Working Papers 121-130
121. Intelligible Differences: On Deliberate Strategy and the Exploration of Possibility in Economic Life (Sabel, Charles F.) October 1995 No Abstract Available Working Paper No.121.pdf
122. Buyouts in Large Companies (Hermalin, Benjamin and Alan Schwartz)
We consider legal rules that determine the price at which minority shareholders can be excluded from the corporate enterprise after a change in control. These reles affect investment after such a change as well as the probability of the change itself. Our principal results are that minority shareholders should be given the falue that their interest would have had were no later investment made; and that this rule is best implemented, in large companies, by awarding the minority the pre-investment market value of their shares. The former aspect of our proposal is consistent with much current law but is rejected by many modern law reformers; the latter aspect of our proposal is novel. Working Paper No.122.pdf
123. The Law and Economics Approach to Contract Theory (Schwartz, Alan)
This paper summarizes the law and economics approach to central theoretical questions in Contract Law and briefly contrasts this approach with noneconomic approaches. The paper also makes two claims. First, the law and economics approach has considerable explanatory and justificatory power but has not developed satisfactory rules to govern parties who contract under conditions of asymmetric information. Second, the law and economics approach nevertheless is superior to non economic approaches. These latter approaches, properly understood, ask questions as the law and economics approach, such as what contract terms would best facilitate long term contracting. The law and economics approach gives better answers to these questions, by and large, because it has better tools with which to answer them. Working Paper No.123.pdf
124. Employees, Pensions, and the New Economic Order (Gordon, Jeffrey) Columbia Law Review, Vol. 97, No. 5, pp. 1519-1566, 1997
The "New Economic Order" in the United States is a regime of trade liberalization, a robust market in corporate control, and labor market flexibility. Among the consequences over the 1980-1995 period is a divergence between the growth rate of corporate profits and stocks prices, which have increased by approximately 250% in real terms, and wages, which have barely increased at all, except for the top quintile. Contrary to popular belief, employees have not significantly participated through their pension funds in this stock market appreciation. In the historically dominant defined benefit pension plan, the sponsoring firm, not the employee, is the residual claimant. Although employees are residual claimants of defined contribution plans, these funds have been underinvested in equity. In part this is because employees fear the volatility of equity returns. The article proposes a new capital market instrument, a "pension equity collar," that would take advantage of the longterm nature of pension fund investing to provide a guarantee of a minimum return close to the longterm average equity return in exchange for giving up (or sharing) the upside above the longterm average. Such an instrument could encourage greater employee equity investment and thus widen the distribution of the benefits of the New Economic Order. The article proposes that the U.S. Department of Labor initiate a rulingmaking project under Section 404(c) of ERISA to determine if such an instrument should be among the menu of choices provided to employees in defined contribution plans Working Paper No.124.pdf
125. Comparative Corporate Governance (Roe, Mark J.) Palgrave Dictionary of Law and Economics
This entry for the Palgrave dictionary looks at the recent literature on comparative corporate governance. I examine reasons for the upswing in interest in comparative corporate governance, what the principal national differences seem to be, how different nations pursue different purposes through their corporate governance systems, and what we might learn (and already have learned) about structure, political differences, and convergence in corporate governance systems. I conclude by mentioning some potential pitfalls in comparative scholarship, such as selection bias, inattention to complementarities, and ad hoc comparisons, and I briefly suggest a research agenda. Working Paper No.125.pdf
126. Lifetime Employment: Labor Peace and the Evolution of Japanese Corporate Governance (Gilson, Ronald J. and Mark J. Roe) Columbia Law Review, Vol. 99, p. 508-, 1999 I
In Germany and Japan, large firms' relationships with employees differ from those prevailing in large American firms. Large Japanese firms guarantee many employees lifetime employment and their boards consist of insider-employees. In Germany, employees or their representatives hold half of the seats of the supervisory board. Neither relationship is common in the United States.
These foreign differences, especially Japanese lifetime employment, are said to yield distinctive advantages, most significantly in encouraging firms and employees to invest in human capital. We examine the reported benefits but conclude that lifetime employment is no more than peripheral to human capital investments. Rather, the "dark" side of Japanese labor practice—constricting the external labor market—likely yielded the reported human capital benefits, not the "bright" side of secure employment.
What then explains lifetime employment in Japan, which developed during a time of labor surplus following World War II? We hypothesize two political explanations, one "macro" and one "micro." The "macro" hypothesis is that a coalition of conservative and managerial interests sought lifetime employment to reduce the chances of socialist electoral victories. The "micro" hypothesis is that managers tried to defeat hostile unions and win back factories from worker occupation, firm-by-firm, by offering lifetime employment to a core of workers. Both the "macro" and "micro" goals were not to improve human capital training, but to reduce worker influence, either in elections or in the factory. We assess the evidence for these hypotheses.
We look at Japanese labor practices and related corporate governance institutions as "path dependent:" A political decision "fixes" one institution and then the system evolves with that fixed institution by developing efficient complementary institutions. Working Paper No.126.pdf
127. Backlash (Roe, Mark J.) Columbia Law Review, Vol. 98, No. 1, pp. 217-241, 1998
Economic systems produce wealth; law and economics analysts try to find which laws are more likely to produce more wealth, often with an eye on whether that wealth is distributed acceptably. But for some economic systems, politics may lash back at the productive arrangements and this backlash potential complicates economic analysis. I analyze this problem first abstractly, showing how even a wealthy but Rawlsian fair system could deteriorate due to backlash, with markets unable to remedy the problem. Next I show some plausible national instances that fit the abstract model of wealth, fairness, and political backlash that led to instability, turmoil, and lower wealth.
When the potential for wealth-decreasing instability is high, basic efficiency analysis becomes harder than it would otherwise be. For analyses of American institutions, this "backlash awareness" at first seems irrelevant, because the U.S. has rarely faced economic-based turmoil. Analysts and academics in Europe, Asia and elsewhere, where economic turmoil has been historically real, often seem to American academics to be much more sensitive to the potential effects on stability and backlash of laws. The fact that for most of American history, and certainly for the American present, the turmoil risks of this or that rule have been trivial, helps to explain the American-centered nature of law and economics. But even for the U.S., some institutions, difficult to justify on normal efficiency grounds, become understandable either as institutions that mitigated backlash or that resulted from backlash.
I offer several categories in which the usual mode of law and economics analysis—ignoring both backlash effects and instability potential—makes sense in the U.S. I then argue, though, that several American business laws and institutions (including Glass-Steagall, Robinson-Patman, the late 1980's anti-takeover laws, and chapter 11 of the Bankruptcy Code) could be seen as backlash, or as the results of efforts to reduce backlash. In these instances, backlash cannot be ignored in a full analysis of the laws. Working Paper No.127.pdf
128. German Codetermination and German Securities Markets (Roe, Mark J.) Columbia Law Review, Vol. 98, No.1, pp. 167-183, 1998
Germany lacks good securities markets. Initial public offers are infrequent, securities trading is shallow, and even large public firms typically have big blockholders that make the big firms resemble "semi-private" companies. These "private" firm characteristics of German ownership are often attributed to poor legal protection of minority stockholders, to the lack of an equity-owning and entrepreneurial culture, and to permissive rules that allow big banks and bank blockholding in ways barred in the U.S.
Here, I sketch out another explanation. German codetermination (by which employees control half of the seats on the German supervisory board) undermines diffuse ownership. First, stockholders may want the firm's governing institutions to have a blockholding "balance of power," a balance that, because half the supervisory board represents employees, diffusely owned firms may be unable to create.
Second, managers and stockholders sapped the supervisory board of power (or, more accurately, stopped it from developing power). Board meetings are infrequent, information flow to the board is poor, and the board is often too big and unwieldy to be effective. Instead of boardroom governance, out-of-the-boardroom shareholder caucuses and meetings between managers and large shareholders substitute for effective boardroom action. But, because diffuse stockholders will at key points in a firm's future need a plausible board (due to a succession crisis, a production downfall, or a technological challenge), diffuse ownership for the German firm would deny the firm both boardroom and blockholder governance. Blockholder governance would be gone (if the block dissipated into a diffuse securities market) and board-level governance would be unavailable because the shareholders and managers had weakened the board beforehand. Stockholders would face a choice of charging up the board (and hence further empowering its employee-half) or of living with sub-standard (by current world criteria) boardroom governance. In the face of such choices, German firms (i.e., their managers and blockholders) retain their "semi-private," blockholding structure, and German securities markets do not develop. Working Paper No.128.pdf
129. Shareholder Activism and Corporate Governance in the United States (Black, Bernard S.) Published in The New Palgrave Dictionary of Economics and the Law (1998), Peter Newman, ed.
I survey corporate governance activity by institutional investors in the United States, and the empirical evidence on whether this activity affects firm performance. A small number of American institutional investors, mostly public pension plans, spend a trivial amount of money on overt activism efforts. They don't conduct proxy fights, and rarely try to elect their own candidates to the board of directors. Legal rules, agency costs within the institutions, information costs, collective action problems, and limited institutional competence are all plausible partial explanations for this relative lack of activity. The currently available evidence, taken as a whole, is consistent with the proposition that the institutions achieve the effects on firm performance that one might expect from this level of effort -- namely, not much. Working Paper No.129.pdf
130. A Regulatory Competition Theory of Indeterminacy in Corporate Law (Kamar, Ehud) Updated version published in Columbia Law Review, Vol. 98, No. 8, pp. 1908-1959, December 1998
Corporate law in the United States is widely believed to be the product of competition among states in corporate chartering. States can attract incorporation by offering law that appeals to corporate decision-makers, and are motivated to do so in view of fiscal and other economic gains emanating from corporate chartering. Different opinions exist on the desirability of this competition. Race-to-the-bottom theorists contend that states lure incorporation by tailoring their law to the needs of self-serving managers, who dominate incorporation decisions. Race-to-the-top theorists concede that state law meets the needs of managers, but argue that the interests of managers and shareholders are aligned.
This article revisits both of these views. It argues that the market for corporate law is uncompetitive, and therefore may not yield the optimal product either to shareholders or to managers. Delaware dominates the market as a result of several competitive advantages that are hard for other states to replicate. These advantages include network benefits emanating from Delaware's status as the lead incorporation jurisdiction; Delaware's proficient judiciary; and Delaware's unique commitment to corporate needs. Delaware can enhance these advantages by developing indeterminate and judge-oriented law, even if such law is not desirable. Indeterminacy makes Delaware law inseparable from its application by Delaware courts and thus excludes non-Delaware corporations from network benefits, accentuates Delaware's judicial advantage, and makes Delaware's commitment to firms more credible. Whether state competition constitutes a race to the top, to the bottom, or to somewhere in between, excessive indeterminacy may add an additional level of inefficiency to the law. Working Paper No.130.pdf