, important to understand the interplay between corporate takeovers and the non-financial stakeholders of the firm. Financial economists have long viewed the firm as a nexus of contracts between various stakeholders connected to the firm. Corporate takeovers not only play an important role in redefining the broad boundaries of the firm but also result in major changes to corporate ownership and structure. In the process, takeovers can significantly alter the contractual relationships with non-financial stakeholders. Because the firm’s relationships with these stakeholders are governed by implicit and explicit contracts, circumstances can arise that allow acquiring firms to fully or partially abrogate these contracts and extract rents from non-financial stakeholders after deal completion. In contrast, non-financial stakeholders can also potentially benefit from a takeover if they get to share in any efficiency gains that are generated in the deal. Given this framework, the ex-ante importance of these contractual relationships can have a bearing on the efficacy of takeovers. The ability to alter contractual relationships ex post can affect the propensity of a takeover and merging firms’ shareholders and, in turn, impact non-financial stakeholders. Non-financial stakeholders will be more vested in post-takeover success if they can trust the acquiring firm to not take actions that are detrimental to them. The big picture that emerges from the surveyed literature is that non-financial stakeholder considerations affect takeover decisions and post-takeover outcomes. Moreover, takeovers also have an impact on non-financial stakeholders. The directions of all these effects, however, depend on the economic environment in which the merging firms operate.

Article

Used for hundreds of years and adapted to a variety of contexts, arbitration is a form of adjudicative dispute settlement where parties consent to selecting third-party neutrals that resolve a specific dispute by applying the applicable law to the facts. Part of arbitration’s success involves its flexibility in adapting procedures and selecting applicable law to meet parties’ unique needs, including having some control over the appointment of an arbitrator who may have unique substantive expertise. Parties may agree to arbitration hoping to avoid the time-consuming, expensive, and complex process of litigation by streamlining or tailoring dispute mechanics. Yet, it is not empirically verifiable that arbitration always saves time and costs, as assessing relative savings requires comparison to a national court and there are over 190 national judiciaries to which arbitration could be compared, as well as nonadjudicative forms of dispute resolution like direct negotiation and mediation. As parties inevitably negotiate in the “shadow of the law,” arbitration aids the assessment of conflict management options; and, particularly internationally, arbitration remains a powerful tool that incentivizes voluntary compliance with awards and streamlines enforcement. Despite the availability of many types of arbitration with different policy considerations, the parties’ consent to it and their agreement to arbitrate (including the applicable law) is the backbone of this form of dispute settlement. Arbitration agreements require parties to make core choices, such as deciding on the scope of agreements submitted to arbitration, the legal place of arbitration, and applicable rules. Such an agreement then provides the framework for fundamental elements of the proceedings, namely, the basis of the tribunal’s jurisdiction and power over the dispute, the standards for appointing arbitrators, the structure and rules of the proceedings, and the content and form of derivative awards. Having a valid arbitration agreement (and an arbitration proceeding conducted in accordance with those legal obligations) also influences whether courts at the place of arbitration will set the award aside and whether courts at a place of enforcement will recognize and enforce an arbitration award. In the modern era, arbitration will continue evolving to address concerns about local policy considerations (particularly in national arbitration), confidentiality and ethics, technology and cybersecurity, diversity and inclusion, and to ensure arbitration is an ongoing value proposition.

Article

Longstanding international frictions over uneven levels of protection granted to intellectual property rights (IPR) in different parts of the world culminated in 1995 in the form of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)—a multilateral trade agreement that all member countries of the World Trade Organization (WTO) are obligated to follow. This landmark agreement was controversial from the start since it required countries with dramatically different economic and technological capabilities to abide by essentially the same rules and regulations with respect to IPRs, with some temporary leeway granted to developing and least developed countries. As one might expect, developing countries objected to the agreement on philosophical and practical grounds while developed countries, especially the United States, championed it strongly. Over the years, a vast and rich economics literature has emerged that helps understand this international divide. More specifically, several fundamental issues related to the protection of IPRs in the global economy have been addressed: are IPRs trade-related? Do the incentives for patent protection of an open economy differ from those of a closed one and, if so, why? What is the rationale for international coordination over national patent policies? Why do developed and developing countries have such radically different views regarding the protection of IPRs? What is the level of empirical support underlying the major arguments for and against the TRIPS-mandated strengthening of IPRs in the world economy? Can the core obligations of the TRIPS Agreement as well as the flexibilities it contains be justified on the basis of economic logic? We discuss the key conclusions that can be drawn from decades of rigorous theoretical and empirical research and also offer some suggestions for future work.

Article

Insider trading is not widely understood. Insiders of corporations can, in fact, buy and sell shares of those corporations. But, over time, Congress, the courts and the Securities and Exchange Commission (SEC) have imposed significant limits on such trading. The limits are not always clearly marked and the principles underlying them not always consistent. The core principle is that it is illegal to trade if one is in the possession of material, nonpublic information. But the rationality of this principle has been challenged by successive generations of law and economics scholars, most notably Manne, Easterbrook, Epstein, and Bainbridge. Their “economic” analysis of this contested area of the law provides, arguably, at least a more consistent basis upon which to decide when trades by insiders should, in fact, be disallowed. A return to genuine “first principles” generated by the nature of capitalism, however, allows for more powerful insights into the phenomenon and could lead to more effective regulation.

Article

Keith N. Hylton

Criminal law consists of substantive and procedural parts. Substantive law is the set of rules defining conduct that violates the law. Procedural criminal law is the set of rules regulating the process of punishment. Substantive rules apply mostly to individual actors, and procedural rules apply to public enforcement agencies and adjudicators. Economic theory of criminal law consists of normative and positive parts. Normative economic theory, which began with writings by Beccaria and Bentham, aims to recommend an ideal criminal punishment scheme. Positive economic theory, which appeared later in writings by Holmes and Posner, aims to justify and to better understand the criminal law rules that exist. Since the purpose of criminal law is to deter socially undesirable conduct, economic theory, which emphasizes incentives, would appear to be an important perspective from which to examine criminal law. Positive economic theory, applied to substantive criminal law, seeks to explain and to justify criminal law doctrine in economic terms—that is, in terms that emphasize the incentive effects created by the law. The positive economic theory of criminal law literature can be divided into three phases: Classical deterrence theory, neoclassical deterrence, and modern synthesis. The modern synthesis provides a rationale for fundamental criminal law doctrines and also more puzzling portions of the law such as the doctrines of intent and necessity. Positive economic theory also provides a rationale for the allocation of enforcement responsibilities.

Article

Law and economics has proved a particularly fruitful scholarly approach in the field of mergers and acquisitions. A huge law and economics literature has developed, providing critical insights into merger activity in general and the proper role of corporate and securities law in regulating this activity. Early economic research examined the motivations for merger activity and the antitrust implications of mergers. Later scholarship elucidated the important disciplining effects on management from merger activity and the market for corporate control. If management performs poorly, causing a firm to become undervalued relative to a well-managed firm, the firm becomes vulnerable to a takeover where management will be replaced. This prospect provides a powerful incentive for management to perform well. More recent work has revealed the limitations of market discipline on management actions in the merger context, and the corresponding role of corporate law in protecting stockholders. Because a merger is generally the final interaction between management and the other stakeholders in a firm, the typical constraints and mechanisms of accountability that otherwise constrain managerial opportunism may be rendered ineffective. This work has played a central role in informing modern jurisprudence. It has shaped the application of enhanced judicial scrutiny of management actions in the merger context, as embodied in the landmark Delaware cases Unocal and Revlon. The law and economics literature has also made important contribution to more recent developments in stockholder appraisal. The law and economics tradition has also provided a useful framework for evaluating the dynamics of merger litigation, including stockholder appraisal, and the extent to which such litigation can be made to serve a useful role in corporate governance.

Article

Corporate governance includes legal, contractual, and market mechanisms that structure decision-making within business corporations. Most attention has focused on corporate governance in large U.S. public corporations with dispersed shareholding. The separation of ownership from control in those corporations creates a unique problem, as shareholders typically have weak individual incentive to monitor managers. Mechanisms that have been developed to address this agency problem include independent directors, fiduciary duty, securities law disclosure, executive compensation, various professional gatekeepers, the market for corporate control, and shareholder activism. In most countries outside the United States, there are few companies with dispersed shareholding. Instead, most companies have a controlling shareholder or group. These companies face a different agency problem, the possibility that controlling shareholders may use their power to gain at the expense of minority shareholders. Enterprise governance refers to mechanisms aimed at related agency problems that occur in closely held companies without publicly traded equity interests. Here too the agency problem typically encountered is the potential conflict between controllers and minority investors, with the added twist that share illiquidity removes an important protection for the minority. Closely held companies have adopted a variety of contractual mechanisms to address these concerns. Other than the important but special cases of venture capital and private equity fund investments, there is less empirical evidence on governance in closely held companies because information is generally much harder to find.